A Comment -- General Comments From an Expert (A Commentary)

The pendulum has swung. Now, the street feels that the Fed won't raise, but cut rates, so there's a rally.  But he expects the pendulum to swing the other way in the middle of the month, and we're seeing signs of this today. This means that there will  be pressure on stocks. It's healthy for both the stock and bond markets to give back some, and to avoid violent swings. We won't know until after Q1 2024 what the Fed will do with rates. Also, the Fed doesn't want to make any major policy changes heading into a U.S. election year.

You need exposure to this defensive sector if the economy weakens, which seems to be happening. But pick your stocks wisely. He prefers AI over obesity stocks, and own a diversity, not one.

The 60/40 portfolio never died, and those with conservative risk tolerance should embrace bonds. Pick the sectors in line with your tolerance.

He expects a rally in to year-end, barring a bad inflation numbers, which he doubts. Powell has not gotten more hawkish and we're in bullish seasonality. Christmas spending will be higher. We're now in a trading rally. He doesn't know if the market can sustain it beyond this month.

Stock rebound has been rewarding for investors who demonstrated resilience. Canada & USA both participating in stock market rally. 3 consecutive weeks of gains has erased prior losses for investors. Believes further strength in markets for investors. Economy more resilient than expected. 

Company Highlight: STELLA JONES INC (SJ):

The top performer for the month was Stella Jones Inc (SJ) whose stock was up 11.21% for the month, 49.71%YTD and 77.04% over the past year. The stock price has moved up more often than down this year from a low in early October of $63.38 it rose to close at $77.04.

SJ is North America’s leading producer of pressure-treated wood products. It supplies the continent’s major electrical utilities and telecommunication companies with wood utility poles and North America’s Class 1, short line and commercial railroad operators with railway ties and timbers. It also provides industrial products,  manufactures and distributes premium treated residential lumber and accessories to Canadian and American retailers for outdoor applications. It operates 43 wood treating plants and a coal tar distillery in facilities located across Canada and the U.S. complemented by an extensive distribution network. As at June 30, 2023, the Company’s workforce numbered approximately 2,835 employees.

Results for the 2nd quarter ended June 30, 2023 (published August 3,2023) continued on their strong trajectory: Sales at $972 million were up 7% over the corresponding prior year period; EBITDA at $175 million was up 14% and EBITDA margin was 18% compared to 17% last year; Net income at $100 million or $1.72 per share was up 14%.

For the first six months of 2023, sales amounted to $1,682 million, up 8% over the corresponding period last year, driven by the 13% organic sales growth of the Company’s infrastructure-related businesses. Long Term Debt was up $198 million in order to finance growth in accounts receivable of $116 million (in line with seasonal trends) and inventories of $97 million (to prepare for higher pole sales). At June 30, 2023 SJ had $292 million available. Net debt to EBITDA was 2.6%

Stella-Jones’ strategy is to solidify its leadership position in its core product categories and in key markets, through organic growth, network efficiencies, innovation and accretive acquisitions. Its outlook calls for a 6% CAGR in sales going forward and 9% CAGR in EBITDA. It also calls for the return of $500 million to shareholders through dividends and share buybacks.
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Lower interest costs will be a tailwind for everybody in real estate, but it comes down to fundamentals. Where is demand exceeding supply? Look to apartments in Alberta with no rent controls, industrial warehouse globally, manufactured housing in the US. 

Probably the best setup is grocery-anchored shopping centres in Canada. Defensive, cashflow is going higher, population growing, interest costs going down.

Pandemic proved the resilience of necessity-based shopping centres. Population growth + dominant grocery shopping centres = sales improve and rents improve. Enclosed retail malls are more challenged: lots of bankruptcies, discretionary retail moves in rather than necessity-based. If consumer spending is soft, the more discretionary retailers suffer.

Yes, up around 10-11%. The Magnificent 7 are dragging everyone along with them. Looking back, October and September were each down 5%. So it just got back close to those July 2023 heights. A lot of the software stocks are well shy of their 2021 peaks. 

On the SaaS side, things have perked up. With SaaS being very highly leveraged and lots of debt on the books, interest rates coming down are helping out a lot.

It's been very quiet. He thinks so, but probably not in December. We'll have to wait till the new year.

For the whole landscape, pricing and inventories have been an overhang. That's come off over the course of this year. Most companies are expecting prices to go up, and inventories have been whittled down. In a good position going into 2024.

Market Update:

The TSX Index was down 3.4% in the month of October 2023; down 2.6% YTD and down 2.8% over past  year. The Dow Jones Industrial average followed a similar pattern. In contrast, S&P 500 index  was up some 10% YTD and the NASDAQ composite index was up over 20% YTD. Canadian GDP contracted 0.2% annually  in the second quarter; Consumer prices in Canada were up 3.7% annually in September, in line with August. The BOC is widely expected to leave their policy rate unchanged at 5% later this week (unchanged since July 2023). Global uncertainty has been exacerbated by the wars in Israel and Ukraine and by the shenanigans in the US House  of Representatives. Additionally, the direction of the Chinese economy is still not clear: its GDP was up 4.9% annually due to a pickup in household consumption.
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The market has had quite a move this year after digesting a lot of bad news (US debt default diverted, inflation worries, interest rates rising, worries that the US government can't fund itself). Incredible. The Magnificent 7 has led the charge, but now the rally is broadening out into other sectors and even into small caps. This year's Santa Claus rally (after tax-loss selling) could last a week or two into January. Gas in seasonally in weakness, so he has been trimming his energy holdings and will return in mid-December; energy seasonality runs from then into April. Agricultural commodities and copper follow a different seasonality. Corn had a good run from mid-2020 to early 2022 when Russia invaded Ukraine, partially recovered until early 2023, fell again and has been basing lately at current levels. He doesn't trade commodities, but wants to se more basing before declaring the downtrend over.