A Comment -- General Comments From an Expert (A Commentary)
COMMENT
Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. In a bear market, stocks will go down. However, it does not last forever. It can only seem lie they will at the time. Energy is a tough sector to call right now. There is a possible global slowdown, higher USD and a big slowdown in China. It could be better than other options in an inflationary environment. Unlock Premium - Try 5i Free
COMMENT
In volatile trading times, focus on the long term. Indicators come from the economy. Is there enough credit available to continue. Buy quality companies with good balance sheets, are profitable, are more mature and have long term growth prospects. Any industry is fine as long as the individual companies have these qualities. Credit spreads will slowly widen which is good for quality companies but puts pressure on more speculative and lower quality ones. Retail investors should seek advice.
COMMENT
Question was regarding the tightening of credit. Banks need to build reserves as the economy slows. In the U.S. banking system mortgage backed securities will not be worth as much as before and this affects the ability of the banks to buy back shares and increase dividends. Tightening of credit will have an effect on the capital of U.S. banks.
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COMMENT
Cash He's shorting the QQQ stocks and the S&P, given the Fed's hawkish stance (pressuring stocks today) and now an alternative to stocks--bonds with yields near 3%. Don't fight the Fed; don't buy when markets dip. Instead, build and hold cash like he is. There will be better times. Deploy more capital by buying the bottom or protect your capital? He's doing the latter.
COMMENT
Catalysts to keep an eye on. So many balls in the air right now. Inflation, higher commodity prices, possible wage inflation, possibly inflation expectations are too high, Ukraine. All making it much more difficult to understand where the economy is going and what the Fed's intentions are. You can see this from the volatility in the stock market. One day up, one day down, no consistency. Watch whether the Fed decides to increase by 50 bps, do that for several months, and then slow down. Also watch whether companies continue to beat earnings, but the more important thing is what are they forecasting for the next several quarters. Will they be able to increase pricing, maintain margins, and grow free cashflow? The other geopolitical issues are important because they have an effect on how central banks look at the world, especially in Europe. The IMF brought down global growth projections for the year. Volatility will continue for the next and following quarters at least. Volatility can be your friend, as you can buy companies you like at relatively cheap valuations.
COMMENT
Sectors to look at. Hard to just stay in cash, as you miss opportunities when the market turns around and rallies. You could be in bank or financial stocks, or healthcare which will be more defensive. Interest rates might impact utilities, but they give you a really nice dividend and you can manage through the volatility. For asset allocation, you want to be in an asset class that offsets equity risk. Traditionally, that's been fixed income. You could be in some defensive names, collect the nice dividend, and wait for a chance to change your portfolio to something with a bit more growth when we get more clarity on interest rates and geopolitical situations.
COMMENT
Money not flowing to venture exchange commodities. He doesn't buy a lot of commodities. When you look at gold, you'd think it would be substantially higher. But reality is that some investors have gone to Bitcoin. Also, a lot of commodity companies realize investors are more interested in their balance sheet and returning capital to shareholders, rather than just going out and buying assets. Plus, people are unsure whether commodity prices can be sustained for a long time, but might go back to more traditional levels. Lastly, in this volatile environment, people are much more wary of being in smaller cap, highly volatile securities.
COMMENT
Bull run for energy stocks. This cycle is more pronounced because of the issues in Ukraine. In March 2020, we started a new energy bull market, based on the interest in renewables and EVs. We needed to find a lot of lithium, copper and nickel, which would need a lot of capex and a lot of fossil fuels. With cutting off Russia from selling oil, we're in a super-cycle for commodities that probably has 4-5 more years to go. Money will have to be spent to bring on natural gas and LNG. Since March 2020, crude oil price has gone up over 4x, nat gas even higher, and S&P TSX Energy Index over 5x. So it's been a fabulous sector for investors.
COMMENT
Bearish on price of oil? He's cautious. Historically, when you have these very powerful bull markets, you have corrections along the way. We'll see record oil prices 4-5 years from now, we've had a fabulous run, and he sees the likelihood in 2022 of $150 US a barrel for oil if weapons of mass destruction are used and Russia is prevented from selling oil and natural gas. He sees a recession ahead. CPIs and PPIs are really high. Central bankers are raising the price of money and removing the liquidity. Don't fight the Fed. He sees an economic slowdown by Q3, and that's when the higher price will end as we try to beat inflation up over the next couple of quarters.
COMMENT
Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. For a shorter timeframe, companies with good cash balances, high equity to market cap ratios and low debt balances will perform well. Healthcare, energy and materials are sectors that should perform well for the next 3 months or so. Longer term, consumer staples, mega-cap tech, financials and utilities should see upside. Unlock Premium - Try 5i Free
COMMENT
Inflation is peaking Technical analysts Larry Williams says there are two ways to look at inflation: 1) The sticky consumer price index measures a basket of items that change price slowly; 2) the flexible price index which changes quickly. Now, #2 is currently at an all-time high. Once the flexible CPI surges, then the sticky CPI. History says that inflation that stays above 2.5% for 29 months on average and we've been through 14. Cycles: the CPI has a dominant 5-year cycle, so it should peak in the middle of 2022, then decline for the rest of the year. Further, the Advance Decline Line tells whether more stocks are rising or falling on a daily basis; currently this line signals to Williams that the AD line is due to rise, leading to a major broad-based rally through the end of June, then pulling back starting in early August, then rebound as the summer ends.
COMMENT
Expect volatility in the short and medium term. The S&P has crossed the 200-day moving average several times on the upside and downside. Lots of worrying among investors, sparked by geopolitical and Fed moves. The software business has gotten soft, because businesses are unsure about spending money in this environment. That said, volatility can be your friend--you can trade it, which is what he is doing more of. He's 25% in semis, 25% in internet software, 20% to cybersecurity which has done well for him, and the rest scattered through fintech and e-commerce.
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