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

Reasons for this rally's staying power: 1) improved outlook at the Fed given economic data showing, 2) positive treasury issuance (the bond bears have become pigs, greedy), 3) more immigration contributing to lower wage inflation and stopping the labour pool from shrinking, and 4) more upbeat commentary about China's economy (based on reports from Apple, Starbucks and others recently). Also, earnings season shows that tech performed overall well and was not a disaster.

October Market Mover: The North West Company Inc.

The best performer was North West company (NWC) whose stock was up 12.16% on the month, down 3.82% YTD and up 6.81% over the past year. The stock hit a near term low on September 7th , 2023 of $29.81 from which it rose precipitously to $34.65 on September 13th  about where it closed for the period. 

It is a leading retailer to rural and developing small population communities in northern Canada, rural Alaska, the South Pacific and the Caribbean. It started in 1987 when the Company's predecessor purchased 178 stores comprising the Northern Stores Division of the Hudson’s Bay Company. Its stores offer a broad range of products and services with an emphasis on food and a compelling value offer of being the best local shopping choice for everyday household and lifestyle needs.

The announcement on September 12t ,2023 of 2nd quarter results was the apparent trigger to this stock price jump. Sales at $618 were up 6.8% over the prior year  comparable period; Gross profit was up 11.1%; adjusted EBITDA at $83.3 million was up 14.7%; net earnings at $38 million up 17.5%; diluted eps were $0.76 compared to $0.64 in the prior period.

Near term operations will continue to be influenced by inflationary cost pressures and wild fires. Over the longer term, Management believes the outlook is favourable due to impact of Government transfer payments and higher infrastructure spending in indigenous communities.
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The Fed has a poor track record when it comes to the accuracy of their predictions on interest rates especially in 2020 and 2021. You can't really count on them when making investment decisions. It is very difficult to make these decisions based on the macro environment. A quote from Ben Bernanke after retirement goes something like this: Sometimes monetary policy is 98% talk and 2% action. Also the guest felt that the ability to shape market expectations of future policy through public statements is one of the most powerful tools the Fed has.

The caller asked about his choice for one of the Canadian pipelines: Enbridge, Pembina, TC Energy and Keyera. He owns the first three and if buying now would choose TC Energy although it has had some issues. It has come down the most of the pipelines and has the most insider buying. It has a 7.8% dividend so even with just a $1 increase in the stock price you would have a total yield of 10% over the next year.

The question was on Canadian banks. They are all down and trading at 9X this coming year's earnings which are somewhat compressed. Therefore they are at a good valuation. CIBC has the second highest dividend yield of 6.7% but it has more exposure to commercial real estate especially in the U.S. as well as greater exposure to the Canadian mortgage market. The banks in general will have to deal with a few hundred billion dollars in mortgages coming up for renewal in the next couple of years.

The rally last week was a big move, but we were pretty oversold. September and October were miserable, but we've seen this before where everybody is down, then we get a surprise bounce. A lot of last week was probably short covering. The tailwind we needed was a break in rates and that's what we got last week. The markets expects a traditional Q4 rally. The US is seeing the rally continue, but Canada is a different story where the cyclicals are struggling, which is logical given the economic outlook. The economy is heading to a recession and Canada will happen before the US. Some of the bad news is already built into stocks like CargoJet. Also, he feels that rates have peaked and rates have been overdone. SPending has lasted longer than expected given the savings from Covid, but that savings is being depleted. There are headwinds out there and a time for caution. He's cautious, neutral.

Has been lightening his bank stocks--where's the good news? Is out of all US banks, given their unrealized loss in US treasuries on their balance sheets.

Isn't much more upside from here. The S&P will top at 4,400-4,500. Doesn't see earnings rising to push stocks higher. We will be stuck and rangebound for a while. Stops are popping this week only because yields are falling and the market was wildly oversold.

Spectacular dividends available in Canadian blue chip stocks. Telco & energy infrastructure very attractive dividend yields. Question is whether to invest in industry, or pick a safe Government bond paying 5-6%. Bargains available in energy infrastructure and energy in general. Not sure whether Canadian banks have reached bottom on share prices. Higher interest rates put pressure on Canadian banking and justifies investor fears. 

Market Update:

The US GDP accelerated in the third quarter, growing at the fastest pace in two years, with a 4.9% annualized rate compared to the 4.5% expected, fueled by a big burst of consumer spending and defied expectations of a slowdown. The Bank of Canada held interest rates unchanged at 5%, indicating the economy is not overheated anymore, but left the door open for more rate hikes if necessary. The Canadian dollar was 72.10 cents USD. The U.S. S&P500 ended the week down 1.8%, while the TSX was down 1.5%.

Most sectors ended the week in red. Technology gave up 4.5%, while energy slid 2.7%. Materials edged lower by 2.4%, while industrials slipped 2.0%. Real estate dropped by 1.5% while consumer discretionary declined by 1.1%. Consumer discretionary ended the week slightly down 0.3%. The most heavily traded shares by volume were Corus Entertainment, Baytex Energy, and Dye & Durham.
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You're starting to see commentary out of the Fed, not necessarily that they're going to hike once more, but that rates are going to stay higher for longer. The forecast is for a 1/4 rate reduction by this time next year. Adjustments will have to be made, both personally and within portfolios.

That's right. Before rates started going up, they were called "zombie companies", where they were being kept alive by low interest rates. We're starting to see those companies fracture. In the Russell 3000, the top 20% of companies with high interest-coverage ratios were doing markedly better than the bottom 20%. Refinancing is coming in, and companies are getting less money with higher rates and the debt's coming back to roost.

Companies with either low debt levels and positive cash positions, or debt levels that are serviced with internally generated cash, are the ones that will do better over time. The stronger will do better, and the longer rates stay high, the more that trend will continue.

There's a lot happening geopolitically (Russia, Ukraine, Israel, Hamas), and Washington was gridlocked as it looked for a House speaker, but fortunately Canada was not effected. Canada is stable politically and economically as inflation is declining as are interest rates. TSX is trading at 13x PE vs. 19x in the US. The TSX pays a 3.5% dividend yield vs. 1.5% on the S&P. There's pressure on yield stocks here (telcos, banks, utilities) as investors have shifted out of them, but he sees defence in energy stocks which pay large dividends and are supported by high oil prices. Invest in companies with recurring revenues, profits and healthy balance sheets.

Ghastly Growth: Canadian GDP Lingers Below the Average:

Canadian GDP spiked in 2021 to 2022 following a sharp move lower in 2020, however, it has since begun sliding lower throughout 2023. Canada’s year-over-year GDP growth is now at a meager 1.12%, lower than its long-term average of 2.61% dating back to 1970. Rising interest rates have been putting pressure on businesses and individuals across the country, and interest-rate sensitive industries such as housing, manufacturing, and financial services have been seeing the impacts of a worsening global macro environment. 
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