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

Are you tempted by the airline stocks? With the economic carnage we've had, the airlines have not fallen as far as they should due to government bailouts. The recovery trade is clear, but you're not going to get the upside that you would if the stocks had been priced correctly. If you wanted a bit of exposure, it would make sense. There's also the options market. He's interested in the space, but he's not there yet. The question of when a vaccine protocol is resolved will determine when this trade works.

Chance of a market correction? Half the world is working from home. The economy is very, very weak. It's being propped up by central banks. It's a very unusual time, and you need to recognize that straight away. Once people get back to work, governments are going to stop paying people, and you'll see the true extent of the economy. No doubt that we are going to get a correction. The tech names are 2 standard deviations away from their historical valuations. When you think tech downside, start thinking about 2000. The downside will be significant. Don't be scared, but be realistic.

Today's tech sell-off as reopening stocks rallied Today was the the bizarro stock market where good stocks got slaughtered and the bad ones thrived (JNJ, Pfizer), because the post-Covid boom has been pushed forward--suddenly sooner. Money managers now want airlines, cruiselines, industrials and hotels, while anything that rallied last year is despised, starting with the essential retailers, such as Costco, Walmart, Home Depot and Lowe's. Specialty retailers, too, such as Kohl's and Nike. Money managers are selling 2020 winners to buy the reopening stocks, fueled by the rising 10-year interest rate (signalling higher inflation). Like the late-2015/early-2016 rotation (more vicious to tech stocks then), this is currently a textbook rotation and, yes, it will be short-lived. That said, this pattern will continue for a little while longer. This rotation ends when the economy hits a wall or takes a breather and when this long-term interest rate rise halts. Note: The Fed says it will not raise short-term rates. At that point, the tide will turn and the 2020 winners will rise again. Interest rates never go up in a straight line, so expect choppiness. Nasdaq tech stocks rise on the hopes of rising earnings, but climbing interest rates--and inflation--limits that. So, sell all tech and buy industrials? That's okay if you're nimble. Or you can scale back on your favourite tech and buy them back even cheaper. The well-run companies that thrived in 2020 will eventually come back, but that could be a while if the economy seriously recovers.

Depending on the company, those with multiples are fine as long they're growing rapidly with strong outlooks. The easy money in the recovery is probably behind us. Higher interest rates normally accompany a stronger economy, which is what is happening, and he sees continuing as we recover. He's not a commodity investor, though there is a serious recovery here; the easy money has been made. Once people can drive in the summer for vacations, he expects this demand to keep oil prices strong. Renewables require a lot of copper and steel to build that infrastructure. In recovery stocks, he owned a few cruiselines, buying low, but sold some.

OPEC. The Saudis have reduced production. Can they can keep oil prices higher? The demand for energy will increase as the world re-opens. The world does not need higher oil prices. Oil producing countries do want higher prices. The world is well supplied. There are calls for $100 oil. $60 oil is probably in the upper range of oil. Looking at the futures market on crude oil, there is an inversion in the curve. Futures are still pushing towards $50. For the next year or so, there may be elevated prices but it is tough to sustain. Demand may never come back to pre-covid levels.

Bond yields. When Powell was asked his thoughts on higher yields, his response was benign. However, the world cannot handle higher yields. How much higher can yields go before the equities markets get stressed? We saw some hints last week that the markets get choppy with slightly higher yields.

Buying US stocks with Canadian dollars. The CAD has strengthened much more than expected. It is linked to OPEC tightening supply and oil prices going higher. Fundamentally, the CAD should be around $0.75. There is a case when there is reflation and oil prices that rise. 75 - 85 cents is the broad range for the next couple years. You could hedge the foreign currency exposure. You could dip into buying US stocks since he does not think the CAD will go below 75 cents in the near term.

Covered calls. When you are selling calls and the market falls as quickly as it did last March, and then recovers, you get called away since the stock price goes up. When you're bullish, you do not want covered call exposure. You must trade a little, especially during sharp declines and options expire.

Inflation. We are getting asset price inflation and supply constraint inflation. It is very different than demand pull from higher spending power from consumers and regular folks. Until the labour's share of income rises and is willing to spend more, inflation will not be too much of a problem. There is labour market slack in the next couple years so there will not be material core inflation.

Fixed income. In an inflationary environment, real return bonds makes sense if you have to be in fixed income. You don't have to be in fixed income though. Private debt is an area that gives reasonable yields. You can generate 5-7% returns without additional risk. Floating rate notes is another way to play a rising rate environment.

Educational Segment. Interest rates have risen pretty steadily this year. Every time bond yields go up, someone calls the end of the bull market. Bond vigilante is an investor that is gut-check against central banks when they lose control of the fiscal purse. Interest rates have been falling for the last 40 years and this trend continues. In 2017-2018 Feds raised interest rates. The US 10 year needs to get above 3.5% and remain higher to say the trend is changing. We simply cannot afford higher interest rates however. The next tool is Yield Curve Control. Interest rates will be kept low.

The reopening looks more likely and sooner with JNJ's vaccine being approved. Overlooked reopening plays include Ford, Ulta, Federal Realty and others. The airlines are obvious plays, but their balance sheets are in tatters.