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

The Chinese consumer saved more than Americans during Covid, saved a lot, so there's a lot of cash sitting on the sidelines. Also, China has been exporting deflationary goods (cheaper) which benefits American consumers, because of the weaker Chinese economy. But a risk for the global consumer are high and higher oil prices which would inflate prices.

It's all about earnings as we head into October, and he expects them to be strong, reflecting a resilient consumer, though these earnings may deteriorate heading into 2024. That said, Q4 will be a positive one, with megatech leading, not healthcare, financials, energy or industrials.

Interest rates and stock can both rise, though to a certain point. Doesn't think the market will do well in Q4, given the market PE of 19x given where rates are. He's cautious, not bearish. For 15 years, the market has enjoyed free money, but many investors have never seen high rates without free money, so they need to adjust. Also, he loves megatech which could lead, though maybe only slightly or be flat.

Prediction of higher oil prices coming to fruition.
Expecting $85-$100 oil prices going forward. 
Record oil demand continuing to rise with shortfall in oil supply.
USA oil supply reducing (less productive wells) combined with Saudi production cuts. 
Fear of recession also not materializing. 
Global oil inventories at all time lows. 

Market Sectors & Investment Strategy:

Understanding sectors is not just about classification; it has a direct impact on investment strategies. Diversification, a cornerstone of smart investing, involves spreading investments across different sectors to minimize risk. By holding a mix of stocks from various sectors, investors can cushion their portfolios against a downturn affecting a single industry.

Moreover, sector analysis helps investors align their portfolio with market trends. For instance, if technology companies are thriving due to innovations, an investor might consider allocating more funds to the Information Technology sector.
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We hit a spiky peak in late July, August was down, and when we close the books tomorrow it looks as though September will be down as well. Ongoing pressure on interest rates, plus a bias toward tightening at both the Fed and BOC. 

The other thing is economic gravity. You don't go through an epic cycle of rate increases over the last 18 months, the extent and pace of which is unmatched in decades, without eventually some fallout. It's often said that monetary policy operates with a 12-18 month lag time in the economy. Here we are 18 months into the tightening cycle, and we're starting to see the effects in the labour market and other parts of the economy. US manufacturing in particular, and in most developed countries, has been in contraction for 7-8 months.

The dot plots were higher than what markets were pricing. They're sticking to their guns. In terms of the BOC, it's coin-toss odds for another 1/4 point rate hike next month. We'll see what happens. 

Both of them still have work to do. BOC, in particular, has a singular mandate to ensure price stability which is 2% inflation, and we're still above that. They have to keep their foot on the brake until they get back to, or at least in line of sight of, a 2% inflation rate.

Indeed. In 2022, returns for REITs were down 24% in the US, down 17% in Canada, and down further this year. What's interesting is that private REITs were positive 13% last year. That difference of about 40% has to be explained somehow. 

The big question is who's right, the public or the private market? He actually thinks it's both. It all depends on which sector or geography you're talking about. Interest rates have really changed the return expectations. But when the fundamentals are improving, such as in single-family rentals or industrial warehouse, higher rates are just a headwind but not necessarily going to cause diminishing value. It's the inverse for office, and there's a lot to get through in terms of commercial real estate.

He's quite positive, given the setup in the public markets today.

Yes, this setup reminds him of opportunities such as the 2008 financial crisis or during the pandemic, where public real estate markets sold off more between 20-40%. An opportunity to buy great quality companies at a discount to NAV. 

In these periods of dislocation, you typically find that the smart money is looking to invest in quality portfolios in the public market. In time, you could see the M&A cycle return, once there's a better outlook and stability in the credit markets.

His mind went to the office sector. These companies were not set up for office assets, but the reality is that that's where the value is. One is HPP, which focuses on west coast office in San Fran, LA, Seattle, even Vancouver. 

For the dividend yield, look to the company's own website or to sites like the TMX.

For actual earnings yield of REITs, you have to go through filings or analysts' research notes to understand what the net operating income is, and then divide it by the enterprise value.

Real estate always has a place in everyone's portfolio, some institutions have up to 20%. 18 different property sectors, which all behave differently. Should be an inflation-protected vehicle. Today, sectors you might want to look at include grocery-anchored shopping centres, single-family rentals, industrial warehouse, manufactured housing communities in US. 

Look at supply/demand. The starting point has to be that demand is greater than supply and outpacing new construction. Ability to increase cashflow over time or to maintain/increase margins, especially during a period of elevated interest costs.

Provide quality housing at a fair market level. Unlikely to be a backlash from huge rents against apartment REITs. The solution is never rent controls, it's always supply.

Benefits of Insider Ownership:

Many of the companies we follow have high insider ownership. Of course, we like this attribute when it shows up along with other factors such as good management, a good track record of growing dividends and buying back shares, and a healthy balance sheet.  The appeal behind high insider ownership comes from the idea that insiders at a company, whether they are management, employees, executives, founders or even corporations is that they have more at stake. Because of this there is, in theory, a higher motivation from insiders for the company to perform well. This ultimately is positive for all shareholders alike.
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