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

If you're a 60/40 or a 70/30 person, stick with that. For the last couple of years, you wanted to be under that while rates were going up and equity prices were falling. It's a balance. We're not in full-on growth mode or economic recovery. We could have a recession. Don't be too offensive, but don't be too defensive.

These stocks are to some extent interest-rate dependent. GICs have become an attractive return with no risk. Higher interest rates have increased the cost of funding. If inflation and rates can at least stabilize, these stocks can work. They don't need inflation to reach 2% right away, as long as we're heading in the right direction.

How can investors know if their portfolio in on the right track? Here are a few options:

• Ask your current advisor to review your portfolio - Obviously they will say it is fine since they made it!
• Ask another advisor to review your portfolio - Obviously they will say it is bad or needs work, as they want your business! And to be clear, investment management is an odd business where two people could look at the same portfolio and have opposite opinions on whether it is good or bad, and both may be right (to a degree)!
• If you don't have an advisor and are asking them to review your portfolio, it is probably not fair unless you plan to give them your business, and from a resource perspective just isn't realistic as they aren't going to do a thorough in-depth analysis of your portfolio for free.
• Ask family and friends - This might be the most dangerous option. While these individuals are more than likely well-intentioned, in most cases they probably do not know much more than you do. Or even worse, they THINK they know more than you and others.

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Soft landing unlikely given status of consumers in North America.
Expecting higher for longer interest rates from US Fed. 
Believes inflation will be sticky for the next few years. 
Watching retail earnings results (Walmart) this week to gauge investor sentiment.
Large retailers are good "bellweather" on state of economy.
Economic weakness in China bad sign for goals of becoming international leader.
Economy in China will survive given high level of government intervention. 

Upcoming US Fed symposium in Jackson Hole will focus on interest rates.
Debate in Jackson Hole will be on whether to raise rates.
US/Mexico trade volumes recently surpassed China - indicating more "friend shoring" in manufacturing. 
Question is whether to keep inflation targets at 2-3% given strength in economy.
Expecting further inflation - believes economy "needs" a hard landing. 

A few prominent benefits that negative working capital provides:

1. For a typical business, the more it grows the more capital it needs, but for these businesses the more it grows the more capital it provides. In effect, the growth of the company is funded by stakeholders (customers, suppliers), reducing the needs and risks to raise more equity (diluting shareholders) or debt (less leverage) to grow the business.
2. Usually, companies with these profiles do provide critical products and services, where demand for these products/services is recurring in nature. As a result, the underlying businesses produce a stable, predictable stream of cash.
3. Solid signal of a strong competitive position as the company can demonstrate negotiation power over its suppliers
4. The funds that are collected in advance could be deployed for share repurchases, dividends or acquisitions which are beneficial to shareholders

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He is looking for a soft economic landing since the CPI numbers are encouraging and there has been the lowest two month increase in inflation seen in two years. Rent is one of the biggest drivers of inflation data and the real time data of new leases being signed in the U.S. is starting to come down. There is a lag effect to interest rate increases so an extra 25 basis points increase here and there won't have a big impact especially when compared to the huge increase over the past year. Investors will look for signs of keeping rates where they are or a start to cutting them.

Editor's Note: This is Alexander's first time on Market call so there are no past picks. Instead he added to his general comments from the beginning of the show. One topic was the spread between the 2 year bond yields and the 10 year bond yields. If this spread is inverted it has always been followed by a recession for the past many decades. However, the two events are not always correlated. Things may be different this time since we have gone through a pandemic, (with its consequent slowdown) which hasn't happened in over a century. The supply chain is improving and the labour market is strong with very few cracks so he is anticipating  a probable soft landing.

August is always a squirrelly month. Earnings seasons is over, big investors are on vacation, so there's only data to rely on. He's been nibbling at opportunities. The Nasdaq has broken below its 50-day moving average for the first time in over 100 days, a long time. Now is either a consolidation period or it will test how much lower it can go. He's still heavily into Microsoft, Apple, Alphabet and Nvidia. AMD is interesting, because at year's end they roll out innovation on the generator side. Salesforce and ServiceNow are profitable and he's also looking at them.

Inverse relationship between interest rates and tech stocks not always the case given tech performance recently.
Optimistic that interest rates are peaking - specifically on the 10 year yield.
Markets might be going through a normalization as the economy recovers from Covid-19.
Believes NASDAQ 100 is in over-bought phase (markets are too frothy). 
Given recent highs in stock market indexes - believes economy is strong. 

Why can negative working capital be a sign of great business?

Of course, negative working capital could be a sign of financial difficulty if the company’s fundamentals are deteriorating. For example, if sales and earnings decline year after year, the company struggles to generate cash flow, and the company also has a high leverage profile, then negative working capital could signal near-term trouble for the company.

However, there is a small group of businesses that have a superior business model or strong competitive position in the value chain, which helps them negotiate better payment terms. These characteristics allow the company to be extremely cash generative, while at the same time maintaining steady growth in revenue and earnings over the years.

For instance, a software company, or cable company where customers usually pay annual subscription fees in advance before the company needs to provide any service. Or a retailer that sells merchandise and collects cash well before it needs to pay its suppliers for the inventory, etc. 
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The issue is that the Fed and central banks around the world are really worried about inflation. The really need to get it down to the 2% range. They don't want to change that number because it will make them look wobbly. They're better off pushing up inflation in this environment because we haven't seen a fall in employment and such. It's slowed down, but hasn't collapsed. 

It's an opportunity for them to push up interest rates by 50 bps or so, and bring down inflation. Inflation is a very difficult thing. It affects one segment of the population more than another. The wealthy don't spend as much of a percentage on food and gasoline, where inflation really hits. 

Rates are peaking. They're not going to go up another 5-6%.

The problem is that Covid caused a massive dislocation in the world economy. So it's very hard to figure out when this normalization is going to happen. People didn't expect inflation to go up this much.

That's the risk. We could be in a place where inflation comes down, employment doesn't go up a lot, have a very soft landing recession, and rates stay high longer than expected but decline over time. China is having deflation.

He can't predict recession or not. There's a possibility we don't have one, but we get a soft landing and move on in the world. That doesn't mean that stock markets can't be volatile. It's just that he doesn't have the expectation of a recession that people are talking about and, if we do, it could be much milder than people think.

Yes. This is a chance to do work on companies that you like for the long term. A lot of companies out there are at a reasonable valuation such as Canadian banks, utilities, telecoms. Lots of companies have great dividend yields and are not trading at extreme multiples, so this is not a bad time.

Remember that the stock market goes up a lot more than it goes down. When it goes down, you want the fall to be shallow for your portfolio. Being out of the market is a bad thing if you have a long-term perspective.