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

LNG Canada shores up the floor for pricing, so it should finally make it more rational for producers than to go on those crazy cycles. But the other side is that gas is a very robust commodity once you turn on the taps. Coastal GasLink won't be accepting gas until the back half of this year, and LNG Canada will take time to be at full capacity.

We're getting close, and we'll have to see how the producers respond. He's very positive long term. But short-medium term, anything can happen. He remains diversified. He prefers a company like CNQ to make the decisions and pull the levers, than going with a company that lives and dies by the gas price.

The other thing is that LNG to get to Asia via the Panama Canal is severely hampered right now. Creates even more of an opportunity for LNG Canada.

All the banks have them, but different classes. So a fund manager can buy an F class, which has no fee and pays 4.8%. Discount brokerages offer A class, which takes a fee. It's bank interest, not commercial paper or money market, so it's the safest.

Look up the codes online with "high interest savings account". If you have trouble, call your provider to find out which one you're able to buy. 

These differ from traditional money market funds in that they're a vehicle to collect bank deposits. It's not a security, it's just a bank deposit, same as a savings account.

The Over-Diversification of ETFs:

The justification for owning fewer ETFs is also that most ETFs hold hundreds of individual stocks within them, already creating a lot of asset and sector diversification. Another important factor for investors to consider is any potential overlap between ETFs. For example, in this Reddit post, VFV, VOO, and XSP all have the same holdings and are designed to track the same index, the S&P 500. Thus, it is over-diversification for many investors to hold more than one of these types of ETFs.
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China has significant economic problems--real estate, shadow banking and weak demographics--and no longer makes it an attractive place to invest. Inflation will hold up higher than people expect, and this will impact interest-sensitive stocks as well as bonds. There are are also geopolitical concerns in the Ukraine and Middle East, which will benefit only a few industries. Massive defence spending will leave little for everything else. He expects 2024 to be very choppy and we've seen this so far this year. We were living in la-la land with lower interest rates, but now we will see normalization with higher rates for longer.

Will the central banks engineer a soft landing without a recession? That's the big question. In 2023, market breadth was narrow with Shopify comprised a third of the TYSX returns, and tech was up 70% that year (only 10 stocks on the TSX). Dividend stocks struggled. But inflation moderated from 8.1% in June 2022 to 3.1% last November. (Next print is on Jan. 18, 2024.) Supply chain shortages faded. GDP was flat. In 2024, the central bank will probably do quant easing next year with 5 rate cuts from 5% to 3.75%, possibly. He expects ever-widening market breadth. Three scenarios: 1) the Bank of Canada makes a policy mistake by leaving rates too high too long which triggers a recession and reduces GDP, 2) there's a soft landing and no recession after rate cuts strengthens the economy and inflation remains contained, which widens the rally more; or 3) inflation picks up higher than 3.1% which leaves the central bank keeping rates higher for longer. Stay balanced, diversified and defensive.

Perpetuals offer fixed rates, like 6% perpetually. A reset has a basis point feature, like an initial coupon of 6%, then a spread of 200 basis points (always benchmarked to the 5-year government bond). Every 5 years, the latter will reset to 200 BPs above this bond. So, if you believe interest rates are going down, buy the perpetual. If you believe rates rise, get the reset. He expects rates to decline.

Does not think prospect of economic "soft landing" is a guarantee. Believes from bottom up/top down perspective, not much upside left in the markets. Upcoming earnings will need to beat by a lot in order to raise markets materially higher. Multiples are already priced for strength. Going forward, markets will remain strong given the strong employment numbers. Prospect of US Government shutdown still a reality, will cause turmoil in the markets. Does not think Biden or Trump will become President. Also watching tension in Middle Easte/attacks in the Red Sea. Energy prices may go higher if large amounts of conflict.

Investing in Bonds:

Believes markets pointing towards bond buying is no longer the best strategy. Too much demand for bonds with higher rates as of late. Bond prices are already baked in. With rates expected to fall, investing in bonds won't be as lucrative. Will be better options for investors in equities. Less globalization, debt issues, geo-political risk all pointing risky economic times ahead. Inflation problem will not go away, and does not think rate cuts will help. 

Company Highlight: Shopify Inc (SHOP)

Shopify Inc (SHOP) stock was up 51% , 110% YTD and 79% over the past year. 

Shop is a leading provider of essential internet infrastructure for commerce, offering tools to start, grow, market, and manage a retail business of any size. It is particularly attractive to small businesses and occupies a nascent software niche which is growing rapidly.

On November 2nd 2023 SHOP published its quarterly results for the period ended September 30, 2023. They were spectacular: Sales at $1.7 billion were up 25.5% over the prior period; Gross profit at $901 million was up 36.1%; Net income was $718 million compared to a loss of $159 million. In the nine months ended September 30, 2023, SHOP facilitated Gross Merchandise Volume (GMV) of $160.8 billion, representing an increase of 18% from the nine months ended September 30, 2022. Monthly recurring revenue at 141 million was up 31.8%. Cash on hand stood at $1.3 billion, down $324 million, partly to acquire marketable securities.
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Bullish on outlook for markets in 2024. Lower interest rates, and strengthening economy will support stock markets. Disruptions from Covid-19 (supply chain etc.) beginning to fade. Inflation appears to be falling along with lower energy prices. Expecting P/E ratios to rise across all industries. Favoring high dividend companies like Bell and Enbridge, especially if interest rates drop. Expecting share prices to rise in blue chip dividend companies as well. 

Company Highlight CGI (GIB.A):

CGI is a Canadian company that provides IT and business process services to clients worldwide. It has over 90,000 employees and operates in more than 40 countries. It is one of the largest IT services providers in the world and has a strong reputation for delivering high-quality solutions to its clients.

Over the past 10 years, its price has appreciated at a 14.8% annualized rate, with good forward analyst expectations for sales and earnings growth, and a five-year sales CAGR of 4.4%. It currently has a market cap of $24.3 billion, it has strong net profit margins of 11.4%, a free cash flow yield of 5.9%, a reasonable forward P/E of 17.9X, and has demonstrated low volatility over the years.

Growth is somewhat muted on a constant currency basis, but it continues to execute a balanced approach between growth through acquisitions and share repurchases. It has a buyback yield of 2.5% and has reduced its outstanding shares by 24% over the past 10 years through buybacks.

CGI has an impressive trend of beating earnings expectations, and its profit metrics have shown expansion over the years.
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There was a chase to year end and a bit of a Santa Claus rally. The crowd was really mispositioned for the widening chances of a soft landing, which are still about 85% according to Goldman Sachs. He's still constructive. 

There's been a big rally. Most watchers are waiting for this rally to thicken, widen out from the Magnificent 7. We've seen that in the last couple of days, with the NASDAQ struggling a little bit and the baton passing. That will continue. 

2024 is a year of tremendous uncertainty. US election coming, wars unfortunately, earnings expectations that may be a little high. People are more aggressive on the markets and looking for the Fed to lighten rates faster than will actually happen. 

Ton of opportunities in dividends, tech, industrials throughout this recovery. But he's also saying that fixed income is still very attractive, and you can enjoy it for the balanced part of your portfolio.

A base asset allocation is 70/30. In a strong bull market, where we don't see the market going down, you can get a swing where you get up to 90% equities. You could also swing the other way, going down to a 50% equity weighting.

In an environment like this, even though we're in a bull market and in the middle of a recovery, you have to have respect for the fact that bond yields are so high. In a registered account you can still get 5%+ on a GIC without any sort of headache. In non-registered accounts, you can buy coupon bonds that are very attractive from a tax perspective. 

There are still all these risks in the market and valuations aren't cheap anymore. From a risk/reward perspective, being on your asset allocation makes sense.

Who knows what this year will bring? You want to construct your portfolio with things that aren't going to lose. Companies, like POW, where it's not a question of "if", but "when". Let them be the meat of your portfolio. 

Around the edges you can have the satellites like SHOP. If you have the risk tolerance and you see them, occasionally from time to time you can add in a small position like ABXX.