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

The damage to the economy by Fed rate hikes has already been done and we will see a flurry of data to show this. Rather, the big story is the economic contraction that's unfolding. This is why the market is rallying. The megatechs are leading because they're seen as safe.

Deposit inflows are the story in the coming earnings season. Commercial RE charge-offs will be low for the big banks. Inflows will offset weakness from net interest income. Also, fixed interest trading will be weak for the banks.

Surprisingly, not as much as you think. A year ago, if you said GIC rates would be 5.5% in an environment as opaque as this, you'd think that many people would be happy to lock that in for a year, and some have. A lot of folks are pretty scared, but a lot of folks think that this is over. 

Markets have been a slow tease up, with bond yields dropping since January. So many strategists have been negative, predicting a recession, and therefore saying be careful.

He's been saying for some time that it's too close to call. Strong labour market on the one hand, inflation that's coming down, so we're not completely out of the woods yet. A year ago, he was very light on equities. On a 60/40 portfolio, he was 40-45% equities. For the last 3-4 months, he's been heading towards about 63-64% stocks. 

The longer we can take the negativity with the economy holding in, and the closer we get to a pause (and we're within 25 bps of that), then it can be a happier story than a lot of people are figuring.

Has hurt so many people over the last 10-15 years. You want to be long gold and silver at the right time, once every 15-20 years, and it's hard to find those times. Gold has really broken out, as has silver. It's always about free cashflow, and that's harder to come by when costs have been rising. Stocks still trade at a discount to bullion, as they have for a long time. 

Not for the faint of heart. And you have to be right about your bond yields, which have to keep coming down for gold to work. That's probably the way they're going to go. He likes ABX and AEM and owns them, but is not piling in.

Ask if the transaction is accretive in earnings going forward? That takes into account execution, cost of capital, existing debt, and earnings. The transformative ones are the riskier ones. 

The Importance of Pricing Power:  We believe that companies with strong pricing power have the ability to do well in an inflationary environment for these particular reasons: 1) The ability to raise prices to offset inflation without losing volumes helps companies maintain their profit margins 2) Pricing power allows companies to price their with flexibility, sometimes even faster than average inflation rates of 3-4%, leading to operating profit margin expansion 3) A high gross margin can be a powerful lever for organic growth over the long term, especially for companies with mature volume growth. 
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We might get interest cuts, but not without pain in the economy and market. Leaving rates so low in 2020-1 was a mistake, made worse by central banks announcing they would leave rates low, which encouraged consumers, businesses and banks to plan interest rate risk on that basis. Central banks won't pivot sharply, because that would lead to questioning of their credibility, already damaged when the central banks wrongly called inflation transitory. Rate cuts will happen in a dire situation or emergency only.

Today's CPI report was positive. CPI rose 0.1% month-over-month, which is on pace for 2% annually. Good. YOY it was 5% in March vs. 6% YOY February. A serious decline. Also, super-core inflation (services ex-shelter) declined YOU and MOM.

Doesn't like bank stocks now. But it's positive that the outflows from the small regionals has stopped and now there are some inflows. It comes down to competition for deposits and the online savings rates are much higher than what the banks are paying. So, the banks will have to raise their rates which will reduce their margins. Bank preferred shares are interesting, though.

Banking sector fears should alleviate since the Fed will guarantee deposits. The near term risks for the Regional Banks group are earnings expectations since deposits have been withdrawn from these banks. Also there is uncertainty on what the new regulations will be for the banks. eg. will there be a cap on dividends to be paid out by the Regional Banks. It is safer to be with the large banks.
The recent announcement re the coal spinoff from Teck is something to watch. This spinoff is best placed within private equity and will be good for ancillary businesses.

Editor's Note - The question was on switching bank holdings from Canada to the U.S. He recommends a blend of both American and Canadian. In Canada he likes Royal and National, in the U.S. Goldman Sachs and Morgan Stanley. Canadian banks have higher dividends.

Protection From the Negative Effects of Inflation.  Having a conservative balance sheet not only lowers the company’s interest expenses amid rising interest rates, but also leaves room for the capability to leverage up and play offence while competitors preserve cash. We prefer companies that are over $100 million in market cap, as these companies are more mature, and have a reasonable track record for investors to evaluate. 
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Growth Versus Value? This is always a popular topic with investors. Should they buy ABC stock at 10x earnings with a dividend, but no growth; or should they buy XYZ stock at 25x earnings with no dividend, but high growth? We prefer growth, but don’t think any investor should pigeonhole their style in one way or another.

A boring value stock, if priced right, can still provide solid investor returns. An exciting growth stock, if priced wrong, can still blow up and cause a lot of financial pain. Both value and growth stocks can be owned, and each stock idea needs to be looked at in isolation. We think it is wrong to simply ignore an entire section of the market just because it doesn’t fit one’s investment style.

Value stocks had their day in the sun when interest rates soared, so maybe now it’s growth stocks’ turn to shine. But unless you have perfect foresight — which no one does — it might be best to own some of each style in the year ahead.
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