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

Let's say you have all your assets in a non-registered account. And you wanted a 70/30 asset allocation. For the 30%, you could use GICs which attract the highest tax rate. In Ontario, if you're at the top income level, that means you're giving 54% or thereabouts to the government.

What you can do is buy coupon bonds, which were issued when interest rates were lower. We're talking investment grade like banks, municipalities, governments -- attractive pieces of paper where you're going to get your money back. So the price moved down to, say, $90, and the maturity is 2 years from now. The coupon is only about 1.2-1.5%. The yield would be the same as a GIC. But the capital appreciation from $90 to $100 gives you about the same yield as a GIC, but most of the move, about 3/4 of the return, is capital appreciation which is taxed as a capital gain.

Because of that, it works out to a lot more money in your pocket, with the same amount of risk.

Owning gold over the last 20 years has been a tough game. If you want a miner, go with the copper miners, better risk/reward, part of the next ESG evolution/revolution of where the world is going.

Canada is only 3% of the world's opportunities, so you want to be global to a large extent. Don't ignore currency. You want to be a lot in the US, but the US is quite expensive. Also depends on what type of portfolio we're talking about.

If it's a non-registered portfolio, dividend tax credit really matters, so how high the dividend is matters more. 

TSX is known for 3 sectors: materials, oil/gas, financials. This is a bit of a weakness. When they don't work, the TSX doesn't look very good. Hides the fact that there are lots of nice little industrial and other plays that are quiet, more mid-cap, and the bid/ask spreads can be quite large. They provide wonderful opportunities, and that's what he tries to pick up.

Be balanced -- 40% Canadian, maybe 50% international with a lot of that being US in your equity sleeve.

What made this rally happen? First the Fed, which signalled that it was at the top of the rate structure. Then it was OSFI saying that banks were capitalized enough, and there was a huge move from there. 

Banks change as interest rates change, including profitability. Massive move down in bonds, except for the last 2 days.

Let's take BMO as an example. Today it's trading around $130. It's had quite a move. 

Wait for a bit of a pullback, because there's lots of optimism in the market right now. Let's say you're comfortable buying at $110 or $120. You could put in a limit order for the next 6 months and just wait for that to happen, and if it hits, it hits. Or you could write a put and oblige yourself to own it at $120, get paid a nice premium over the next 6 months, and if you get put in, you get put in. You need to have the money set aside, or have a margin facility, and be ready to be put in. 

The real risk is if you do it with the wrong stocks, and you get put in and then the stock goes down. More often, the risk is that you get this nice little premium, but then the stock rallies, and you don't get filled at that low level. Your return is not as good as if you'd just bought it.

A tool to use at the right time and place.

Two days in, and he wants to throw up because it's started off so lousy. He doesn't want it to go up as it did last year, because then we'd be into absolutely silly valuations again like 2021. 2023 was a terrific year, especially for the Magnificent stocks. But they were just recovering from a terrible 2022.

It's totally uncertain what it's going to do in 2024, no one knows. Interest rates are going to come down, as is inflation, and this will probably be good for stocks. But there's going to be something thrown at us that we can't prepare for.

He's going to spend most of his time thinking about the companies he owns, how they're going to get better in good times and bad, how they're going to allocate capital, and sticking with strong management. That's how a long-term investor thinks.

It depends. The great move from 0% to where they are today was fast, but where rates are right now is normal, they're not high. BOC will reduce rates before a lot of the refinancing pain happens in 2025-26. He's not a doom and gloomer.

The stocks that are doing poorly already reflect that in their prices such as office REITs and real estate companies, have already been beaten and battered. They're not going to do better until interest rates come down and that economy starts to turn.

It's all about the spread that people can make. No question, it's now more expensive to build. But if they can get higher prices for their projects, and immigration is exploding here in Canada, you still have to be bullish on real estate in Canada and NA long term. It's just a normal cycle with a bump in the road.

When clients start with him, he likes to start with about 30-33 names, each with about a 3% weighting. He wishes he knew which stock would do the best, and then he'd allocate more to it. But he doesn't. If things go well, he lets stocks run up to about 7-8% before trimming them back. If things get smaller, and he likes them, he buys more.

Don't focus just on dividend stocks just because you're a certain demographic or you like income. Don't just focus on growth names. Have a diversified portfolio of companies that will do well in lots of different environments.

Stocks have been struggling since the start of the year. Banks had a nice runup in December, as everyone thought rates would start to come down in 2024. But rates have peaked up a bit in the last couple of days. You can't learn much from what happens from day-to-day stock moves. Better to focus on the quality of your asset.

More comfortable about banks than he was a few months ago, since central banks are going to start lowering interest rates across the globe sometime in 2024. This should take a lot of heat off the Canadian banks, though it will hurt earnings in the short term. It's better for the world economy that rates start to come down.

Canadian railroads have been the crushing outperforming sector going back many years. Better than the banks.

Doesn't like them, because he doesn't like paying to protect himself against currency movements and paying out extra fees. As a long-term investor, the currency won't make any difference over the long term. 

Bank earnings are hard to predict, but he's more bullish on the US economy. US consumers locked in mortgages, and so they're in a much stronger position than Canadian consumers. You should probably own US banks over Canadian.

The street has gotten ahead of itself, expecting too many interest rate cuts too soon. Any weakness in the inflation numbers will spoke the street and it's entirely possible. Doesn't expect 6 cuts this year. Pounce on any selloff!

Company Highlight: Dye & Durham (DND)

Dye & Durham Limited (DND) stock was up 72% on the month, but down 15% YTD and up 2% over the past year. This stock ranked 2nd from the bottom in September and has had a roller coaster ride for some time.

DND is a leading provider of cloud-based legal software and payments technology solutions designed to improve efficiency and increase productivity for legal and business professionals. It has approximately 1,400 employees and more than 60,000 customers around the world, with operations in Canada, the United Kingdom, Ireland and Australia, and more recently, South Africa.  Management anticipates that by growing its business organically and through M&A over the long term, it will be successful in building the company to a billion dollars of adjusted EBITDA.

Results for the third quarter ending September 30, 2023 were announced at the end of October: Revenue at $120 million was flat compared to the prior period; Net loss was $13.5 million compared to a loss of $11.5 million; total debt was down $45 million and cash on hand was $20.4 million down some $20 million.

In late October DND announced a large refinancing of convertible debt to reduce outstanding by $95 million through the issuance of a new convertible debt issue. By December 7th the offer was to purchase existing $95 million convertible debt with a combination of cash and new debentures at a higher rate. This should result in 41%  of company debt now fixed (vs 24%). DND believes this to be a useful move to secure more flexibility.

During the period one of the principal investors bought 300,00 common shares for $3 million; and management announced significant progress toward achieving a leverage ratio below 4 and that the strategic review of non core assets was moving ahead.
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A year ago, the street expected a recession, but now it expects a soft landing. If there is a recession, will it be broad or only in certain sectors? The softening US dollar was a story last year and it continues to influence the market (shares have risen as the dollar weakens). Watch the USD. Also watch the US election this year. The last few years have followed exactly the pattern of a presidential cycle: years 1 & 2 are not strong, year 3 is very strong and year 4 is also strong. But in year 4, January-February are choppy, then March-August are strong, then September-October are choppy, then the rest of the year is strong. Let's see if 2024 follows this pattern.