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

Banks - US vs. Canadian. His preference now is the Canadian banks. They have better platforms for growth because they can grow into international markets. Valuations are comparable, but Canadian banks pay out more in dividends. Plus, better tax treatment outside an RRSP for the Canadian investor. Look to the US for things you can't get in Canada, and he prefers alternative asset managers over banks for that.

Trading proposals prompted by meme stock mania. A company like GameStop went from near-bankruptcy to one of the most valuable companies in the world for a time. He doesn't know the details of the regulations, but they're probably trying to address "pack trading". In those trades, not everyone got out. Someone like Elon Musk can say something and a stock just pops, as there's an army of followers who just bid stuff up. Trading for free was part of the meme stock craze. Payment for order flow is illegal almost everywhere else in the world, except the US. The new regulations should have some teeth, as if people lose faith in US equity markets, that will affect things globally.

Cyclicals and rising rates. The problem with all the interest rate hiking is that there's a lag before things kick in. They might overdo it, and they can't reverse that quickly. Timeline anywhere from 6-18 months before these things hit. Rate hikes could put the brakes on the economy significantly, which ripples through the value chain. When investing in deep cyclicals, you have to buy low and sell high. Look for blood in the streets, and we're not there yet. Be cautious on cyclicals. We were lucky to get through the pandemic by putting the foot on the gas, but now we have to pay the piper.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Investment Red Flag to Watch For: Insider selling. There are dozens of reasons an insider might sell so insider selling is never a perfect indicator. As a former insider of a public company, I sometimes just needed some money, so I would sell regardless of what was occurring at the company I worked for. It didn’t mean bad news was about to drop. At this time of year, for tax and portfolio management reasons, there is often more than the usual insider selling. We can accept this. But when looking at new investments, we will always look at recent insider activity. The red flag is waved when there is consistent and persistent selling across the board from numerous executives. Most companies have quiet periods around quarterly earnings periods, and we also don’t like to see a massive increase in insider selling the second these quiet periods end (why are insiders so desperate to sell some shares?). We also look at the volume of insider transactions. If an insider owns one million shares and then sells 15,000 of them, we hardly care. But a sale of 300,000 would raise our eyebrows.

The Fed raised interest rates 50 basis points and said they would stay high for a while. Markets slipped today in reaction. Most money managers saw this coming, though. We're seeing inflation peak, but not wage inflation which is crucial and is THE issue. Wage inflation fuels all inflation and is endemic. There are more jobs than workers. Powell is in a dilemma, and you would find yourself in his position. There's also too much speculation, especially in cryptos, and housing prices have to decline and the housing market weaken to get rid of excess inventory, though see more apartments and rentals.

TFSAs are a great vehicle. Put high-dividend Canadian payers outside a TFSA. Don't get speculative, though some risk is fine and don't be too conservative either. Buy strong growth companies.

Believes central banks raising interest rates was long over due. Expecting higher interest rates for longer. 50 basis point raise this week almost certain. Question is whether more rate increases are coming. Not sure whether a soft landing is possible. Rising interest rates makes sense, and real estate investors should have been prepared. Tailwinds from the past decade are in the rear view mirror (best of tech growth etc.). Thinks that inflation has peaked, but question is where it will settle (4 or 5%).

Educational Segment. Believes market is misinterpreting US FED policy, and thinks rates will remain higher for longer. Interest rates need to remain higher for longer in order to stabilize the economy. Market is pricing in aggressive interest rate easing as if recession is coming.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Investing Reg Flags To Watch For: Declining sales. As growth investors, we will hardly ever be that interested when a company is reporting lower sales year over year. But in an inflationary environment, this becomes even more of a potential red flag. If inflation is running at eight per cent, and your company is not increasing sales by at least that rate, it is moving backwards. We all know costs are rising, so a two per cent boost in sales really means profit margins are down at least six per cent. Watching this red flag can help you find more companies that potentially have pricing power. Of course, cyclical companies have widely variable revenue growth, since they are price takers (for example, commodity plays), so declining revenue is less useful as a red flag. But if you happen to find a tech, health-care, industrial, consumer or non-cyclical stock showing declining revenues, just skip it and look for something else.

Investors are waiting for the Fed announcements on Wednesday. There will one or more interest rate increases but fear of a recession is more on people's minds now. Also there is the question of what will happen in Europe where inflation is even more worrisome than here. There could be a disjoint between interest rate increases here and those in Europe. Next year will be challenging for global investors. It is a tough call.

Santa Claus rally The VIX will go down during this rally. After Thursday, there will be days of strong stock-buying.

To see a Christmas rally, we need to see cooler CPI (consumer inflation) and the FED raising interest rates only 50 basis point and saying they will take some time to examine data before deciding their next move. Today's producer price index was higher/hotter than expected, which pressured markets. The Fed has to hike by 50 points. But CPI is more influential. However, we are seeing deflation in used cars (these prices have fallen) and gasoline keeps falling and showing no sign of rebounding, because Russia is flooding the market with crude oil to fund its war on Ukraine. Key will be Powell's comments next week.

Believes strength in market is the start of a new bull cycle. Volatile recovery as investors digest earnings etc. 3rd market rebound this year occurring right now (initiated by Fed pivot hopes). Added energy in Q4 in 2021 & recent pullback creating investment opportunities. Likes prospects for Canadian banks especially TD, BMO & RBC.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Investment Red Flag: Inventory or receivables rising faster than sales. Investors should always look at receivables and inventory levels in relation to sales when considering a company. Look for consistency: if sales rise 10 per cent, then a 10 per cent increase in inventory is OK, but a 25 per cent rise is not. Sure, the company might be building inventory for a future growth spurt. But just as likely — if not more likely — the company’s expectations for sales are wrong, and its inventory is building because customers are not buying as fast as expected. This can hurt two ways. Customers might have too much and thus back off making new sales orders for a period of time, resulting in weak future sales growth at the company you are investigating. Or, worse, you might see the company take a writedown as its inventory becomes obsolete and unsaleable. Similarly, one needs to watch receivables. If they are growing faster than sales, it could mean your company is offering favourable payment terms in order to secure more sales, or, much worse, it is having trouble collecting on customer invoices.