Happy July!

This article/newsletter was initially published July 2022. At the time, the advisor was not affiliated with iA Private Wealth Inc.

As I sat down to write this more than once, I struggled as I believe not a lot has changed since I wrote my last update, except more and more daily rhetoric about recessions looming on the horizon.

We recently had some friends visit for the July long weekend. One day as we went down to the lake, I was impressed with his tenacity to haul a 40lb tackle box 152 steps down our stairs to try to catch a fish. As the casts went out without a hit, he would change the hook and try, try again. A few more casts, no success, rinse and repeat. He did this countless times and probably went through the whole tackle box, only to get one bite and one fish follow the hook to the dock! I feel the stock market is in the same position right now, casting everything it can at us to try to sucker us into taking the bait: hook, line, and sinker. As investors, we tend to often want to sell low and buy higher when our confidence in the markets is better. Doing the opposite makes more sense.

Smart fish don’t bite when something feels a bit off. Something is a bit fishy. As I write this, so far this year, Apple is - 16.9%, Amazon is -33.9%, and Facebook is -50.9%. his is not unique to them, but a small sample of the carnage happening in the technology sector. This is not unique to them, but a small sample of the carnage happening in the technology sector. Do you really think these companies care about interest rate increases with the hoards of cash they are sitting on? That’s what Wall Street says though- as interest rates go up, we need to sell these companies as their profit margins will shrink. I’ll look at that hook, but just not biting it.

Here are the cash equivalents that just these three companies have… in BILLIONS: Apple: 62.6, Amazon: 96.3, Facebook: 48.1. I could go on, but I think you get the picture. There’s some big fish out there and they aren’t biting either. They are tossing the lines to you, hoping you take the bait.

These companies will continue to run their businesses for their long-term future growth, not the next six months. Does anyone out there see the resemblance to this and the oil price shock of only two years ago? I am sure everyone reading this wishes they loaded up on VET at $2.50 a share only 28 months ago (more on energy below) as it sits at $24.6 today. That’s a nice 925% return in 28 months. Anyone for Apple at $147 today? DraftKings at $11.90 today? Can’t stomach it?

Patience usually works in fishing, how about having a bit in the stock market? It’s not a straight line up. Be patient. We have portfolios aligned with your needs in PIMG. Just like you stick with the hook that works, I believe our strategies work, we just need to sit in the boat and be patient while the fish swim around us.

As we work through the recovery from Covid I believe there is going to be a very strong fundamental shift away from hard goods like housing and home improvements, cabins (and all the toys that go along with them), and all else we could physically do without travel and limited contact. This naturally could not keep up at this heightened pace indefinitely and now that consumer shift is in play. One must pay credence to this shift, but this doesn’t mean housing has to collapse. It needs to slow down- it was going at a torrid pace. We are still undersupplied on housing, that doesn’t end overnight. It doesn’t mean a crisis is imminent. A necessary slowdown from elevated levels is imminent.

I am almost thankful China is in lockdowns, and in reduced growth mode, or I believe we would have an energy crisis on our hands. One could project as they move through this and developed economies “naturally” slowdown from the overspending on personal hard goods that we will still have expansion and pressure on the energy complex for quite sometime. With 1.3 billion people there they too are itching to travel and enjoy the enjoy the outside world also at some point. Oil is needed for that to happen. There is a reason why Mr. Biden is travelling to Saudi Arabia to discuss the Oil situation:

While on energy, I also attached another slide deck from Ninepoint that is astounding, to put it lightly. The amount of free cashflow presently generated by this industry is staggering.

Also, when asked why I don’t want to own banks right now. I feel this is another alarming hit to their profits as almost all of these North American energy companies have had very high debt loads and high cost of capital in the past. That is now over. The banks not only have a slowdown in consumer loans and mortgages, and much higher loan loss provisions needs, but these energy companies are drastically reducing their debt and FAST! Our largest holding in PIMG is VET and at $100 WTI prices they could effectively pay off all of their debt and buyback all of their shares in two years (slide 2)! Don’t let current volatility scare you out of these positions. We are not fixing this oil shortage tomorrow. Keystone looks pretty good right now, hey?

The intriguing thing with investing is that there are buyers and sellers who have different opinions every day on what to own and when to own it. This year the S&P500 has had the worst start since 1970, falling 21% in the first six months. Inflation and interest rate increases are the main culprit, along with the continued concern with China’s zero-Covid policy-with more lockdowns announced this week in Macau. There has been no place to hide as cash loses value relative to inflation. Energy seems to be the only positive so far this year yet has sold off significantly in the last month on recession fears. The slides I shared show you why I disagree with the selloff, and someone is trying to bait us into selling them our energy positions.

I have attached today’s “The Open” where you can see on the right the different indexes year-to-date (ytd) performance. Again, for those of you in the PIMG models I am pleased with our performance ytd comparatively, and much of this is due to our energy and dividend exposure, and cash on hand for our retirees.

I strongly believe we are changing our priorities and spending is going to follow that. Is a recession in the books? It seems to be the only solution to the elevated costs we are all facing. It is part of the business cycle. The real issue is how much more volatility and corrections must we face? I waited to write this to see our North American jobs numbers and the unexpected 1% rate increase decision rate by the Bank of Canada: Payrolls increased 372,000 in June, more than expected, as jobs market defies recession fears

Canada unexpectedly lost 43,000 jobs last month | CBC News

It is astounding that we can be talking about a severe recession with unemployment this low. It feels like 1999 or 2008 in these stock markets and yet our unemployment numbers are at (or near) all-time record lows!

This weekend AMC theaters saw their best weekend of 2022: (AMC Theatres has its best weekend of 2022, surpassing even its pre-Covid mark - Kansas City Business Journal (bizjournals.com)). Today airline stocks are soaring (pun intended) but also remain extremely volatile this year. Every restaurant we go to seems to be very busy (but slowing a bit in June from reports I have read) as would be expected in higher inflationary environment. As discussed prior, those on limited budgets or without substantial savings will be affected the most by rising costs. Those with higher savings rates and fully employed seem to be shifting to travel, leisure, and personal experiences more. The new house is bought, the deck and fence are redone. Time to travel and enjoy the finer things in life. Heathrow airport just asked airlines to stop taking bookings as they are too busy. This is not recessionary. But will also slowdown next year. It doesn’t mean all travel will crash. It will slowdown. It is being priced in.

Everyone I talk to is super busy. This does not help inflation and adds fuel to that fire as people compete for those goods or services by paying more to get the product or service sooner. This also has become a problem for some retailers who decided to bulk up on orders and now have too much inventory as consumer spending has shifted (Target and Walmart Are Victims of Their Own Inventory Success - The Washington Post). This too has to normalize. It is unsustainable. This too will have to come down, just like housing is already slowing. It cannot last forever, but that does not mean we are moving into an imminent crisis. Jobs growth will slow, spending will taper, interest rates are “normalizing”. If you told me in 1993 that I could get a 5-year mortgage under 4% I would’ve worshipped the ground you walked on!

The media will tell you it’s recessionary when job growth slows, and as always, they are only partially telling the truth. It is too low and helping drive inflation higher. It also needs to stabilize along with interest rates to a more normal level. Click on the Stats tab and our historical average is 7.62%: Canada Unemployment Rate - June 2022 Data - 1966-2021 Historical - July Forecast (tradingeconomics.com)

I actually feel much better myself writing this today! I convinced myself things aren’t as bad as the media states. We need to slowdown a bit, that isn’t terrible. There is a price that comes with that, and we are going through that market re-pricing right now. Sometimes even those of us working on your behalf in the industry need to take a step back and re-evaluate. I believe we will enter a technical recession very soon. The markets are 6-9 months ahead of the economy. The dynamics we face are no different than past business cycles. This too is working its way through our markets and economies. The BoC is already forecasting lower GDP for 2023. That is good for the inflation targets and those technology shares discussed above…

As stated, the last few months have been a bit of a fishing expedition as there were no earnings to discuss. The media took on the inflation and recession fears with nothing else to talk about (ex Ukraine). Now that earnings season is starting, we will have winners and losers, as always. I like what we own and hope a majority of our companies do well. This is what we wait for, to see who’s succeeding and who’s failing. I will try to adjust as we are tossed the ‘lines” from management and analysts. Many in management might throw us a stinker while in this environment also. I’ve fished for sturgeon with some of you, and that is how we catch the big ones, the stinkier the bait the better.

The truly ironic thing with investing is we want markets to go up to feel better about investing our own money. It is counterintuitive to investing. If I suggested that you should wait and possibly pay more tomorrow for quality assets you can buy today at a discount because it will feel better, what would you say to me? The next month or so will have continued volatility as we go through earnings season. Don’t forget, markets are 6-9 months ahead of the economy.

Inflation and jobs are high. This isn’t the 80’s when inflation and unemployment were both high. This hopefully means we can normalize things without a massive slowdown. A “soft” landing is what that is called. I’m siting in that boat. I also believe as we work through the slowdown, China may help alleviate some of the pain as they exit COVID lockdowns. We shall see.

The slide below shows similar recoveries from yearly starts like this. Get your rods ready, it is time to go fishing. Don’t forget to be patient though, all fishermen must be.

Steve

PS: We truly appreciate your trust in us and hope you enjoy this nice run of weather! Please call me or respond if you want to chat further.

This e-newsletter has been prepared by Steven Switzer and expresses the opinions of the author and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable, but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. This provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same privacy policy which Raymond James Ltd adheres to. Securities-related products and services are offered through Raymond James Ltd., member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member-Canadian Investor Protection Fund.