Tag: ETFs

Corporations, it seems, are just really, really good at making larger-than-ever profits. There are many reasons for fatter margins. It could be innovative new products and services, lower taxation, decreasing competition, willingness of consumers to pay higher prices, and so on. The bottom line is that the stock market will certainly pull back at some point (as it did this week). And there are solid reasons why companies are worth more now than they were, say, a few years ago.

Stagflation’s disappearing act

Back in spring/summer of 2022, all the “cool” writers were predicting a scary-sounding future of stagflation. We, on the other hand, were a bit more skeptical. We felt that these worst-case economic scenarios were just around the corner.

So, two years later, are we fearing unemployment rates may shoot through the roof? Are we fearing a shrinking GDP? (Gross domestic product, that is.)

Barry Ritholtz doesn’t think so. He’s the co-founder, chairman and chief investment officer of Ritholtz Wealth Management LLC, in New York City.

The above chart illustrates what economists call the “misery index.” It’s a rough approximation of measuring stagflation.

You’ll notice that while things weren’t exactly great in 2020 and 2022, they weren’t historically bad either. Last year was downright tame, and (spoiler alert!) we’re probably in for another not-so-miserable year for 2024.

Note, though, that this features American data. While Canada’s misery index isn’t quite as upbeat as the USA’s, Canada still sits below long-term averages.

Sure, the cost of living is up in for Canadians and Americans. But so are wages. And unemployment in the USA is at 60-year lows. While growth in Canada has been “anemic,” we haven’t experienced the deep recession folks were worried about over the last couple of years. Growth in the U.S. has been excellent. And inflation has steadily trended downward in both countries.

The massive hype behind Nvidia has resulted in a price-to-earnings ratio of over 55x. By comparison, tech giants Microsoft and Apple currently have ratios of 36x and 29x, respectively. Conventional logic says Nvidia’s growth has to fall back into line at some point—but this sustained period of record earnings is tough to argue with for the moment. Nvidia made 18% more money in Q1 2024 than it did in Q4 2023, and it made a whopping 262% more money than it did in Q1 2023.

To put this growth in perspective, Nvidia’s market capitalization has grown more than $1.1 trillion since Jan. 1, 2024. That’s bigger than the entire market capitalization of Canada’s 14 largest companies—and that’s just growth so far this year!

Founder and CEO Jensen Huang sounded appropriately upbeat in stating, “The next industrial revolution has begun—companies and countries are partnering with Nvidia … to produce a new commodity: artificial intelligence.”

Nvidia bought back $7.7 billion worth of its shares in Q1 and announced it was increasing its dividend from four cents to 10 cents per share (on a pre-split basis).

Frankly, I think it’s just a matter of time until competitors start to close the gap with Nvidia and some of those juicy profit margins start to shrink. That said, there is a whole lot of money to be made while that process plays out. Clearly, investors are willing to pay a premium for Nvidia’s future earnings.

Tough week for U.S. retail

Despite last week’s record good news for Walmart, the first quarter was not universally good for big American retailers. All figures below are in U.S. dollars.

All three of these retail heavy hitters cited a stretched consumer as the main reason for mediocre quarterly earnings reports. Target CEO Brian Cornell explained that low sales numbers reflected “continued soft trends in discretionary categories.” Compared to its rival Walmart, Target has substantially fewer customers coming into its stores to buy groceries, so the consumer shift to necessities appears to be hitting it harder.

Lowe’s CEO Marvin Ellison had similar thoughts on the current retail scene, saying, “Interest rates can go down, but you still need consumer confidence to come up.” Macy’s CFO and COO Adrian Mitchell went so far as to say that its team expects consumers “will remain under pressure for the balance of the year.”

Rainey went on to comment on the state of American consumers. While “wallets are still stretched,” it was also the case that “even the low-income consumer seems to be holding in there pretty well,” he said. He also added that shoppers were still coming to Walmart to buy necessities like food and health-related items, along with less general merchandise (such as home goods and electronics).

Going forward, Walmart is banking for growth on new revenue drivers, such as its subscription program, Walmart+. Global advertising grew 24% in Q1 and will be an interesting supplemental line of business for the company going forward—as it has been for retail rival Amazon. 

In less celebratory news, Walmart has plans to streamline its store offerings by shuttering Walmart health clinics in American locations.

Fellow big box-store titan Home Depot had a predictably-less stellar quarter than Walmart.

Given that consumers continue to cut back on home renovations after the massive COVID reno-boom, it stands to reason that Home Depot shareholders might be in for a bit of a sideways run for a while.

On Monday, the company revealed that while it was reporting its worst revenue miss in two decades, its bottom line was still holding up pretty well. Shares were mostly flat on the week.

Meme stock madness returns 

One post on X, formerly known as Twitter, is all it took to squeeze a billion dollars out of companies shorting GameStop this week.

pic.twitter.com/YgjVqtgcNS

— Roaring Kitty (@TheRoaringKitty) May 13, 2024

For those who haven’t watched Dumb Money or Eat The Rich (excellent airplane flicks btw), GameStop stock is the iconic “meme stock.”

What is a meme stock?

A meme stock is an equity that sees growth instigated by internet memes—usually not based on earnings or value. To sum it up: GameStop is a semi-dying company that appears unlikely to make a profit in the foreseeable future. Consequently, it doesn’t make a lot of sense (according to traditional investing metrics) to pay a high price for GameStop stock. However, speculative bets on where its price could move can quickly make investors money (or make them lose it) quite quickly. Investors who short sell GameStop’s stock are essentially betting that the price will continue to go down. If enough people buy shares of GameStop, those short bets against its share price can cost those investors a ton of money.

Buffett not “uncomfortable” with Canada

When countries look to attract the attention of big financial funds, they often attempt to brand themselves in a manner that will bring much-needed foreign investment to their shores. For example, you might see buzzwords such as:

• Innovative
• Efficient
• Attractive 
• Shareholder-friendly

But given Canada’s stagnating economy, I think it’s appropriate to get excited about this Warren Buffett quote:

“We do not feel uncomfortable in any shape or form putting our money into Canada.”

When Buffett takes the stage at his annual “Woodstock for capitalists” in Omaha each year, the investing world sits up to take notice. So, it was noteworthy to hear his lukewarm notes about Canada, including:

“There are a lot of countries we don’t understand at all. So, Canada, it’s terrific when you’ve got a major economy, not the size of the U.S., but a major economy that you feel confident about operating there. … Obviously, there aren’t as many big companies up there as there are in the United States. There are things we actually can do fairly well that Canada could benefit from Berkshire’s participation.”

He went on to reveal his company’s possible Canadian strategy, saying, “In fact, we’re actually looking at one thing now.” While most other investors are cool on Canadian stocks, it’s interesting to see Buffett warm (again).

Buffett’s last major foray into Canada generated a massive 70% gain in a single year back in 2017 when he invested in Home Capital Group, so he may know a thing or two about making money in the Great White North.

Other highlights from the annual general meeting included (all figures in U.S. dollars):

• Buffett’s company, Berkshire Hathaway (BRK.A/NYSE) is currently benefiting from high interest rates, as it sits on a massive cash hoard of $189 billion.

• Berkshire sold about $39 billion worth of Apple stock during the quarter. Berkshire remains Apple’s single biggest shareholder with over $135 billion still invested.
• In the absence of big deals, Berkshire continues to reward its shareholders by buying back its own shares to the tune of $2.6 billion for the quarter. When asked why he hadn’t used the cash to make big, flashy investments, Buffett responded, “I don’t think anyone sitting at this table has any idea how to use it effectively, and therefore we don’t use it. We only swing at pitches we like.”
• Berkshire’s operating profit rocketed up 39% on a year-over-year basis.
• Underwriting profits at Buffett’s insurance companies were up 185% year-over-year to $2.6 billion.
• Buffett told the audience that he had sold all of Berkshire’s remaining Paramount Global shares and was refreshingly honest in admitting, “It was 100% my decision, and we’ve sold it all and we lost quite a bit of money.”

Buffett wrapped up the annual meeting by saying humbly, “I not only hope you come next year, [but] I hope I come next year.” He later added, “I know a little about actuarial tables,” in reference to his insurance expertise.

This insight was made particularly relevant given the absence of long-time friend and partner Charlie Munger at this year’s event. Munger passed away at age 99 in November 2023.

Oil sands producers await TMX price bump

Diluted bitumen started flowing through the expanded Trans Mountain Pipeline on Wednesday (even at a brisk walking pace, it’ll take weeks to reach its destination). This is raising hopes that at last Canada’s oil sands producers will be able to narrow the discount paid by a now-larger cohort of refiners for their product. Meanwhile, two of the largest shippers on the pipeline reported first-quarter earnings sans that hoped-for revenue bump.

Cenovus output and profits both surprised on the upside, and the company further sweetened the pot by hiking its base dividend by 29% and announcing a variable dividend of 13.5¢ a share for this quarter. Production for the quarter exceeded 800,000 barrels of oil equivalent per day. At the same time the company modestly reduced its overall debt level.

Results for Canadian Natural Resources  suffered from lower-than-expected production and realized prices, especially on the natural gas side. Output came in at 1.33 million barrels of oil equivalent per day.

Amazon, Apple still magnificent

Two more technology mega-caps reported first-quarter results this week, helping keep the Magnificent 7 bandwagon rolling.

Amazon reported continued strong demand for its Web Services, as corporate customers signed longer-term deals with bigger commitments. Generative artificial intelligence (AI) components added to the overall spend, the company said. Advertising revenue also enjoyed strong growth, although there are signs consumers are turning more cautious with retail spending. Following the earnings release, the stock rose 3% Wednesday morning. 

Amazon rival Walmart, meanwhile, opted to close 51 health clinics at U.S. stores and discontinue its virtual health services, the company announced Tuesday. It blamed high operating costs and “a challenging reimbursement environment” for poor profitability in the division first launched in 2020.

Apple’s revenues fell less than expected and earnings surpassed Wall Street estimates. The company also said it would boost its dividend to 25¢ a share and authorize $110 billion worth of share buybacks. Services revenue grew to nearly $24 billion, offsetting declines in sales of iPhones and other devices. Sales fell 8% in Greater China (including Taiwan, Singapore and Hong Kong), but that drop-off was not as severe as analysts anticipated. Apple shares surged nearly 6% before markets opened Friday, and more than a dozen analysts raised their target price on Apple.

Tipping on fast food

There’s no accounting for taste as fast-food purveyors moved in divergent ways in the first quarter; some were squeezed between cost inflation and consumer austerity while others continued to super-size their sales.

The high interest rates over the last few years have led to the explosive growth of cash holdings, including certificates of deposit (like guaranteed investment certificates (GICs) in Canada) and money market funds. Cash holdings in the fourth quarter of 2023 increased by $270 billion to $18 trillion. Despite that relatively small increase, the rise in value of U.S. equities has led to American households to hold more of their wealth in equities than at any point in history (save the dot-com boom in 2000).

There are likely many reasons for this shift, but these factors could likely be the most prominent influences:

• It’s just simple math, since U.S. stocks are on such a long “winning streak” post-2008, the value of those assets is going to be worth more relative to other assets.
• As companies complete the shift from defined-benefit pension plans to defined-contribution plans, it’s possible more stocks are being purchased at the individual level.
• The average investor got smarter thanks to much more accessible information. Consequently, they now understand the long-term wealth-creating potential of owning large companies (both domestically and internationally).
• Millennials and older Gen Zers are sticking around in the stock market after being introduced to it during the meme-stock and pandemic world of 2021.
• There hasn’t been a brutal bear market for U.S. stocks since 2008. Sure, there were substantial pullbacks at the start of the COVID-19 pandemic, and then again in 2022. But, those were relatively short-lived. When the stocks did come back, they returned in a massive way—thus, rewarding buy-and-hold investors.

A contrarian investor might say this indicates an oversold market. We’re not so sure that’s the case. Given the long-term track record of U.S. stocks, we’d be surprised to see stock allocations fall below 35% of household assets in the foreseeable future. That’s as low as it got during the worst days of the pandemic. There has been a durable paradigm shift in how investors see the stock market from a risk/reward perspective.

Canadian investors aren’t doing so bad either. We hit a record high last quarter for financial assets of $9.74 trillion, and overall net worth reached $16.4 trillion. Financial assets (shorthand for stocks and bonds) increased overall net worth by about half a trillion bucks, while residential real estate was down about $158 billion. Household debt was up 3.4%, but that’s actually the slowest rise in debt since 1990, and the debt-to-income ratio actually fell slightly.

Will new corporations spin off more value?

When big corporations buy new companies or dive into new lines of business they often tout the advantages of integration and synergies. The theory goes that the asset will be more valuable as a cog in the bigger machine. General Electric (GE/NYSE) and 3M (MMM/NYSE) are two of the world’s largest industrial companies and it was interesting to see them move in the opposite direction this week.

In contrast to the bigger-is-better theory, companies can sometimes get too big and be hindered by layers of bureaucracy. In that case, the spin-off idea is put forward, in which a part of the company will be separated into its own entity so it can focus on providing a narrower product or service. The more narrowly-focused company should, in theory, excel as it’s no longer distracted by the tangle of corporate machinery at the parent company.

GE completed its corporate restructuring last Wednesday, as the former parent company has now been divided into:

1. GE Vernova (GEV/NYSE): The energy assets of the old GE.

2. GE Aerospace (GE/NYSE): The old GE market ticker continues on as a pure aerospace company.

3. GE HealthCare (GEHC/NASDAQ): GEHC was successfully spun off in late 2022, and is up about 57% since it started trading.

GE Aerospace shares finished down 2.42% on their first day of trading, while GE Vernova was down 1.42%.

Anyone in DJT Land listening?

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Drill baby, drill—but only in the USA, please

With so much going on in the world, it might have slipped past some Canadian investors that the U.S. fossil fuel industry just hit an interesting milestone. America now has the honour of producing more oil in a single day than any other country in the history of our planet. Yes, even more than Saudi Arabia.

When you consider that the USA has been a massive oil importer for much of the last 70 years, it’s pretty noteworthy that the U.S. exported four million barrels of oil per day last year.

It certainly appears that investors are not shying away from providing capital to American fossil fuel companies. It also means that Canadian efforts to turn away from natural gas (despite our allies essentially begging us for more yet again this week) may not add up to much in the great push against global warming.

The USA is now the world’s largest exporter of natural gas, as well.

Wow, it’s a good thing the Keystone XL pipeline got cancelled, as it appears to have put a stop to all that American fossil fuel business—and at hardly any cost to the Canadian economy either!

Economists would argue that the best way, by far, to reduce the amount of fossil fuel being burned would be to put a tax on it. How popular is that tax on carbon these days anyway?

Clearly, the world has to decide on what sort of level playing field it wants to create in regards to the rules for carbon reduction efforts, as Canada’s attempt to go it alone doesn’t seem to be gaining much traction. 

Lower inflation clears runway for rate cuts

Canadians dreading their spring and summer mortgage renewals got some good news this week, as Canada’s annualized inflation rate dropped to 2.8%.

The Statistics Canada report stated that the slower growth of cell phone service fees, groceries, and internet bills were key reasons why the consumer price index (CPI) number came in significantly lower than the 3.1% economists had reported.

The main takeaways from Tuesday’s StatCan report are:

• Rent and mortgage costs are still the main drivers of inflation. Excluding shelter costs, the CPI is up only 1.3% from a year ago.

• Gas prices rose 4% in February from January, and were a major reason for the 3.1% economist inflation predictions. If prices return to a decline (as has been the trend), it would continue to be disinflationary.

• Notably, cell phone plans were down an astounding 26.5% from last February.

• While grocery prices have risen by 22% over the past three years, it appears we’re finally reaching an equilibrium. February was the first time in two years that grocery CPI was lower than overall CPI headline.

• Restaurant meals, property taxes and electricity were outliers above the 3% CPI mark.

• The preferred metrics of core inflation for the Bank of Canada (BoC) are also subsiding, and are down to 2.2% annualized over the last three months.

If we use interest-rate swaps to judge the likelihood of an interest rate cut, there is roughly an 80% chance (up from 50% before the CPI numbers came in), that the BoC will cut rates in June. (Interest rate swaps are basically a way for the free market to speculate or bet on what interest rates will be at a specific point in time.)

In a related note, as the chances of interest-rate cuts increase, the value of the Canadian Dollar falls. The CAD hit a 3-month low on Tuesday. Overall, that’s good news for mortgage holders, bad news for USD-paying snowbirds.

By comparison, Japan raised its interest rates for the first time in 17 years this week, ending the world’s last negative interest rate policy. The Eurozone also released its inflation data this week, and in a pattern quite similar to Canada’s, it also surprised to the downside, as inflation fell to 2.8% from 3.1%.

This week, both the U.S. Federal Reserve and the Bank of Canada reiterated plans for rate cuts later in the year. Here’s how mortgage rates are responding.

Soft earnings for Power Corp and Alimentation Couche-Tard 

It wasn’t exactly a banner week for Canadian heavyweights Power Corp and Alimentation Couche-Tard.

Shares of Couche-Tard were down 4.2% on Thursday after its earnings release. ATD president and CEO Brian Hannasch stated that the lower-than-expected earnings were primarily due to lowered customer traffic and decreased gross fuel margin in the US. He went on to talk about how the integration of the TotalEnergies acquisition is going smoothly and that the company is excited about adding four new countries and 2,175 stores to Couche-Tard’s network of convenience stores.

Power Corp shares didn’t suffer quite the same fate as Couch-Tard, as they were up 1.4% on Thursday, despite the significant earnings miss. It appears that a 7.1% dividend increase was enough to quell any fears that the company was underperforming its current valuation.

Business textbooks are always teaching the Japanese business concepts of Kaizen, Kanban, Andon and just-in-time production. But despite this, the actual market valuations of Japanese businesses have been falling behind for a long time now (basically my entire life).

What some investors fail to understand about this historical anomaly is just how massively overvalued the vast majority of companies were in Japan in 1989. It’s as if Japan’s entire stock market had Tesla- or Nvidia-level expectations of world domination.

Here’s a few takeaways from Ben Carlson of A Wealth of Common Sense:

• From 1956 to 1986, land prices in Japan increased by 5,000%, even though consumer prices only doubled in that time.
• At the market peak, the grounds on the Imperial Palace were estimated to be worth more than the entire real estate value of California or Canada.
• In 1989, the price-to-earnings (P/E) ratio on the Nikkei was 60x trailing 12-month earnings.
• Japan made up 15% of world stock market capitalization in 1980. By 1989, it represented 42% of global equity markets.
• From 1970 to 1989, Japanese large-cap companies were up more than 22% per year. Small caps were up closer to 30% per year. That’s incredible growth for a 20-year period.
• Stocks went from 29% of Japan’s gross domestic product (GDP) in 1980 to 151% by 1989.
• Japan was trading at a CAPE ratio (cyclically adjusted P/E, which uses 10 years of inflation-adjusted earnings in its calculation) of nearly 100 times, which is more than double what the U.S. was trading at during the height of the dotcom bubble.

So, in regard to the constant naysayers who want to compare the “lost decades” of the Japanese stock market to current market conditions, we can only say there is no data to support this level of pessimism. In other words, there are market bubbles, and then there’s the Japanese bubble.

As usual, celebrated investor and CEO of Berkshire Hathaway, Warren Buffett was a bit ahead of the curve on this one. He’s been buying up Japanese assets for several years. Buffett was quoted by CNBC back in 2023 as saying, “We couldn’t feel better about the investment [in Japan].”

It’s also worth noting that even Japanese stocks win “in the long run.”

If you put $1 a day into Japanese stocks starting in 1980 (~$10,500 in total), you’d have over $17,000 today (thanks to recent all-time highs).

This is true despite Japan experiencing one of the worst equity market returns in history during this time period. pic.twitter.com/2t8SG9xJfV

— Nick Maggiulli (@dollarsanddata) February 26, 2024

As Nick Maggiulli, author of Just Keep Buying (Harriman House, 2022), says in the above tweet, if you had started investing in the Nikkei 225 in 1980 (in the run-up to the Japanese bubble), you’d still have a real annual return of 3.5% today (inclusive of dividends).

Carlson also points out that if you invested in a Japanese stock index back in the early 1970s, your returns would still be about 9% a year, despite the biggest bubble of all time bursting in the middle. It’s just that all future returns were pulled forward due to manic speculation—and investors have been waiting for companies to “grow into their valuations” ever since. After waiting a long time for the earnings growth spurt to kick in, it appears the valuation shoes finally fit.

Of course, no such Japanese index fund existed at the time. Today, Canadian investors can efficiently get Japanese exposure through exchange-traded funds (ETFs), such as the iShares Japan Fundamental Index ETF (CJP) or the BMO Japan Index ETF (ZJPN).

Nvidia doesn’t have much room left for multiple expansion when it comes to an increased share price for the stock. After accounting for its incredible earnings day, Nvidia is still trading at a P/E ratio of 66x. Even fellow tech heavyweights Microsoft and Apple are only at 36x and 28x respectively. Consequently, if Nvidia continues its incredible bull run, one would have to believe that the demand for chips will continue to skyrocket and that Nvidia will be able to hold off competitors like AMD and Intel. —K.P.

RRSPs are not a scam or a rip-off

With the deadline to contribute to registered retirement savings plan (RRSP) officially passed as of February 29, we wanted to quickly address the becoming prominent idea that RRSPs are some sort of scam.

We’ve noticed an increasing number of inquiries from friends and family over the last few years that go something along the lines of, “RRSPs are just a rip-off because you have to pay tax on them anyway.”

Since you’re reading a column called “Making sense of the markets,” you’re probably aware that RRSPs are not in fact an asset. The fact that some Canadians don’t understand is shocking. It’s important to understand precisely what RRSPs are.

RRSPs are a type of investment account—one that’s registered. It’s a place where you can hold investments, and it has powers that protect investments from taxation. If you think you’re purchasing RRSPs as an asset, then you might have gone to a bad wealth management company. A good financial advisor helps you understand what asset you were investing in. A bad financial advisor will be vague by using phrases such as “invest in RRSPs.” Investment information is often murky so money can be put into whatever high-fee investments (such as mutual funds) they wanted to sell that day. (Need an advisor? Check out MoneySense’s Find A Qualified Advisor tool.)

Of course, an RRSP doesn’t avoid taxes entirely. It defers tax on the contributed amount from when you relatively earn a lot of money (while working) to when you earn less money (when retired). If you get a tax refund when you contribute or owe less taxes when you contributed to a RRSP, that’s essentially the government saying, “Since you contributed to your RRSP, your taxable income this year is not as high as it would’ve been. So you don’t owe us that money now. Oh, and if you have children, we’ll likely increase your Child Care Benefit cheque, as well.” 

If you get a refund, then invest it and let all of that money compound in low-fee investments for the next several decades, you’re very likely to be happy with the results. But those people who say “RRSPs are scams” are usually salespeople pedalling life insurance for higher commissions. 

Yes, for some Canadians investing within a tax-free savings account (TFSA), it means they could come out ahead of investing within an RRSP. Yet, for the vast majority of Canadians, they could end up in a pretty similar place. Don’t forget, if you invest inside a TFSA, you don’t get that tax refund to stuff right back into your investment account—you’re contributing after-tax income. When deciding on a TFSA or an RRSP, you would need to know exactly how much income you and your spouse will have when you retire.