Markets Claw Back

US Pulls Back from Most Trade Threats

The NASDAQ market has risen rather dramatically from its low near 15,267 points in early April this year to over 20,600 points today, a gain of roughly 35%. Similar bounces are evident in all the world equity markets as the United States threat to tax “the world” has softened. This still hasn’t solved the American problem of having too much debt and it’s ability to pay the interest on this amount. I personally have a 5-year mortgage (for investment purposes) which I renewed in 2020 at 1.8% and I think the best I can do is 4.4% today so I likely will either pay off most of it if not all of the loan when it comes due in October. The U.S does not have this flexibility so they might find themselves in a bit of pain later this year.

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Selling Was Overdone

Momentum is a huge factor in investment performance. Shares of the Magnificent Seven (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, Tesla) saw their shares get hammered up until the first part of April but have bounced back strong even though they trade at exorbitant valuations. This might be a good time to shift to value type funds instead of the growth funds. Generally, returns for the balance of the year will be muted as the “sell in May and go away” moniker might sound simplistic but verifiable over my whole 45-year career. So go-go investors that take high risk for high rewards will likely change their tune when momentum wanes. As the saying goes, "markets don't climb to the heavens". The exception apparently is bitcoin that has continued to defy gravity and recently traded at a record high of US $120,000.

The Canadian market, though, might be getting a little crowded. For example, Edgepoint has recently increased the minimum investment on their Canadian portfolio from $20,000 to $100,000. This is basically telling investors “we do not want your money” in order to protect current shareholders. Or from an individual stock perspective, I like to look at valuations of bank stocks to give me an idea of market risk as banks are highly leveraged and highly sensitive to what happens in the economy. Historically – and yes I can go 40 years professionally – Canadian banks traded at roughly 75 cents on the dollar in 1982 during the recession. The highest they got was 2 times book value over the next 40+ years except briefly hitting 3 times book in 2007. I just looked up Royal Bank shares as they recently announced a dividend increase and share buyback to further pump up their shares which have already increased some 12% this quarter already. And lo and behold they trade at slightly more than 2 times book today.

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Investing in Gold and Precious Metals

Of the mutual fund managers that swing through town that have the most compelling stories, precious metals funds make the most sense. The basic premise is that investment into metals and minerals have not kept pace with demand. Mines just do not have the same risk/reward results as investing in go-go stocks has had. This may be changing. For example, the Cobre Panama mine owned by a Canadian company First Quantum Minerals was a roughly $10 billion investment with copper its main product. This was shut down by the locals due primarily due to corruption and environmental concerns. You literally had small fishing boats out in the waters stopping the imports of coal which was used to power the main plant. So, the plant sits idle. But recently there were renewed hopes of the operation starting up production. I have visited Panama City a number of times and the poverty is very evident so we will see if economic needs will triumph over environmental concerns. For example, while store theft is a concern here, in Panama City the streets are patrolled openly by the military and shops have locals with sawed off shot guns in plain view. Walk quickly.

I also recently saw renewed American military support for the Ukraine. Trump has apparently changed his tune on Zelensky. So, what does the Ukraine have that the Americans need? How about significant deposits of various strategic and critical minerals including rare earth elements like titanium, lithium and uranium. Especially when you alienate most of your trading partners like China, it’s easier to have one on their knees.