Markets We had two major economic events this past week. First it was the US Fed raising their Fed funds rate by 25 basis points which was in line with most expectations. The 25 bps was a drop from the steady flow of 50 basis point hikes we’ve seen over the past few months. The Fed has increased the fed-funds rate by 4.5 percentage points since March 2022. That’s the largest one-year increase since the 1980-81 hiking cycle.
While that didn’t surprise the market what really set the markets on fire was the obvious change in tone and much more dovish commentary from chairman Powell. Markets immediately began rallying with Nasdaq jumping 232 points on Wednesday and a further 384 points on Thursday for a total of 616 points or 5.3%.
The second piece of major economic news was the January US non-farm payrolls report which came in Friday morning at a stunning 517,000 crushing the estimated 187,000 number that economists were expecting. These hot numbers shocked many investors as it was enough to cause investors to reconsider whether the economy was slowing down enough to allow interest rates to be lowered soon. Bond yields and the US dollar rallied, and equity markets gave back some of the gains of the previous days.
The Dow managed to end the week off by 0.15% while Nasdaq gained 3.34% and the TSX was higher by just 0.21%. |
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While we have seen a strong shift in market sentiment and many more have moved into the bullish camp I think we have moved into overbought territory, especially in the torquier Nasdaq tech names. I’m expecting markets to be a bit more vertically challenged in the short term, profit taking seems more likely after the recent strong moves.
I believe we are firmly in a new bull market move but we need to shake out some of the recent bull market converts. The best bull markets move higher on a wall of worry.
Energy While the equity markets seem to be a bit easier to read of late the energy markets have me scratching my head a lot lately. Th oil bulls continue to make a strong argument as to why oil and natural gas should be heading higher (Ukraine/Russia, China reopening, supply constraints, OPEC production curtailment, etc.) prices continue to weaken.
European Union governments have agreed on Russian oil products price caps at relatively high prices which likely means more potential supply than originally expected. Sharp increases in weekly inventories in the US are also clearly depressing oil prices and outweighing bullish factors. WTI oil is back testing its 12-month lows. This chart does not look bullish to me and if it wasn’t for the fact the US needs to replenish its strategic petroleum reserve, I’d be quite bearish if WTI broke below $70. |
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But as bad as oil prices have been lately natural gas has been even worse. Natural gas prices are well below levels from just before the Ukraine conflict and are now testing 2+ year lows. How can this be, especially with all the doomsday predictions from so many energy experts during summer? We are now seeing industry majors asking the industry to slow production to try and stabilize prices. If the experts are getting it so wrong how can us laypeople have a chance? |
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Put me in the uncertain camp right now. I think the energy market has to go lower in the short term to shake out some of the longs. If we don’t see some renewed strength in energy prices I can see the energy service companies which I have been very bullish on, take a hefty breather. For now, though the energy service sector has been holding up very well. |
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Baker Hughes drilling data showed a net drop of 10 land drill rigs in North America this past week. https://rigcount.bakerhughes.com/
Commodities I tweeted out early in the week that I was expecting a bounce in the US dollar. While it dipped on the US Fed’s comments on Wednesday the sharply stronger jobs data juiced the dollar into the close of the week. The dollar has been in a pretty steady downward trend for months and a snap back was getting overdue. |
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The dollar strength reversed a number of commodity prices. Precious metals were on the defensive and had one of their weakest days in months. Gold for April delivery closed lower by over $50 dollars on Friday, below $1900 at $1876, it’s lowest close in over 3 weeks. |
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Copper turned lower for the week and is back testing the $4.00 level per pound. |
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The North American steel index held up well and is testing decade level highs. |
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One of the strongest commodities of late, lumber, traded most of the week above $500 per thousand board feet before closing on Friday at $499.90. |
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Most commodities are likely to remain under a bit of pressure if the US dollar sees more strength.
Stocks I believe we are in a new bull market. This past week’s comments from the Fed has reinforced my belief that recent market bottoms are likely to hold and we will see higher highs and higher lows. That said I’m being a bit more defensive. Markets look a bit too overbought right now. This includes a number of the names I like. This just means I plan on sitting on my hands a bit more and will wait for pullbacks. There are very few stocks that I would chase higher right now. I think we can afford to wait for our spot. Like last week, Ceapro (CZO.V) and Inventronics (IVX.V) are the names that still look appealing at current levels.
Bewhere Holding (BEW.V) put out some news this week and the stock popped up a bit trading at its highest levels in about 4 months. It’s a long-term favorite but is one of my holdings that I’d like to see stay quiet a bit longer in hopes that I can come back to it with a bit more cash from some of my other stocks. There is a large overhang of warrants at $0.35 which likely caps the stock around those levels until they expire early next year. |
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Ok, back to my housing supply rant I’ve been on over the past year. Months ago I mentioned any slowdown in new housing supply, due to a rate increase environment, will be felt in the rental market. We are seeing residential vacancy rates in many areas at multi decade lows which are putting major upward pressure on rental prices. Here is an article about this: https://vancouversun.com/real-estate/cmhc-rental-vacancy-rate-lowest-two-decades/wcm/f5dadb66-192a-4032-9ca9-fabc5f607205
We can not improve the housing situation in Canada by raising interest rates. A decrease in the ability for people to get mortgages will turn many into renters forcing rents higher if there isn’t a similar increase in rental units. The only real answer is to increase supply. Here’s another article on the subject: Metro Vancouver’s rental vacancy rate drops as demand, prices soar: CMHC. https://www.westerninvestor.com/british-columbia/metro-vancouvers-rental-vacancy-rate-drops-as-demand-prices-soar-cmhc-6441118 “The vacancy rate went down and we're seeing strong increases in rents, which means that demand is just that much higher. We'll need to keep building more market rental, non-market rental and more affordable units in the coming years in order to meet the demand and have the housing system work well in terms of meeting the needs of renter households,” Bond said.
It continues to be clear to me that home builder related stocks have a very strong outlook for many years to come. This past week we saw US home builder stocks rally very hard with many breaking out to new 52-week highs. The sector was so despised last summer with so many investors and commentators predicting a catastrophic collapse. As Mark Twain once said, "The reports of my death are greatly exaggerated". The reports of an imminent crash in real estate and home builders has not only not materialized, home builders continue to be one of the hottest sectors in the market. It’s a reminder that markets can overprice sentiment to the downside just as much as they can to the upside and our job is to determine what is properly priced in.
We saw a new 52 week high in the builders ETF (ITB) which is now up 54% from its June lows. Considering how profitable and cheap many of these companies are currently trading at, if, or when, there is a change in interest rate policy and demand for the supply of housing units gains steam we could be in for an epic move in the sector |
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The summer lows in builder’s stocks is a reminder that when everyone thinks one way it’s important to start to think the other way. At the very least, look for a contrarian argument.
Other Stuff Where have all the cannabis investing experts gone?
Remember a few years ago when cannabis was THE hot sector? There was an explosion in new cannabis IPO’s, financings went through the roof and investors couldn’t throw enough money at the space. Many Cannabis stocks went crazy and millions were made by the early investors that were willing to step of the crazy train while it was going full speed. Turn on BNN here in Canada and it seemed every second interview was another expert in Canadian weed. Where have they all gone?
One of the darlings back in the day was Aurora Cannabis (ACB.T) which once sported a $194 share price. On Friday the ACB.T closed at $1.44 down 99.3% from its 2018 high. Checking in on its financials we see that the company is still bleeding a lot of money having lost another $51 million in the latest quarter which added to its past losses means it has an accumulated shareholder deficit of $6.1 BILLION or in other words has burned through over $6 billion in cash and still can not turn a profit. |
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Aurora is not the only cannabis company that has gorged on early, easy cash and can’t turn a profit. Almost all the companies that the cannabis experts were touting and gaining headlines are in the same predicament. I’m sure well over $10-$20 billion of investors’ money has been vaporized. But among all the burned out weed plays there are a few companies that may have been late to the game or built with a real business plan by hard working business people that had to learn to fend for themselves with out all the cash handouts of the early players. Some have not only kept the lights on but are in the enviable position of growing and actually making money. Wow, what a concept.
I’m highlighting this because this is the typical outcome of many hyped up market bubbles. Lots of money chases an idea, early winners attract more companies looking for easy money and skyrocketing valuations. Promoters get involved, investment bankers smell easy commissions and fees. News outlets see a building audience and bring the hype to the masses and we get investor euphoria looking for the next stocks that looks to double every month. Easy peasy. It’s fun while it’s happening but you just never know when the music will stop and if don’t get your money out early or, god forbid, you believe the hype you ride these things all the way down, many will go to zero.
Some of my best winners have been from stocks that did get hyped up early when they went public. The stock may have been a darling at the time shortly after listing but likely didn’t deliver the promise on time or maybe the promoters left the ship early and the company was forced to learn to swim on its own or it drowned. Guys like me like to wait it out and see which companies learn to swim. Which companies find a way to scratch and claw with out the help of the markets. They turn their company into a real business with real revenues and real profit. This can take years. By then most of the early investors have lost patience. The company becomes an orphan and now if they’ve learned to make money and no longer need the capital markets they become even more orphaned because the investment banking community has no need for them. No financings needed then no fees generated. They are unloved orphans trading at deeply flawed prices that guys like me love to see. And that’s when things can get interesting, and we see early “discovery”.
About 3 months ago I bought my first cannabis stock. A very small amount of Grown Rogue (GRIN.C) at $0.10. This week I sold it at $0.15 for a tiny little profit. GRIN is one of the few cannabis companies that has been able to grow revenues and turn a small profit. It’s never received the hype the big boys did and it certainly never received the capital that they did either. Just grinded it out and learned to run a proper business. |
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I took my little profit and bought another profitable little cannabis company, Decibel (DB.V) at $0.12. |
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Both companies have a lot of similarities. Both are not well known, have struggled over the years to turn things around, both have very little following from the capital markets, and both have just recently hit new 52-week highs (pun intended) in share price. Both look like orphans to me.
To your wealth, Paul and Trevor |
