Markets Major equity markets shrugged off ongoing banking fears, as well as another 25 basis point hike by the US Fed, to finish the week in positive territory. The DOW ended the week up 1.2% while Nasdaq finished higher by 1.7% and the TSX closed up 0.6%. |
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While the US Fed hiked this week US treasury yields moved in the opposite direction basically calling BS on the Fed’s actions. 2 year treasury yields hit new 6 month lows on Friday. In the past 3 weeks US treasuries have quickly changed and predict a slowdown in economic activity and Fed interest rate reversal. |
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Financials US treasuries along the whole curve have seen yields drop. The 10-year yield is testing recent lows. |
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The US dollar index continued lower. |
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Canadian bond yields continue to drop as well. The Canada 5-year bond pushed to new 7-month lows putting further pressure to ease fixed mortgage rates here in Canada. |
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Commodities Gold continues to trade at its highest level of the year in US dollars as investors risk aversion is now attracting investors back to the historic safe haven. Gold closed the week just shy of the $2000 per ounce level, at US$1975.70 per ounce.
WTI oil hit new 52 week lows this past week but was able to firm up as it ended the week. The recent support price of roughly $70 likely turns into resistance as investors struggle to find direction in oil with macro economic and geopolitical events pushing down against longer term supply concerns. |
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Natural gas is back testing it’s recent multi year lows. |
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This week’s Baker Hughes drill rig data showed a very large drop in Canadian rig count likely due to the start of spring break up in Canada where road bans prevent rigs from moving to and from well sites. The US saw an increase of 4 rigs while Canada saw a drop of 42 rigs this past week. https://rigcount.bakerhughes.com/
The US energy service ETF dropped to a new multi month low on Friday likely signalling investor concern over lower industry activity due to lower energy prices. |
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Stocks It’s hard to imagine that equity markets would be able to shrug off more central bank rate hikes and further stress in the global banking system. Both the Swiss National Bank and the Bank of England joined the US Fed in raising rates. Credit Suisse collapsed this past week and was absorbed by UBS and several more US banks continue to struggle amidst depositor withdrawals. Central banks seem to think that higher rates won’t create more cracks while equity investors seem to think the central banks are about to cry “uncle” and will have to change course very soon. |
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Does this look like the chart of a market that has just witnessed further rate tightening and 3 major bank failures? |
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Equity markets seem to be forecasting smooth sailing ahead… I continue to find comfort owning small, growing, and profitable microcaps. So many of these companies trade at valuation metrics considerably lower than their bigger comps. As Howard Marks likes to say “Success in investing is about what you pay, not what you buy.” Many microcaps just offer much better value than most large caps.
Other Stuff While big markets try to determine what they want to do I want to double down our focus on where I think the better opportunity continue to be found, especially for smaller retail investors. We saw 2 stocks from our universe of small companies hit new 52 week highs this past week. DCM.T has had a month and hit new multi year highs closing at $2.35 up over 80% in the past 30 days. |
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Total Telcom TTZ.V also hit a new multi year high, I’m sure that was partly based on SCD investor interest. I’ll be looking to add to my TTZ holdings on any decent weakness below $0.22. |
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Other stocks that showed some good strength were the hard rock drillers. Companies like GEO.T, FAR.T and OGD.T. |
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You’d expect them to continue to do well if gold stays strong which I expect will do so. One stock that has finally dipped enough to get me excited is Zedcor (ZDC.V). The stock has been on a steady move higher for months and is this past week hit a low of $0.56 on no news. It closed the week at $0.59 down about 18% from its recent high. Below $0.60 looks very attractive to me. |
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Immunoprecise Antibodies hit a new 52 week low this past week as well. Breaking below US$3 triggered potential margin calls which may have been the reason for sharp drop during the week. Forced selling like margin call selling usually offers a great buying window as that along with emotional capitulation selling can drive excess price movements into very oversold conditions. |
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IPA is now trading at levels last seen just before the start of the Covid pandemic. The last time the stock was trading at these levels was early 2020, when it was just the CRO business. Back then IPA didn’t have their Talem subsidiary, no pipeline assets, didn’t have their AI subsidiary, Biostrand, and they had very little cash. It’s times like these that opportunistic take out buyers also appear. It’s always best to keep a level head when everyone else seems to be losing theirs….
We are getting to the time of year where most of the nanocaps and microcaps with a December year end start releasing their year end financial statements. It should get interesting as most small companies don’t release much news and quarterly and year end numbers tend to be where they get some action.
More Other Stuff Looking out 2-10 years, I think Canadian housing is one of the easiest investment trades. We have very large and growing supply/demand imbalance. We need more housing units, and we need to produce them faster. I expect companies that can help solve this problem will do very well.
We saw more evidence this past week of the looming housing crunch. Canada’s population grew by a shocking +1 million number. Granted, some of that is catch up from the pandemic years when immigration was almost zero, but even still, if you take the rolling 5 year period you’ll notice a significant growth in population well above prior periods. |
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The numbers are staggering….
The Canadian government has announced that immigration growth will be a major initiative in the coming years and estimates are that we will see over 500,000 new immigrants arriving in Canada annually. Immigration has always been a cornerstone of growth in Canada. While this will be welcome news to those industries that are struggling to find employees, this growth in population will put strains on our physical and economic infrastructure. Housing seems like an obvious concern. According to the CMHC, housing starts in Canada (as of Feb 2023, seasonally adjusted) are currently running at a rate of 243,959. Last June a CMHC report estimated that Canada would need to build 3.5 million new homes by 2030 to fill the need. That’s an average of roughly 437,500 per year. The highest level of housing starts in Canada ever was roughly 280,000. |
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can we possibly get there? We saw what happened when we were running at record levels of construction in 2021/2022. Project timelines were delayed, there were all kinds of material shortages, labour shortages, and prices went through the roof…..
A lack of skilled labour is already a major concern and the current slowdown in construction isn’t exactly going to help. Some of you may know that I studied construction management when I left high school. I spent almost 10 years in the construction industry as a framer and finishing carpenter even running my own small construction company for a few years. We had a skilled labour shortage back in my day and it’s only gotten worse since then. And when things slow down like we may be seeing right now due to higher mortgage rates, the industry loses more tradesmen. As tradesmen reach retirement age they tend to retire when things slowdown not when they are extremely busy and making loads of dough. And new trades people don’t tend to join when things are slow and work is lacking. You end up with a greater trades deficit the next time things get busy again. And now here comes the government….
The Canadian Federal government just announced a $4 billion fund to help improve the bureaucracy and permitting process at the municipal level in hopes of speeding the process to get building projects started. Ok, so now you’ve sped that process up but who is going to build all these sped up projects?
We could be setting up for a major construction crisis just as demand and government pressures coincide.
Canada needs to build more housing units. The only way I see this to be possible is by increasing skills training, incentivizing more young people to join the trades and by improving productivity. We need to adopt improved technology that allows more production per trades person. More pre-fabrication and more automation in that process. This past week I participated in a panel discussing new construction technology. There are some great companies working to help solve the critical issues facing the North American housing industry and I think investors who pay close attention to the companies that are successfully solving these problems are likely to do very well.
The current housing slowdown may lull many into a false sense of security. Housing affordability will not improve if we can not supply enough product to meet rapidly growing demand. We must find a way to increase the rate that we supply housing. If not, then there is a much bigger housing crisis coming our way. One only has to look at the numbers…. To your wealth, Paul and Trevor |
