Your Money - February 5th 2021

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Wow, is this market going crazy or what? I spoke with a well-respected Investment Counsellor in Vancouver today and we both agreed that reality left the train station about 2000 points ago for the Dow and Nasdaq when you compare the latest valuation metrics to historical norms. No question the rally is being fueled by ultra-low interest rates and the upcoming $1.9 trillion dollar stimulus bill. Credit is spilling out all over the place except in maybe a few spaces that truly need it. Bond traders are getting itchy trigger fingers. 10 year US T-Bonds are now 1.15% basically double where they were six months ago. BTW, Canadian 10 year rates are 1 bp away from hitting 1%. That is good news for financials especially banks and insurance companies and helps explain why Goldman Sachs, American Express and  Visa jumped 8% this week.

Meanwhile, the last two years of contraction in the energy drilling space may finally be showing up in the supply side of things. It is certainly showing up in the price, albeit some of it is directly related to ongoing production cuts by OPEC + Russia, but I think it may be dawning on some that we have seen the lows of the oil bear market. The last signal is usually the consolidation of weaker players being taken out by the financially strong. Then again, we are seeing a huge movement in ESG type projects undertaken by some of the biggest energy players in the world. That is a good thing from a global warming standpoint, but given global population growth rates, we don’t want to see too much curtailment in exploration or we might see ourselves with a shortage of oil similar to the experience of the US during the oil embargoes of the 1970’s. There needs to be a balanced transition and my biggest worry comes from the effects of a rapid conversion to electric transportation without sufficient electricity production. Remember BC already is a net importer of electricity and given the delays and cost overruns on the Site C dam project, we could be faced with electricity prices skyrocketing.

Of course the other driver in today’s rally is technology. We note some hits and misses. Alphabet aka Google (up 14%) and Amazon (up 4.5%) both beat earnings estimates this week sending their stock prices modestly higher. However, between the regulators who are building cases of monopolistic concentration and the upcoming corporate tax increases (Governments are in desperate need of cash to fund their spending programs) I am getting a little nervous about the long term prospects and stock prices.

There is no question the virus has left us with a new paradigm that is moving through all levels of the economy. Work from home, aka telecommunicating, Five G technology and medical hygiene have changed the way we live. We are witnessing the emptying out of major cities as individuals and families seek less concentrated housing conditions. That is spurring a boom in housing which in turn is spurring demand for lumber, paint, carpets and furniture. But by the same token one cannot help but feel the pent up desires to see a back to normal lifestyle. Going out for dinner, a play or movie are on hold and so are most other forms of travel and entertainment. The cure comes from washing hands, wearing masks and getting immunized. Sadly that last one is not going well.

Overall, the drive towards new technologies and the adoption by millennials of said products and services is leading to a dichotomy in the markets.  And given the frothiness in markets, woe is the company that misses on their street estimates. Qualcomm, one of the leading chip makers for cell phones and RF Devices missed on a couple of metrics and the stock got clipped for 6% this week. However, with a 1.7% dividend and a 20 times PE multiple, it’s starting to look attractive to me.

Stay safe and happy trading.

Cheers Steve

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Steve Bokor

Steve Bokor

Portfolio Manager