Tech Wreck - Your Money January 21st 2022

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Fasten your seatbelt and put your tray in the upright position, we are going into a bumpy ride. Not withstanding the FOMC meeting on Wednesday where investors get an inside look into the thought processes of US Central bankers and that Bank of Canada on Wednesday. That is followed by US Q4 GDP on Thursday and more inflation stats on Friday. Given the recent volatility in both bond and stock markets, any deviation from the expected numbers will likely cause increased volatility in most of the financial markets. We note the VIX aka volatility gauge aka “the fear index” jumped from 19 two weeks ago to 29 today. It means there are lot more investors buying put options to protect their underlying positions, or are making a bets markets will fall further. Mind you, the domino that caused this week’s melee was rising bond yields and over the last two days, some of its impetus has reversed course. The question is for how long? Personally, I am thinking with inflation running north of 5%, government bonds continue to provide investors with a negative real return and that cannot last forever. More importantly we noticed 2-year bond yields breached 1% this week, I believe the first time in about 2 years.

Setting aside the economic and monetary releases, its earnings confession week and judging from the lukewarm to negative reception so far, corporations must beat on all metrics and guide higher for 2022 if they don’t want to suffer the same fate. Bell weather names include IBM, which should be interesting given the spin out of their Kyndryl last year, plus Apple, Microsoft, Inte,l Tesla, Boeing and 400 other companies. Judging from the long list of marquee names, it will probably be the most important week for earnings this quarter.

Now for the other elephant in the room, it seems that Covid is running strong in some regions and perhaps peaking in other. The issue at hand is whether the cure is worse than the disease from an economic standpoint. Personally, I believe everyone should get vaccinated because our medical system is ready to collapse. The science is showing a remarkable drop in severe symptoms for those with vaccinations. My view might be controversial but when I was a child, we had mandatory vaccinations. That was a good thing as it helped to wipe out things like polio and smallpox. I know we have politicians jumping on the band wagon that the pandemic is becoming an endemic, but that could quickly change with the next iteration of the virus. In the meantime, the December lockdowns that extended into January might indeed cause a lowering of economic activity leading to slower growth than anticipated which could then cause further disruptions in stock prices.

And last but not least, it’s been an interesting week on the geopolitical front. Judging from the comments I read, President Biden did not exactly generate a warm and fuzzy feeling on the topic of Russia and the Ukraine. If the NATO Alliance does not want ever increasing military action, they will have to show a united front to prevent a Russian incursion. They can ill afford to see another satellite region fall under the yoke of Russian occupation. It will only serve to embolden the Russian Leader. I noted last weekend North Korea launched more military missiles to the anger of South Korea and Japan. Coincidence? I don’t think so.

Finally, we need to look at Canada. We followed US indices lower this week despite seeing rising commodity prices in oil, gold, and natural gas. Energy stocks sold off this week but are still up 11% for the month. And I note gold caught a bounce in the early part of the week and still closed up 2% despite a pull back today. So despite the losses in technology, pot stocks and consumer discretionary names, I note a couple of dozen companies that closed higher for the week including Northland Power, Boralex, and Dream Unlimited (real estate).

In addition, higher rates generally are good for financial services companies as they make more money on the spread between interest paid on savings accounts and interest earned on mortgages and loans. So a handful of those companies are posed for a bounce should rates increase next week.

Happy trading and Stay Safe.

Cheers Steve.

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Steve Bokor

Steve Bokor

Portfolio Manager