Tech is on a Tear! Your Money July 29th 2022

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Stocks soared this week on hopes that the US Fed would increase interest rates by 75bp rather than the 1% some feared. In addition ( and as we have been predicting) US Q2 GDP came in at negative 0.9% and when combined with the -1.6% from the first quarter, the US is unofficially in a recession (2 consecutive quarters of negative growth). It may be short lived, but most Wall Street bobble heads agree the Fed has probably slowed if not stopped the rate of inflation in their economy and by extension ours. I tend to agree with them. Millennials and Genz’s and Boomers have globally seen their crypto assets fall from $3 Trillion last year to $1 Trillion as of the end of June. Simultaneously the rate hikes by central banks have caused house prices to tumble and last but not least, many of the high-flying technology and meme stocks have all but collapsed in price. Peloton, Shopify down 73% year to date, Roku and Netflix down 62%, Roblox, DocuSign, Snow Flake, PayPal, Meta down more than 50%. Is it time to stock up on shot guns and canned goods? Not in my opinion. Most of the excesses that developed from the zero-interest rate environment have now corrected in price. We expect China to come out of its covid crisis in the coming months and all that inventory sitting in overseas warehouse’s will finally be delivered to customers in North America and Europe. In fact, it could be argued that there will be too much inventory that will in turn cause prices to fall. Note, given the pent-up demand and relative low supply, I believe the actual roll over of inflation will likely take place at the end of the third quarter and not the beginning.

Having said that, we don’t see a resolution to the Russian sponsored energy crisis. We believe prices will remain sticky and well above the price of gasoline we paid last year to drive our cars. Sure, there will be a boatload more electric vehicles on the road a year from now, but not enough to rebalance the supply/demand curve. We also do not see food prices going down much either. With high transportation costs still in the equation, I don’t see prices coming down too much. And don’t get me started on the lunatic running our country as he tries to force farmers to reduce their fertilizer emissions by 30% by 2030. The world is running out of food, but the Liberals under Trudeau want farmers to use less fertilizer. Do you know what happens when you use less fertilizer? Your crop yields go down!!! Mind you, I recently read the Dutch government wants to reduce methane production by raising fewer cows. Now, in fairness, if the government wants to subsidise farmers to modernize their planting, fertilizing, watering and harvesting, you can in some cases maintain crop yields with lower input costs. You would need to install monitoring and testing equipment in the ground (moisture and nitrogen measuring devices) along with crop rotations into plants that actually increase nitrogen in the soil (clover, peas etc.), but that means less plantings in wheat, rye and canola, you know the things we export most. But I digress.

This week we also saw agreements in principle with members of the US Senate to increase spending in critical areas of economic development and taxation. If they can pass those bills prior to the US Midterm elections, the Democrats might salvage most of their seats in the house. More details will unfold in the coming weeks but the most important one in my opinion is the $52 Billion Bill to help chip makers like Intel, Micron etc. build plants directly in the US. Currently, the biggest US chip makers rely on production facilities in Taiwan. Its just a guided missile away from the Chinese mainland and while China is looking with a great deal of interest on Russia’s invasion of Ukraine, it is a totally different kettle of fish in the Western Pacific. Taiwan is a sitting duck (armed to the teeth mind you) and has little hope of getting rescued by its geographic neighbours. Domestic chip production is an economic imperative for Western nations and this new bill is a major step in that direction. Some would argue its corporate welfare at its worst, but it would be interesting to see how those same detractors would fare if chip production would grind to a halt leaving most with antiquated telecommunication and computer devices two years later.

In other news, somewhere around 900 US companies reported earnings this week with many of them hedging their outlooks for the balance of this year and 2023. But I don’t blame them. You tell me exactly where interest rates are going to be six months from now, and you would probably get a different answer from the (we are not sure how things will be for us later this year), cryptic responses from corporate North America. And I don’t blame them.  Next week it gets really busy with over 1300 US companies reporting and over 100 Canadian names as well. If nothing else, we expect the energy names to surprise to the upside given the high prices for oil and natural gas. The energy sub index on the TSX has been by far the best performing index up over 40% so far this year. In fact, the next best sector is consumer staples, but they are only up 5% this year. The rest are in the doghouse following the selloff in May and June. The biggest loser so far this year is Healthcare, but it’s dominated by pot stocks, so no surprise there, especially since the US Democrats failed to live up to their promise to decriminalize marijuana. The next biggest loser is technology and again no surprise given Shopify’s 73% drop this year. Hard to believe that less than a year ago it was the biggest company by market cap in Canada and now it’s barely holding on to the 15% position.  To make matters worse, it is axing 1000 jobs to conserve cash and control spending. Kind of lost a billion dollars last quarter. Anyone remember Blackberry in 2008 and Nortel in 2000?

Lastly, was I the only one not shocked by TC Energy’s announcement that their new natural gas pipeline project ballooned by 70%? I found an article in the Gas Processing news online the original cost estimate was $1.9 billion and completed by 2020. With delays, blockages, and vandalism it jumped to $6.6 billion. Now add in more delays, more blockages, more vandalism, and the new cost is $11.2 billion. Meanwhile, if I am not mistaken (and occasionally I am very mistaken), Enbridge has committed $1.5 Billion towards the Woodfibre LNG plant near Squamish. I am guessing its because they have a ready supply of natural gas nearby and a decent port to export LNG. It is scheduled for 2027 with a budget of $5.1 Billion.

Lastly, we cannot underestimate the size of the snap back US markets experienced this month especially the tech heavy Nasdaq. My screen says it jumped 12% in July, which is one of the biggest bounces I have seen since the snap back in April/May of 2020. However, it looks like most of the heavy lifting has been done by the mega caps. Apple up 18%, Amazon plus 27%, Netflix up 28% and Tesla wins the top spot rebounding 32% in ONE MONTH! Now if you look at how the Nasdaq top 100 are doing, there is a fair list of companies that are still down more than 20% this year. On the other hand, Chevron is up 39% this year and Canada’s Tourmaline Oil is up 96%.

Stay safe and happy trading.


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Steve Bokor

Steve Bokor

Portfolio Manager