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What can I Say…volatility is back and there will be more winners and losers. The tech wreck looked like it was over last week as markets lifted in spectacular fashion following an ugly start to May. However, these kinds of snap backs usually see a corresponding dip as supply and demand factors rebalance. If nothing else it points to a lack of liquidity, which could be a function how markets operate. Last week I pointed out how automated trading programs that use Artificial Intelligence to drive investment decisions, focus on ETF’s as their vehicle of choice to increase or decrease their exposure. However, when all the machines decide to sell at the same time, (or buy) there is not enough liquidity to soak up the volume resulting in over sized price changes.

This creates opportunities especially if you have a long-term time horizon. After 38 years in the business it is safe to say I never sell at the top and I never buy at the bottom, but if I can catch a good portion of the trend, your portfolios should do well over time.  I should also point out this is not a rationale to buy any of the zombie names out there. If a company drops by 50% but it still has no hope to earn a profit for several years, they are not to be put on your shopping list.

So what sectors do I like and why? How about auto parts. Supply bottlenecks have temporarily crippled companies like Magna, Linamar and Martinrea, so valuations are cheap and eventually their businesses will recover…in my opinion.

Banks and financials. You must be living in a cave not to notice inflationary pressures will continue to force central banks to raise short term interest rates and banks make more money as rates go up.

Telecoms. Good yields and a growing markets thanks to Five G.

Green energy producers, decent yields and a long runway of projects as governments strive to reduce greenhouse gas emissions.

Cybersecurity. What can I say? Our company just upgraded our security systems with Fortinet, but it could have just as easily been another one. There are many to choose from and as a luddite I have no opinion on them other than to say the sector is skyrocketing so would choose an ETF.

Fixed income. Stick with short duration, floating rate debt and credit specialists. Rates will eventually stabilize and then will decline as a normal part of the business cycle and when that happens, investors holding the right kind of bonds could make solid risk adjusted returns.

Energy. You don’t need to speak to me more than three times to know that I believe we are in a secular bull market for energy. I don’t see oil or natural gas staying at these high levels but when you consider the planet is going to add 700 million odd people in the next decade, they need to feed, house and transport them. Windmills, solar panels and hydro dams, will not, in my opinion, provide sufficient sources of energy, never mind the hidden environmental costs. Canada has the most environmentally sound energy policies and yet our biggest customer to the south prefers to import crude from Saudi Arabia, Russia (oops) Columbia and Iraq. What boggles my mind is all those other countries deliver it via self polluting oil tankers. Yikes!.

Bottom line. There are opportunities developing and on days when they present themselves, take advantage of mispriced securities.

Stay safe and Happy trading.

Cheers Steve.

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