Absurdity Rules - Your Money May 20th 2022

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What can I say…it’s getting stupid out there, as great companies get slaughtered for minor earnings miss metrics (sales, net margin, and/or profit). It should come as no surprise to investors that companies are having trouble with supply lines given the continued shut down in China and the horrific war in Ukraine. We also should not be surprised that consumers are pulling in their horns in the face of rising interest rates, its economics 101.

So, when I see blue chip names like Walmart, Deere, Cisco and Target getting hit worse than when markets melted down 2 years ago, it puts me in a buying mood. Don’t get me wrong, Bear markets can last for the better part of a year, but over the last dozen years or so, cycles seem to be compressing with duration getting shorter and shorter. In the current cycle, inflation has spiked which has dug into the operating costs of businesses. However, once those higher costs have been accrued for, the absolute level of prices might stabilize which means inflation could be stabilizing. Second if we get China up and running again, the missing components that have stranded businesses in NA could be up and running at regular run rates.

The wild card will be labor prices. If consumers feel they are losing ground and withhold services for higher pay, we could end up revisiting a 1970’s style inflation cycle. However, I think the Federal Reserve will raise rates three more times and each successive increase will permit corporations to alter their capital spending and employment budgets. If you ask me, the JOLTs or job openings 11 million will quickly shrink, potentially ending the so-called tight labor market.

Bottom line, while there are still dark clouds on the horizon especially with Russia showing no signs of withdrawing, equity valuations are getting attractive across a broad spectrum of industries. Take energy for example. Even if crude oil pulls back to $85 per barrel, Canadian energy companies will be making boat loads of money. As for Canadian banks, I just have to remember my personal experience post 2008. Suffice to say, I believe a slice of the population will experience an unexpected increase in their financing costs. If you have floating rate debt, you might want to lock in a portion, just to be safe. 

Next week earnings galore, especially our Canadian Banks, plus US GDP and PCE Inflation, the preferred stat used by the US Federal Reserve. Markets will be closed in Canada on Monday and will be back on Tuesday. Happy long weekend. Stay safe and Happy trading


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Steve Bokor

Steve Bokor

Portfolio Manager