Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is a special Olympics edition of Stu's Day. Stu, are you all wrapped up in the Olympics? Are you a big Olympic guy?

I do like to watch the Olympics, and it's pretty hard not to cheer for the people that are out there, whether or not it's winning medals or doing personal best or whatever it might be. It's pretty hard not to get wrapped up in the stories of the Olympians.

Now, because you're such a nice fellow, I'm going to guess you cheer for everybody. You have a little bit of a tilt towards our Canadian athletes, but you're cheering for everybody to do well.

Pretty much. I definitely got a tilt towards Canada where we can get it. But I just love the whole celebration of the effort and all that jazz. So I'll take it all.

Let me tell you how into it I am. I've been having baguette and croissant for breakfast all week. I probably did a little bit of that before the Olympics, too. But when I'm in France, I don't know, I'm terrible this way because it's just so predictable or so much what everyone would do. When I'm there, I get up in the morning and I go to the bakery and grab a baguette and some croissants and come back to wherever we're staying and then have breakfast with the wife and kids. I don't do that anywhere else. But all of a sudden, I go to France and that's what I'm doing. And then sure enough, I'm finding myself doing it at home in the middle of the Olympics. I just see Paris or France flash before my eyes and all of a sudden, I'm eating carbs.

I would take an eclair, too. If you're at the store, pick me up an eclair.

Okay, you got it. Producer Nancy, can you stop taping? I'm going to go get those eclairs, and then we'll come back and finish the taping. So the Olympics are on. It's pretty exciting so far. Something else is also almost too exciting. I had Eric Lascelles come back mid-month in between his regular monthly appearance on the podcast to do a special catch-up around the economy and what's been going on around central banks, the prospect of central banks lowering rates, longer-term yields coming down yesterday, breaking through some pretty important resistant points. We've talked about technical analysis a little bit and how you use that on the podcast. We'll probably come back and refresh that in an episode over the next couple of months. But you've also got some things going on with manufacturing and the consumer. So we had Eric catch us up from a purely economic perspective. What are the numbers and why are the numbers looking that way? What we like to do with you, Stu, is to figure out how that links then to companies and how that's dropping down to the bottom line of companies. And this is a great time to do it because we're right in the midst of earnings season. We've had lots of earnings thus far through the middle to the end of July. And then this week, we get all the big tech companies. Four of the Magnificent Seven report this week. So what are we actually seeing? From the economic data, is that translating to what we're seeing in the bottom line of companies? Are we seeing the consumer slowing down? We look at consumer companies. Are we seeing that happen on the bottom line there? And just trying to tie it together. Because one of the things we want to be able to do as investors is, when we hear what's going on from an economic perspective, how does it relate and how do we use that to make decisions around how we're investing? And obviously, we want to know how you do that as well. So if we're looking at the earnings season — we talked a little bit about earnings last week, Stu — are you seeing some of these themes around lower interest rates? And so short-term rates run by central banks, cutting rates and the prospect for a significant number of additional cuts coming between now and the end of this year and through next year. A bit of a slower consumer and bit of a slower manufacturing environment. I think we had China with some relatively slow GDP. The US GDP number for the last quarter, good forecast; for this quarter, not as good. Canada, a little bit soft. You wrap that all together, what would be the examples of the different companies and how that's playing out in the reports that you're seeing from them?

It's a great point. As investors, when the analysts and the portfolio managers are going through each individual company's reports, they're listening for anecdotes that management are sharing about what's going on that's creating the financial statements that you're looking at. For some time, you're trying to marry these anecdotes with things that you see in the press. If you're talking about the consumer, in Canada, some time ago, there was an article about how Open Table was seeing less reservations. Even though you don't know exactly who on Open Table might be seeing less reservations, a light bulb goes off that says that something’s different. The consumers are functioning differently than they had in the past. When we have gone through the earnings season so far, you're doing a couple of things. You're looking very specifically at the companies, but then you're also looking at the aggregate stats. To your point around this season is that the earnings themselves have been not bad, but the revenue has not really surprised to the upside. Lower revenue is something that we had seen in some of the anecdotes coming into this and we're somewhat prepared for. Why earnings are still pretty good is because cost structures, which had so much pressure from inflation, are starting to slow. So they're getting the benefit on the cost side, but the revenue line has certainly started to slow. And that's for a variety of reasons, whether it's big companies like McDonald's and Nike and a few others where they've seen some shifts in demand. Some of them have gone about business strategies that also need careful analysis when they're doing it. So you need to decipher what is maybe an end consumer behavior change and what is maybe a difference in business strategy. So we would try and do that. I think any time you get in these situations, every business we look at, we look at what is our expectations for revenue and what is the expectations around the margins they're going to make on that revenue, and how do those compare relative to history. So when we have situations where a business's current margins are well above its historical levels, we know that that is vulnerable either to a change in consumer sentiment or competition. The old adage, regardless of the industry: your margin is my lunch. I want to come after that. And the thing that's interesting is that in this environment, a lot of those differences start exposing themselves because business is getting a little bit harder. So when McDonald's comes out with the five dollar meal plan again in the United States, and they start doing some things, and you see this all before they report. So in the case of McDonald's, actually, the stock had gone down and had a little bit of a relief rally when they actually reported, because you're sitting there saying, well, if I can see in the newspaper that they're offering a five dollar value meal, it's likely not because traffic is booming. They're likely doing that in response to something. Then you see small changes in revenue, and you see a bigger change in margin as the overall revenue flows through the cost structure of these businesses. So it's very much company-by-company. We sit and listen to Eric, and we know it's slowing.

Well, I was going to jump in. The way we start the podcast, people think we're just killing time and just yip-yap back and forth. But there's a method to the madness of our conversation. So you think about it, say, you and I, your favorite podcast host and your favorite Stu are carving up, eating eclairs and croissants during the Olympics, you hear that data point or that story, and you go, wow, they must be getting fat. If they don't do anything different, they're just lying on the couch watching the Olympics eating that stuff, then yeah, they're going to get fat. But then you find out that what they actually did is they're eating all that stuff, but they're inspired by the Olympics and they're running a 10K every day, they're actually losing weight. They've changed their approach to the way that they live their lives, even though they're eating more. That can be a good thing. There's your McDonald's. So we got to lower prices to get more traffic in. But then you get the report, and the report says, okay, wait a minute. This strategy shift has actually led to more traffic. So it's actually not as bad as you thought. And this is where it's not just as simple as, okay, I hear that this is happening in the economy, that companies are just going to stand pat and let that erode their margins, let that erode their bottom line. They're going to make a reaction to it. And that's the other piece that you need to make sure that you understand.

Yeah. Investing is a very iterative process because that's the way companies approach markets. No one is in the set-and-forget stage. So just as investors, when things get really good, we have to be a little bit wary. When things get really good for companies, it encourages competition. So if any company is just minting it, then there's going to be people that sit there and say, how can we do the same? And chisel away at their margins and chisel away at their market share. And as investors, if we're paying a very high multiple for a set of circumstances that are not likely to persist, then we have to be a little bit wary. And that's what we've seen through and through on the consumer side. It began with some of the lower-end consumer names where they start to feel the pressure, but it's built all the way up into the luxury goods. We've seen some fairly dramatic changes in some of those share prices. When you're an investor, there's a couple of things that you could do. You can predict what will happen, and then you can build your whole portfolio around that prediction. Or you can what they call underwrite a set of conditions that are required for your success. And if you do it that way, one, it's sometimes can be easier to change your mind, but also, two, it's like saying, I could predict that this is going to persist forever, or I could acknowledge that it needs to persist forever in order for my investment to be successful. And that's a bit of a mindset shift. And that's the way we're trying to do it. We're trying to underrate what are the assumptions required for success? So that when you're reading the tea leaves each day or whatever it might be, and you're picking up small incremental facts about things, you're going to challenge those against the assumptions that you've made in your investment.

And the same thing happens from an economic perspective that Eric talked about. We had the big shift in the US election campaign with Biden dropping out and Harris coming on to replace him. And people have their own expectations of Trump's economic policy. They say, well, if the odds of Trump winning are higher, well, we'd expect a strong dollar, higher inflation with tariffs, all these things. And if Harris wins, we'd expect the continuation of Biden policies. And then, we've seen the market do exactly the opposite because the market thinks through next level and looks at how your second wave might play out differently than your initial interpretation of how those policies will go. And again, you've got to be very flexible in your thinking. Like you say, you've got to have a range of different opportunities that will allow you to win if a number of different things happen rather than that one thing you think is going to happen.

Yeah, 100%. The interesting thing, too, is that there's only so many business playbooks. The same playbook tends to get used in all industries to some degree. How you go to market. The four Ps. How you price, the product, the promotion, what have you, how you distribute it. There's only so many levers for management to pull, and they tend to get pulled across all industries in somewhat of an alike fashion. So you learn something from one industry, you go compare it to another. You think something is set in stone. You think Netflix can raise prices or whatever until the sky is the limit. And then Amazon Prime comes along. All sorts of things. So there's always considerations, and you have to then match those against where the share price currently trades and whether or not that's adequately reflected as we sit today.

Although it seems like this is a very unusual cycle — and there are certainly elements that are unique to this particular economic cycle — but in general, we keep going back to the same: inflation peaks, 12 months later, rate peak, 12 months later, earnings bottom. We'd be expecting to see this weakening right now. Does it look like that in terms of what companies are saying. They're expecting that weakness to continue into the next two quarters, which is, again, where we would expect that bottoming out ultimately in earnings. Well, revenue and then earnings.

It's a little bit case dependent, but generally speaking, at some point, there'll start to be interest rate decreases, whether or not it's this particular Fed meeting or in September. Lowering interest rates begins the cycle of easing monetary conditions, which affects mentalities. Should I invest? Right now, there's not a lot of loan growth going on in the system. And the reason for that is because maybe I think it's going to be a little bit cheaper, so I'll wait for it. Then it starts to get a bit cheaper, and then you say, now I can borrow because I can make that investment in whatever it might be. There's some pent-up demand. Pent-up demand leads to better revenue. Better revenue leads to better margins. Better margins leads to better earnings. And that's how the bottom starts to form. So when you get into certain parts of the cycle, you want to be trying to find areas where there's pent-up demand because you know that the demand exists. As soon as there's lower rates, it will materialize and there'll be earnings that follow. Other areas where maybe there's not quite the pent-up demand and maybe they're not as interest sensitive, you're not going to get that same follow through. So it's stock-specific, but you're bang on in the sense that, as a whole, you have tight monetary conditions and so, people save, rethink priorities, they begin to change consumption patterns. And then as interest rates start to go down and monetary conditions get easier, some of those decisions start to reverse. That's how you get a better earnings profile coming out of the easing cycle. There's a lot of discussion around that.

As we talked about last week, that somewhat leads to a shift in the leadership because it's a different backdrop, different leadership.

It's highly dependent. If there's a real shift in leadership, it might take a bit of a stumble on the other side. Maybe we'll see how that plays out. But for sure, when you have a bunch of companies that have more reasonable valuations and their financial results start to improve, whether that's three, six, nine months from now — stock market is forward-looking — and you can sit there and say, I can get a pretty a good deal on a handful of companies that are going to start to do better, that's where I'm going to move more of the portfolio towards.

Given the circumstances with these big companies reporting this week that have had such incredible growth and such incredible stock price appreciation and are running at such high multiples, how much is this really the key quarter, really the hardest one for them to meet those expectations? Again, you are seeing weakness in the economy, and it's just so hard to live up to. Again, here's our Olympic athletes. They do all this fantastic work to become the absolute peak performer in their individual sport. But then boom, it's Olympic time. Now is where you got to really deliver or people are going to say, hey, that's too bad, they didn't achieve what they wanted to achieve. It feels like that's where we're at with some of these companies in terms of the weakness in their stock performance. Again, that expectation comes for each earnings, but this one is particular because of the softness in the economy.

I think that's true. To your analogy, it's like that person winning the gold medal. Someone says, was it a personal best? No, it wasn't. All of a sudden, the gold medal doesn't count, because it wasn't a personal best. So what we tend to look for in these companies is called a reversal. We've talked about technical analysis before, but normally when you get great news and the stock opens up and finishes down, then you say everyone knew that. I think going into this earnings season, there is a bit of angst around some of these big names. So even if the news is just so-so, and the stock reaction is so-so, then so be it. The ones that you look for to say, well, that's a real turning point are the ones that opened up and finished down. Maybe the cake is baked on those ones, and it's time to think about something else.

Well, it's going to be an interesting week, not just the stock market, but the Olympics as we started talking about. We're in the dog days of summer as we come into August. Always great to catch up and see what's on your mind because you're always thinking ahead. Lots of thinking there along with that great eclair idea. I'm heading out now.

Well, great to talk to you, Dave, and we'll catch up next week.