Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a controversial episode of Stu’s Days. Stu, welcome back. We missed last week, but you look like you're in a good space now.
I'm in my office, which is always a fun space. I do like being in front of the screens and everything, if that's what you mean.
Well, let me tell you where it gets controversial, Stu. I'm in Vancouver today, and I'm walking down this street, looking for a place to eat, and I see this restaurant, and it's a Pho restaurant. P-H-O. I believe it's pronounced Pho. And it said, every day is Pho’s Day. So maybe they have taken over Stu's Days. It's not Stu's Days, it's Pho's Days. Should we fight them on this?
No, everyone needs their day.
Every dog has its day.
That's right.
Wow. That's very magnanimous of you, Stu. I guess that's why everyone likes you so much. Or it's your investment knowledge. But what's not controversial and what is positive, lots happened in the last two weeks since we connected. So we had the Fed rate cut, 50 basis points. We had this stimulus package out of China, which, after a few disappointing shots at stimulus, it looks like they've nailed it this time because people are pretty excited about it. We've seen some markets move. Markets continue to hit all-time highs. So wrap it all up in terms of what you've been watching the last two weeks. What's interesting you and what it means?
Yeah, well, it's interesting because we started off with the Fed and it's like you have your bowl of popcorn waiting for the Fed to come out. And the market went up and down and up and down on the Wednesday afternoon. And you go home and you watch. I think the thing that we need to always to try and remember is we're trying to separate what will take time and what will come out over time with letting the price action determine the narrative that people want to go home with. So the Federal Reserve went 50 basis points and kind of said, don't expect 50 all the time, which some market participants called a hawkish fifty. The way to start, but it still wasn't quite to the excitement that the stock market wanted on Wednesday. And then we came in on Thursday and it was a rip show. All of a sudden it was exactly what the stock market wanted. I think we have to be careful. We don't want the narrative to be determined by the price action. So generally speaking, by going 50, does it improve the odds of a soft landing? I think the answer is probably yes. And then the second thing is along the way, we've had some more economic data that has been pretty good, all things considering. So yields have found a level. They're just sitting here. Inflation remains benign. If anything, we got to be a little bit watchful on the inflation front. Not that it's going back to any levels we've seen, but it gets a little bumpier from here, and we may be more dependent on things like shelter and auto insurance, a few other things. But yields have come down to a level which should assist the economy. The economy still seems to be in an okay shape. People are watching unemployment, as we've discussed. That's going to be a really crucial feature. And you had markets, on the headline level, where valuations were elevated. A couple of things to the positive, is that margins are wider, profitability is up, returns on capital are higher than they've been historically. So maybe that supports modestly higher valuation. But still higher. Not out of the range of comfort, but on a headline basis, a little bit more elevated. From a scenario analysis standpoint, those valuations are based on earnings that will see even better margins going forward. So we need to really think through that. But the other side to that is the average stock looks not too bad. And then we had a variety of other news. Microsoft came out and signed a deal to restart a nuclear power plant.
Three Mile Island, no less.
That's right. Significant for the company that's doing the restart, but also a reminder of the mountains of CapEx that sits in the pipeline. And will that CapEx live up to expectations for some of the highest valued stocks? Time will tell. But nevertheless, for the economy, it is CapEx. There's going to be a lot of money still in the flow. So that came along. The yield curve continued to get even more a positive slope, which helped some financial stocks. So the market broadened a little bit as well. So that's positive. It didn't quite have what we call a breath thrust, lots of stocks hitting 20-day highs all at once. But generally speaking, it was somewhat constructive. And then, as you mentioned, China came along with just a couple of days in a row of more significant announcements. Will they be successful? Time will tell, but the reaction in markets has been quite strong, quite significant. One of the quotes that's written on my wall from different investors, which I love, is: opinions about facts set prices. It's too early to tell whether or not all these announcements out of China will actually stimulate the economy, but the initial opinion about it is it will. You've had two surges in the Chinese markets. You had one, then you had a little brief period, and then you had the second following on. They do look a little bit more serious about trying to stimulate and get to their economic goals. Then that brought a whole bunch of other stocks to participate, the material stocks and things like this, with copper bouncing off $4 and re-accelerating. I probably meandered all over the place there, but it has been an eventful couple of weeks. And I would say most of those events at the margin have been a positive for sentiment on the average stock.
Well, I'm not surprised, though. I threw down the gauntlet on Pho’s Day — and that's a soup — but you are going to go to the investment stew, which is your shtick. And of course, everyone loves the investment stew because there's a lot in there. It's meaty, all kinds of fun stuff to talk about and consume. And so that was a great synopsis. But I've been doing this other video series with a lot of different portfolio managers, and this idea around CapEx spending was a common theme. And then the idea that you have had some of these big companies, particularly in the AI space, that have had unbelievable runs. They're just cash cows, so they've got the cash to go and spend. And now they're just dumping billions of dollars of CapEx. You see the effect it's having on, say, NVIDIA, as one stock that we've talked about. But it broadens out to a lot of other companies that are going to be a part of this incredible revolution, almost another industrial revolution, which is AI. And it creates opportunities in a much broader spectrum of stocks. And that's great.
Yeah. It's interesting for sure. How this flows around. The interesting thing about Microsoft signing this contract, their share price is relatively flat through all this. And you think, well, this is the big one starting to throw its weight around and actually those plans about how the data centers will get built, powered, how this will all arrive. Maybe it's some of the other areas where it hasn't been thought about as much that might be a little bit of a beneficiary.
Yeah. And then going to the Chinese stimulus, I was talking to Phil Langham, who is an emerging market manager that we've had on the podcast before. And he's been underweight China for a long time and quite disillusioned with the prospect. Not disillusioned with the Chinese economy or the prospects for growth in China — they're still good, they're just not what they used to be — but there are other areas that are more exciting, India, Vietnam, etc. Bangladesh is another one he's talked about. But he heard this announcement, and as you say, opinion was that this one is maybe different. And so, he's starting to look differently at the Chinese stock market. And again, if you've got the US with rates coming down and maybe economic activity and earnings bottoming out, and we're moving on to growth in the future, you throw China in there. If it starts growing at 5% instead of 3% again — or 6%, whatever it might be — then you got some really interesting stuff going on around the world with the economy and profitability of companies.
Yeah. I think that's fair. There was one other piece of news, not as significant on a global scale, that we should probably cover off as well, from a Canadian banking standpoint: the government came out with some changes on the level of mortgage they would insure and the amortization period. You can view this a number of different ways, but you can now get CMHC insurance on a house up to a million five. That changes the down payment dynamics. And it is the beginning of a solution where I think the one conundrum between supply and demand in, say, some of the big Canadian cities was, okay, if I'm going to bring new supply, it might be costing me $1,200, $1,300 a foot or something like this to build new supply. A thousand square foot condominium, at a million two, wouldn't get the benefit of CMHC. Yet the ability to pay might have been around 950 or $1,000 a square foot or something like this. These are rough numbers, but it had this gap. There's an affordability issue, but then you can't bring supply on at those prices. I thought that that CMHC news was interesting because it helps begin to grease the wheels of the condominium market where there's been oversupply. There's no new building. That dynamic, I think, is worth highlighting for our Canadian listeners, because when you think about the down payment, you need 5% on the first 500, 10% after that, on a 30-year amortization. All of a sudden on a house in that million-and-a-half-dollar range, the difference between renting and buying started to narrow quite a bit.
And we talk about the Canadian economy, and one of the hurdles or headwinds that the Canadian economy is facing is housing affordability. We've talked about from a bank perspective, all these mortgages that are going to start to roll over in 2025, 2026, off low 2% as a rate. Right now, they roll into 4.5 or 5%. But with rates coming down, you create new supply in that sweet spot of pricing for the builder and for the buyer, if the buyer can get access to capital. So the government comes in and guarantees it. So it all works out and is going to help get the Canadian economy through that potential roadblock.
Yeah. And I don't think this necessarily means «up, up and away» for house prices. But when you can help take off the one side that people worry about. There's a range of outcomes, and people always say, well, I'm worried about the tail outcome. And if I can lower that negative option, then it helps people think about everything else.
You might even say we've seen a little bit of that in the stock market when the Fed started cutting, right?
It's the same idea. That's exactly right.
All right, Stu. Well, great catching up. I'm going to go and have a bowl of soup. Because now that I'm talking about it. Do you like Pho?
I've had it a few times. Yeah, it's quite tasty.
Yeah, it's really tasty. So I think I'm going to go do that. If I'm in Vancouver, I might as well give it a whirl. I know you’ve got a big meeting coming up, so we'll let you go. But thanks again and see you next Stu’s Day.
Great. Thanks very much, Dave.