Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Stu's Days. Someone was telling me that Stu's Days is a synonym for Thanksgiving, which we just went through in Canada. Is that the way people should think about a Stu’s Day? Because it's almost like Thanksgiving every week, right?
Well, maybe we should make it a holiday. A national holiday every Tuesday.
Well, at the rate we're going, we're going to have a holiday most days. If the robots take over, maybe that's one we could do. A Stu’s days holiday and it works out good for everyone.
Last week, Tesla had their day with the Optimus robots, and then it came out that maybe they were actually being controlled in the background. They weren't real artificial intelligence robots. So maybe that's you and I, Dave. You're controlling me while we talk.
No, I'm actually controlled by other forces. They worry about me representing a brand with my unique sense of humor that may sometimes go off the rails relative to the way people think of a conservative Canadian bank. But I'll tell you, I was in Los Angeles this weekend. I'm in Halifax now. I did Coast to Coast in the last 12 hours, which is why I'm probably not very sharp today. You're going to have to carry the load, which you probably should on Stu’s Days. But speaking of Tesla, those Tesla trucks, what are they called? The Cybertruck? They're all over the place in LA. My wife and kids were going, wow, what are all those ugly trucks?
And it's crazy. The finishes you can get on them. You can trick them up if you want.
Oh, yeah. They were all done. They were all a little bit different. But California is just a different place. You're in around LA and you just think about there's probably as many wealthy people in LA as there is in all of Canada, or probably more. You go down as a Canadian with the dollar where it is, and you just feel a little poor.
That's right. You've been called up to the big league for a weekend.
For a weekend. And I threw the game-winning home run because I could not keep up. But that's okay. Nice, humble Canadian. I don't mind that. That's what you do, too, right? You're very reluctant. You're a very humble person.
Simple pleasures, Dave.
Simple pleasure is like bank earnings. That's going to get you excited.
That's right. It has been a holiday in Canada. It was Columbus Day in the United States, and the bond market was closed. And probably the most interesting developments have been the beginning of third quarter earnings. And the banks have come out of the gates pretty strong, especially the ones with big capital markets arms, where trading has been better, investment banking improved, and then net interest margin, which receives all sorts of study, has been a little bit better than maybe feared. And these banks have been pretty strong.
We saw it in a couple of banks in the Canadian earning cycle that had really strong quarters, the numbers out of the US, a couple of them are absolutely phenomenal quarters, not just good.
They're very strong. They're very good quarters. I would say the one area that maybe is still to come is the investment banking side of the equation, which is improving, but those levels are still below 10-year average numbers. So there are still some things to improve, but the trading business has been very strong. And a lot of that is just like when we think all the volatility that we talk about each week. Trading businesses love volatility. It's the fuel for movement, one direction or the other. Those big trading businesses love that.
We keep coming back to this theme because it's so important: inflation peaks; a year later, rates peak; a year later, earnings bottom. So this would be about where we would be expecting earnings to bottom. Yet we're seeing pretty good numbers. How do you account for that? Is that a case that is confirming that we're probably through the worst of any economic slowdown? So maybe this is a confirmation that we don't get a recession. Or have we already seen earnings bottom out earlier, or is there still some more bad news to come? How do we place the expectation that we're going to see earnings slow when earnings continue to seem pretty good?
Well, you're always looking for evidence. So we've talked about the unemployment rate. It’s an important indicator to a softer landing. The other thing inside of the bank numbers is the consumer spending. The banks that I've reported so far, just like the big Canadian banks, they have multiple business lines. They have investment banks, they have credit card business lines, all sorts of things. And in the credit card business lines, the consumer spending also has been pretty good. It's held up better than people thought. So when you think about the most recent employment report, which was better than expected, then you see some of the spending holding up at pretty good levels. That means that US consumer is a big chunk of their economy. And if they're holding in, then that's going to be not bad for the broader economic picture. So maybe there's one or two more months of seeing unemployment behave to say, oh, yeah, the soft landing is in the bag. But a lot of forward-looking indicators — like the stock market is a forward-looking indicator — have marched down that path. And sometimes with the wealth effect of the stock market, it becomes self-fulfilling because rising stock markets make people feel wealthier. The consumer then doesn't bottom at the same level. It's such a big chunk of the economy, and the soft landing is underway.
We're going to have to get Eric back on to talk about the impact that this has had on forecast for how much lower the Fed reserve will be able to take rates before the end of this year and then through next year. This brings us back to the Bank of Canada, which we'll get to in a second. And then you've actually seen some of the longer dated bonds, the yields are actually drifting a little bit higher over the last couple of weeks, which again, seems to indicate that we're going to turn the corner fairly well. Like you say, we're just looking for that last little bit of confirmation.
I think that's right. The interest rate picture has the market seem to gravitate from one direction to the other because the inflation data has been pretty well contained. In Canada, it was pretty good. The UK, this morning, was pretty good. Yet there's some tension because the economy has been okay. You've had inflation come down without really this massive deceleration in the economy. The short end of the bond market seems to gyrate between these two scenarios. On some days it feels like rates aren't going to go lower, and you get a certain reaction in the stock market. And then some days it feels like they are going to go lower, and you watch some of the movement in the different sectors. Going back to our three buckets because I want to also just catch the last on the earnings front, you have a very interest sensitive bucket that was very strong. It’s still been okay but it hasn't been the driver recently. This soft landing has been very constructive for the modestly cyclical quality businesses. Financials are definitely in that bucket, but all over the place, industrials, those stocks have been pretty good. And the equal weighted stock market, we've talked about, that's been pretty strong to the point where you used to be able to get average valuations in the average stock, and they've migrated higher to being a bit more expensive. And then we have the last bucket of higher expectations. The one thing I think that will be most interesting in this reporting is what they call the hyperscalers, the Microsoft, the Googles of the world, the companies that are spending all the money on the chips to create all the data centers for future use. Their stocks have been a little sluggish, all things considering, on a relative basis. And what people are trying to figure out is how much return on capital or investment are they going to see on some of these big CapEx increases. Last quarter, we saw CapEx go up again. This quarter, people will say, what is the new estimates for CapEx? Is it CapEx to the moon? And if it is CapEx to the moon, when do we start to see returns on it? We've all gone on to ChatGPT, and we can now make images, and we can do all sorts of things or whatever engine it is that you use. But people want to start seeing some tangible revenue and profits that accelerate on the back of this accelerating CapEx. There was always this big movement of services to the cloud, but the incremental spend on these very significant processors to drive activity, people want to see some incremental return on that capital as well. I think that's going to be one of the most important earning stories as we finish up October.
Again, those companies are Microsoft, Amazon, Meta, and Google.
Yeah, Google. Those are the big ones. But then even Apple, not in and of itself, but they've talked about the AI service they're going to put on the phone, but it's not quite there yet. I got to go buy this or that. So there's lots to discuss about the positivity of the future. People just want to see a few breadcrumbs that they can lock their hands on to really picture this in their heads.
Yeah, it's interesting. There was a report yesterday related to ASML, which is one of the big chip makers in Europe. And they had a very negative report. A lot of the chip stocks themselves struggled yesterday. Is that something to look for in terms of a sign that maybe this appetite to spend tens of billions of dollars to build this out, maybe it pauses for a second while we wait for some results to be shown? Or do you think this is just straight ahead and they got to build this because they've got to make this work? AI has got to happen, or these companies don't have that next phase of growth.
Well, it's highly competitive, and the companies that are participating have a lot of resources, a lot of cash to spend. So there definitely is a land grab mentality to it. It's going to be big. I want to be there. I want to be a leader. That might persist. The stock market often gets in those situations and say, look, I get what you're doing, but I’d also like returns on my money. And I think that's some of the tension that we're feeling now. So the best of both worlds would be, you see these companies report and they show evidence of revenue and profits that are going to come from this spend and the spend increases. Those are the types of things shareholders like. Put more capital out because you're making a great return on it. If you're putting capital out and I'm uncertain of the return, that's not as quite good in the short term in the stock market. So I think those are the things that we're going to have to work through in the next couple of weeks.
But again, as we've been saying, it’s been pretty good for the average investor when things broaden out like this, because you're really not going to be concentrated in a small set of stocks. You want to have proper diversification or you're investing through an investment manager like yourself, which we'd say is probably the best way to invest in the markets to make sure you've got proper diversification. But when the market concentrates like that, it works against you. When it broadens out, then it really starts to work for you. And I'm saying it that way because that's exactly what you want to say at the cocktail party to your friends who have been bragging that you probably don't have as much money as you think in some of that concentrated part of the market. But now you're winning because you're getting the broadening out of the market.
A broad market is like an engine with lots of cylinders. If one of the cylinders starts to struggle, there's other things that keep the car moving forward. Versus a narrow market which is highly dependent on just a few. And they're definitely financials, industrials. There are more companies participating than we've seen, say, in the last 12 to 18 months. That's been a feature really since the summertime, I would say.
Yeah, I much prefer a broader market. And for most investors, that's where you can get a little bit more excited about things. Although, as we continue to say, and I want to say this every time we do a broadcast, for the millions of people that are now listening: we want people investing, not just saving. Far too much saving going on over the last couple of years with Canadians. We need more Canadians investing. For whatever reason, it just seems to have taken a long time to get Canadians to start considering getting back into markets. Again, make sure you're doing it with the right advice. But that diversification and the idea that I can get a nice, broadly, professionally managed diversified portfolio and just sit there and smile as it chugs along, that's a much better feeling than sitting in cash, in my view. I obviously have a bias here, and I'm going to guess you have the same bias.
Definitely over the longer time frame. The power of earnings growth, the power of management to figure out how to deal with bad times, how to find new markets. All of these things have been pretty powerful contributors to the long-term equity return. We've had a good stretch here. There are pockets where maybe the valuations are a little stretched, but on the whole, you can still find reasonably valued companies with reasonable earnings prospects as we move forward.
You know, Stu, I'm just thinking here. Maybe I'm inspired by the Atlantic air after the Pacific air. My family comes from this area of the world. If only there was a strategy. If you had markets that were at all-time highs — they had a really good run, a little concentrated, starting to broaden out — but I'm still a little bit nervous about valuation. I know I got to be investing for the long term in stocks and bonds, but I've been sitting in cash. I've been worried about just everything that's happening. The market keeps going up. If only there was a strategy I could use that could get me into the markets in a way where that volatility could maybe even help me, even if the markets pulled back. I don't know if you have a suggestion, Stu, because I'm lost. Maybe I should be listening to this podcast more closely because I know you've got an approach, Stu.
I should get my cape on, my dollar cost average DCA boy and his red cape. And I can fly down to Halifax and meet you. But dollar cost averaging, a wonderful approach for so many markets, but specifically in periods like now.
If you're a regular listener, you'll know that we bring this up 99% of our Stu's Days. We might have missed one or two over the years. But it's just such a great strategy. Three years ago, people who were listening to us in tougher markets — and we talked about the strategy, and by this point, they've got their money in and they've got big gains behind them now, in this type of market. We can't emphasize enough the importance of investing versus just saving, especially if it's in an account that's not tax protected. Long term — because markets will move up and down — it's the way that you grow your money above the rate of inflation and you actually increase your purchasing power. And that's why we invest in the first place, right?
You nailed it, Dave.
When I get a gold star on something I said on Stu's Days, I know I'm finally there, after all these years. It took a lot to beat it into me, Stu. All these years of learning with you and your colleagues, maybe I'm finally starting to get it.
No, it was fantastic. Couldn't have said it better myself.
I think my kids got it. Have you ever been to Brandy Melville? The new one is Edikted. You're not going to like it, Stu. It's not Addicted, it's Edikted. So not only do they mess up the spelling. It's grammatically incorrect. Oh, boy, you walk into that store, it's not very correct. And it's more expensive than Brandy Melville. You probably aren't that comfortable with your daughter buying clothes there. But those are the musings of an old man. You're much younger. Well, if you haven't heard of it, you'll get it soon.
I'm sure it's coming my way.
And if those reports are already coming out saying that the consumer is pretty good and people are spending in the US, my daughters were down there helping out this weekend. It was something to behold.
I bet. Okay, well, thanks very much, Dave, and we'll see you next week.
Stu, thanks as always. Fantastic. I think there's a lot of stuff in this, if hopefully people are listening closely. We'll see you next week.
Thanks, Dave.