BlogCast #1 : The Market, Inflation, Gold, Trading, "Good Deals"

4Apr23 $TRP $MFC $MMC $AON $AMGN $HD $MDT

SUMMARY In this Purple Chips blog cast, Raymond, a Purple Chips associate, and John discuss the current macroeconomic picture, highlighting rising markets despite negative investor sentiment, high inflation, rising interest rates, and oil prices. They also touch on geopolitical tensions and their impact on inflation and gold prices. John advises caution, favoring stocks with reasonable P/E multiples and dividends, and suggests a few specific stocks he believes are good bargains.

AUDIO Here’s a synthesized audio playback of the Purple Chips call today between Raymond and John. You can adjust the audio speed.

TRANSCRIPT

Raymond: Welcome to our first Purple Chips blog cast. I think that's the right thing to call it we'll have both audio and text. I'm Raymond and John is on the line.

John: Hi, Raymond.

Raymond: This morning we've got a few items we'd like to walk through here. First, John, can we start off at a very high level talking about the macro picture - what's going on in the world today in terms of the markets, etc.

John: Well, there's a lot happening in the background. First of all, you've got markets rising, which is a little bit surprising, given the sort of negative feelings that investors have. But that's not too surprising in a way because every time everyone gets a little too bearish, the market always seems to pick up because the market has a way of doing the opposite of what people expect. And in the background, we've got very high inflation. We've got rising interest rates. We've got oil prices that had a pretty good move up the other day. They just moved up about seven - 8% or so because Saudi Arabia went and cut their output.

You've also got the China-Taiwan tension, which may escalate at some point. That's a wildcard so there's a lot going on in the background right now.

Most of these things have a negative tone attached to them. So my view on all of this, is that you have to be very careful. I still think we're in a broad trading range. And I really, really want to favor stocks that have reasonable P E multiples, and dividends, and I'm avoiding the high multiple growth or tech stocks, because some of them are quite risky. The risk profile has gotten higher in the last year for some of those stocks, because if you're trading at a 40 times multiple, and if things are expected to slow down in the future, you could see some of the stocks going down to 30 or even 20 times multiples, which is a big difference in the value of a stock.

Raymond: Can we focus a bit more on what's your view of inflation?

John: Well, inflation will likely remain high. It's probably slowing after the sort of COVID bumps that we had where all the supply chains were disrupted. But you've also got something happening because of China and the tension between China and the US. There's a lot of barriers being put up. And so there's going to be less trade between China and the US. And that means that the cost of goods is going to go up. In the last 20 years, we've seen prices falling on all kinds of things. And that's not going to happen anymore. You're going to see prices rising, the cost of living is going to go up. So there's no question about that. The Fed has indicated that they're still going to be raising rates, and there's no reason to think that they won't if inflation remains high. Inflation is not going back to 2%.

Raymond: Is the price of gold reflecting any of this?

John: Well, it's very interesting that you mentioned that because gold has been performing really well. In fact, today, gold is up about $40. We're making new highs and I think we're breaking into new high territory here. And given the global situation, the geopolitical situation, I would not be surprised to see gold gain substantially and gold has been a bit of a laggard, and the gold stocks have been dogs, but they're probably going to be pretty good investments going forward. I'm not advocating putting a whole pile of money in gold but having a little hedge in the gold sector is not a bad idea, especially in times of rising inflation. And, we could see emphasis on the US dollar going down. So, if the US dollar weakens, that's another reason for gold to go up. That always helps the gold case.

Raymond: Okay, how about let's talk about a bit about the banking situation after all the noise with Silicon Valley.

John: Well, I think that the Fed managed that situation pretty well. They came in very decisively, very quickly. A lot of the banks were recapitalized, and I think this is all going to blow over. I'm already seeing a lot less press about that.

Raymond: How would you trade in the markets today?

John: We have a broad trading range. And so, when you're long stocks, and you've made reasonable profits - you're going to have a lot of back and forth in this market - some of the good value stocks that jumped by 10 or 15% on this latest wave - you might want to consider taking some of that profit. Now think long term - some of these stocks have become good values, but just recognize that you're going to have many opportunities in a market like this. The key is buy on weakness and sell on strength. That's what we're supposed to do.

Raymond: Any particularly good deals you're thinking about?

John: There's a number of stocks that I still like. I still think on the Canadian side that TC Energy, TRP, is in the bargain zone, especially with a rising price - they have a beautiful earnings track record, and they have a lot of visibility on their long-term cash flows and revenues. So that's a stock that I really think is just a bargain. I also think Manulife, MFC, is a bargain because insurers tend to make more money when rates are rising, because they can end up investing a lot their capital into long-term bonds and stuff like that: because the rates have gotten better, their returns are better.

On the US side, insurers make sense. Companies like Marshall McLennan, MMC, is a seasoned excellent insurer. Aon, AON, as well. There are some health care companies that are in great shape that are still bargains, like Amgen, AMGN. Home Depot, HD, last week was a super bargain. It was in the $280s. Right now at $298 it’s probably a little high. Medtronic is a terrific company that's really on sale and that hasn't moved very much. I really like MDT.

Raymond: Well, I think we've got a good first blogcast here, John. Let's wrap it all up and we'll talk soon.

John: Okay, thanks Raymond. Bye for now!