Larry Berman CFA, CMT, CTA

It has to be. We won't get those numbers, yet those are the high-frequency data points that really give us some insight into the faster-paced nature of the US employment numbers. The last survey that was done (before federal workers were furloughed) said that the US economy is growing with AI, and very little everywhere else.

So the whole economy is being pulled up by the building of data centres and capital expenditures in the AI sector, along with the ancillary follow-throughs. The consumer is doing OK at the high end, but at the low end we're seeing consumers really start to struggle.

This one's quite the anomaly. Today he heard someone justify the valuation when they looked 10 years into the future (if robotaxis and everything else plays out almost to perfection). He might be too old-school for this, but he can't pay 200x PE or more for this company.

Thinks there's bound to be some disappointment in this week's earnings announcement.

No doubt that money's rotating. If you look at the quality of the rally in the last few months, the stocks that are going up the most are the ones that were the most heavily shorted. And that's not a high-quality factor.

Earnings are coming in and broadening out a little bit, but still largely concentrated in the leadup from the AI investment.

When he compares these two, it's on total return not just the yield. If you look at the price charts of these 2 ETFs over the last few years, you'll notice that in this falling rate environment the money market securities have a very slight downward trend in terms of their average price. Whereas ZST and its corporate bonds have a very slight upward trajectory, owing to their slightly longer duration.

When you look at the coupon payments, largely what's in ZMMK is commercial paper. While that's corporate credit, Canadian government bills and so on, there's still overall an aggregate yield that's less than what you're getting on a total return basis. 

A lot of the bonds under a year that are being purchased in ZST are being purchased at a discount. So you get the coupon plus a little bit of capital growth. Total return is not a lot more, but still more.

When he compares these two, it's on total return not just the yield. If you look at the price charts of these 2 ETFs over the last few years, you'll notice that in this falling rate environment the money market securities have a very slight downward trend in terms of their average price. Whereas ZST and its corporate bonds have a very slight upward trajectory, owing to their slightly longer duration.

When you look at the coupon payments, largely what's in ZMMK is commercial paper. While that's corporate credit, Canadian government bills and so on, there's still overall an aggregate yield that's less than what you're getting on a total return basis. 

A lot of the bonds under a year that are being purchased in ZST are being purchased at a discount. So you get the coupon plus a little bit of capital growth. Total return is not a lot more, but still more.

We're on the eve of a recession here in Canada, yet the TSX is at all-time highs. It's hard to justify those 2 things. Depending on what kind of investor you are dictates how aggressive you want to be in moving your money around. It also depends whether your investments are in taxable or registered accounts. All those things are factors in what you do to protect your portfolio.

In this high-valuation era we've been in for some time now, he loves the buffer-style ETFs. They allow you to continue to participate on the upside (if there is upside). But they give you a good degree of protection during a market pullback. BMO has a number that trade in the US, and other providers are coming out with them. Great for people worried about valuations and a recession.

Another method is to put $$ into covered call ETFs -- boost the yield in your portfolio with something like ZPAY. It gives you a much higher income component as a guarantee into your return versus the price volatility of an overvalued equity marketplace.

Could also consider shifting assets into bonds. If we do get a recession, government bond yield will come down. A  lot of that's already reflected in Canada, but we have yet to see it reflected in the US Treasury market. So US Treasury long-duration bonds could be attractive.

But none of these measures are buy-and-hold. You have to be very active in your portfolio when shifting things around, if you're going to worry about a recession and try to time the market. It's the hardest thing to do, even for professionals; he's been doing it for ~40 years now, and hasn't figured out the secret sauce yet ;)

It's the Mag 7 equivalent of what's in China. That's where the growth potential is in China. Chinese consumer is going to be challenged, as they have a serious demographic issue. After the recent rally in Chinese equities, he'd avoid or be underweight China. So he's not advocating it right now, but if you do want to be in China, China tech is the place to be.

(There might be a Canadian equivalent to this one, but he can't recall the ticker just now. If he finds it, he'll post it on X.)

Likes the natural gas space a lot, there's an abundance in NA. It's one of the most efficient ways to generate energy in a less dirty way than burning coal, for example. Likes it as a transitionary carbon-based fuel to power the world. The world's going to need a lot more energy what with AI and the electrification of the world in the coming decades. Nat gas will be a big part of that.

He wishes the Canadian government had invested better over the last decade so that we could distribute our nat gas resources to somebody other than the US, as the US is becoming increasingly difficult to deal with on trade.

These guys buy SaaS as their general business model. Some concerns in Silicon Valley and other places that AI is going to replace a lot of what SaaS can do. That could be a problem for a company like this one. It's been a great play for the past decade.

Going forward, there are some questions with AI that we need to have answered. Not sure that anyone has those answers yet. Stock trades at a pretty significant premium of 40x PE. High risk. Avoid at the moment.

One of Canada's great success stories. But on risk/return, analysts think it's worth less a year from now than what it's trading at today. Fundamental analysts aren't always right, but if they are then it's overvalued. Markets are going up and everything's at an all-time high, so it's hard to find assets priced cheaply right now.

Cockroaches in the Credit Market

Last week during JPM's earnings call, Jamie Dimon used that phrase when referring to some of the fraud that was recently in the auto loan space. There's always been fraud in markets. When he talked about cockroaches, he said that when there's one there's usually many. A lot of the private credit managers spoke up and said that there might be cockroaches in Dimon's neighbourhood, but not in theirs.

At the end of the business cycle everything seems great and wonderful, with markets at all-time highs. Larry brought along some ETF charts to follow along with and see when you need to really worry.

The first chart shows the total return of the high-yield bond ETF, HYG-N. The chart goes back to before the great financial crisis. That same chart also depicts the total return of VTI, the Vanguard ETF that represents the entire US stock market. You can see great gains there. But during the period of recession (whether the GFC or the very brief recession during Covid), you can see the shock to credit markets.

A second, related chart shows a white line representing the yield spread of high-yield (junk) bonds over their government equivalents. When that line rises significantly, it's correlated with weakness in equities. About a year before the GFC, that spread in high-yield bonds started to rise. Based on where it is today, we don't have that same sense of credit risk that we saw back in that period.

So, what does that mean? During Trump's tariff upset in April, the white line jumped towards 5%. So that's 5% above the yield of a government bond. Going back to pre-GFC, it was 15-20%; during Covid, it went north of 10%. So we're nowhere near that level of worry in credit markets. Dimon's comment might be a little bit premature.

He's also brought along a table from Moody's, which shows the average default rate annually all the way from AAA down to non-performing, C-rated bonds. If you add up all the junk bonds (BB, B, and all the C's), it's a little less than 9%. Once that company defaults, the recovery rate is ~40% (so if you lent them $1, you get 40 cents back). When you do the math, on average you could lose about 4-5% in junk bond investments.

One last chart, BIZD, which represents the private credit markets. It's at a very important inflection point here. If that line breaks, it's telling you something.

Good question. The answer is that it doesn't matter, because the market response is extraordinary for these things. Anybody's evaluation of it doesn't tell you why this stock should be up 25-30% in a day for such a large company. 

So the analysis doesn't matter. He's more interested in the market response, which tells you about the speculative nature of the market we're now in. And it could last days, months, maybe years. AI is still very early, and everybody gets really excited about it. 

He's not, as he realizes the speculative nature of what's going on right now. For him, his style is more of value, GARP, not growth at any price. We're now in a growth-at-any-price market environment. It doesn't scare him, as he's seen it before, but you have to understand what it means.

It means it can keep going and for far longer than people expect. When it ends, it can end abruptly and dramatically.

When you have forward-based earnings not going up, but the market multiple is, that's an environment when you have to ask what's the market moving on? You want the market to move on fundamentals.

If forward-based earnings were ramping, and the economic outlook was robust, then he'd say game on. But when you don't have that, it's a troubling sign.