This week's questions
[00:00] : Intro
[00:00:29]: What happened in the markets this week? An interesting week.
[00:01:04] : So how did the market movement affect Genus portfolios and did we make any adjustments this week accordingly?
[00:01:51] : Is this a sign of excess demand dissipating (of lumber)? And can you explain what exactly this term of transitory inflation means?
[00:03:27] : So can you explain what this means for general market valuation and perhaps going forward how that’s votes for the broader equity markets?
[00:04:42] : Can you explain China is a fact what the US has been doing or talking about in relation to cryptocurrency and also how cryptocurrency movements affect the broader market?
[00:06:08] : The significant drop in cryptocurrency does affect some companies like Square and all the ones that have come out. Is that correct?
Ian Lusher: [00:00:07] Welcome to Friday Market Insights. It is May 21st, a beautiful day. My name is Ian Lusher. I’m a partner and a portfolio manager with Genus Capital Management. I’m here with Wayne, our CEO and chief investment officer of Genus. How are you doing Wayne?
Wayne Wachell: [00:00:24] Great, great sunny day. I’m happy. Long weekend coming up too.
Ian Lusher: [00:00:27] Exactly. What happened in the markets this week? An interesting week.
Wayne Wachell: [00:00:32] Interesting week. The overall market levels didn’t change that much. Neither the bond rates, but commodities came off for the first. They got a great run here. They came off, of the course of the week, lumber came off, copper came off. That oil came off. And, of course, Bitcoin came off this week, given some comments by Elon Musk. And the Chinese made some statements this week. And then a big corporate deal as well with that, with AT&T spinning out their water media assets into discovery and taking 70 percent of that new entity.
Ian Lusher: [00:01:04] So how did the market movement affect Genus portfolios and did we make any adjustments this week accordingly?
Wayne Wachell: [00:01:11] It was a flat week in terms of portfolios. We made minor adjustments. We sold some lumber stocks. We were overweight. We reduced our weight there. We’re still overweight lumber stocks. We still like the cyclical value trade. That was massive stimulation this year, massive government spending and stronger growth coming with the reopening trade. So we’re still on that trade. You still see that trade still has legs. And so we’re positive and sticking to those positions.
Ian Lusher: [00:01:36] Right. You mentioned the price of lumber and commodities and debt in general falling off a little bit. The price of lumber has actually dropped off significantly. And there was reports of housing starts slowing a little bit in the US and Canada in April. Is this a sign of excess demand dissipating? And can you explain to clients what exactly this term of transitory inflation means?
Wayne Wachell: [00:02:02] Well, I think this is the evidence of a lumber correction doesn’t prove that their inflation is transitory. Let’s wait and see for the overall inflation story. But lumber was due for a correction at the low last year with three hundred thirty bucks, went to seventeen hundred, ran down to twelve hundred this correction. It was due for a correction. Just had gone so far, so fast. Previous highs were in twenty eighteen around I think six hundred dollars. So now it’s in triple that basically. So it was due for correction. We still believe the housing story. There’s a housing shortage in North America right now. People want to move to the burbs. They can they can go to work, via Zoom, and that that story has legs, I think. And but costs are going up. I was talking to my builder last week and he was saying that lumber costs for homes in Vancouver doubled basically and other costs have gone up as well, maybe around 10 percent. So you think lumber costs are maybe 10 percent of the overall construction cost, there’s 10 percent right there, plus 10 percent is 20 percent increase in building costs. That could have a bit of an impact on building going forward. But there is big, big demand and there is a supply shortage. There still has still legs in this story, we believe. But it was due for a correction.
Ian Lusher: [00:03:17] Make sense. So the market, the general markets have trended slightly lower, perhaps in May, but earnings are actually up. So can you explain to clients what this means for general market valuation and perhaps going forward how that’s votes for the broader equity markets?
Wayne Wachell: [00:03:37] Well, yes, it was a great earnings season, spectacular. Everybody knocked the cover off the ball, but the market kind of yawned. And it’s because the market had gone so, so far so fast. And markets always get ahead of earnings. OK, let’s that’s they always get ahead of earnings. They always anticipate earnings to get ahead of them. And then earnings catch up. Well earnings are catching up right now. Now we’re seeing targets in the S&P around forty four hundred forty five hundred. The S&P earnings for this year, we’re seeing for twenty twenty two people looking at twenty two point, which is kind of through the pandemic. Earnings there have gone from like one ninety five to maybe to 10 in the past two, three months. So you put a 20, 20, three time multiple on that and it looks good. The forty four forty five hundred right now on twenty, twenty two earnings. The market is trading at 20 times. It was at twenty two times. So you can see valuations have improved and given where interest rates are it’s, that’s not a bad area for valuation. But we did have we have gone so far so fast, not as much upside going forward. I think the markets are telling us that.
Ian Lusher: [00:04:40] You mentioned our friend Elon Musk, can you explain to clients China is a fact what the US has been doing or talking about in relation to cryptocurrency and also how cryptocurrency movements affect the broader market?
Wayne Wachell: [00:04:55] Sure. Well, we’ve been saying for some time that governments have a monopoly on money, all kinds of money, coin money and fiat money. And I think they want to maintain that and they will do what they can to maintain that monopoly as well as are going to be regulation on cryptocurrency that’s coming, we believe. There’s going to be a regulatory crackdown on what was going to happen, it’s going to happen. It’ll happen at some point time. Jay Powell mentioned on Thursday doing a study on that. China’s announcements this week, twice this week, sort of mentioned their claim to have monopoly powers within their jurisdiction. So I think it’s just evidence you’ll see more governments doing that going forward. So it’s coming. And, you know, Elon Musk was saying, look, the Tesla brand is tied to ESG, it’s clean. But when you’re actually mining Bitcoin, you’re actually using energy, which is not good for the environment, of course. So that’s you know, so it’s getting there’s a dark sort of image issue coming now, I think, with some of the cryptocurrency use in terms of the environment, in terms of regulatory issues coming. And people are saying much is being used by money launderers and and crooks. So.
Ian Lusher: [00:06:05] And then this kind of significant drop in cryptocurrency doesn’t does affect some companies like Square and all the ones that have come out. Is that correct?
Wayne Wachell: [00:06:16] Yeah. There was a move in the past three months for some of the FIN tax to start using Bitcoin for trade. You know, so it’s just you saw Square, we saw PayPal getting into it and that gave the Bitcoin a big, big boost. And maybe that’s going to come out while there’s going to be a regulatory crackdown. Let’s wait and see what happens after the dust settles.
Ian Lusher: [00:06:38] Well, thanks very much, Wayne, and that’s it for this week.
Wayne Wachell: [00:06:41] Have a great weekend.
Ian Lusher: [00:06:44] Thanks to everybody who is watching and have an excellent long weekend.