MoneyTalks Spring Discussion

There are two investment themes we at BT Global would like to share with you this month:  US Cannabis equities and Canadian healthcare stocks.

If you are looking for outsized returns with limited downside you need look no further than the following few pages.  We stand behind these ideas as the two sectors each represent a maximum position of (net) 20% exposure in our Fund.

Let’s talk CBD and Cannabis opportunities in the US.  This situation is simply absurd.  The market is much bigger in the US, while the number of companies and their corresponding market caps are far larger in Canada.  It doesn’t make sense and will not last.  Our friends at Green Thumb Industries (GTII, great stock and a buy), put out a slide the other day at an investor day in Toronto which simply says it all.

We would recommend buying all the larger Multi- State Operator stocks Curaleaf Holdings, Cresco Labs, GTII, Harvest, Cannex, Ianthus, INDUS Holdings etc. and simply watch what happens as the market opens up south of the border.

We could go on and on about the additional long term advantages the American companies have over our Canadian players, including cheaper valuations, lower multiples, bigger markets, better margins, superior management talent etc.  But the real sustainable and key asset they have is the ability to build brands.  The Canadian Government views cannabis much like cigarettes and the freedom to develop a real brand is drastically reduced.  In the US the best and biggest brands will emerge with few restrictions and this will ultimately hand the economic benefit to US cannabis shareholders.  Our government has it wrong (again!) and their policies will eventually cripple the Canadian cannabis industry.

As investors we need to be aware and we need to react.  Fortunately, all of these US based companies are listed here in Canada and we have the opportunity to get to know the management teams and invest in the best companies before they list in the US.  If you don’t have time to look at individual names, perhaps you could simply buy the Horizon US Cannabis ETF (HMUS).  We think this fund will perform very well over the next 18 months, basically until Mr. Trump is tossed out or re-elected.

The next big play is Canadian Healthcare.  More specifically we like the companies that are listed in Canada but have the majority of their business in the US. Often these stocks trade at a significant discount to the multiples on US stock exchanges.  There are not many such opportunities but there are a few.

Viemed Healthcare Inc. (VMD.to) is our top pick and trades at an unusually low EBITDA multiple of approximately 7x 2020 estimated EBITDA versus US comps at 12 x or more.  The company published very good results recently and the stock is close to all-time highs.  This is understandable in our opinion and Viemed should continue to do well in the markets for many reasons.  They have no debt, are growing organically at between 35-45% per annum and are number one at what they do in America.  The company treats people that suffer from Chronic Obstructive Pulmonary Disease (COPD).  How big is this health issue?  Unfortunately, it is huge. It represents the third largest killer in the US, after cancer and heart disease.  They are an industry leader in providing equipment and services across more than 30 states and actually reduce the healthcare costs for their clients.  How long can it remain one of the cheapest healthcare stocks in North America?  If it were to trade only in Canada, probably a while, although the discount would certainly narrow over time.  The reality is that the company is going to list in the US sometime this year which we believe will only be very good news for shareholders.

When it comes to macro calls we find ourselves a bit less confident.  It is hard to predict with great conviction where things are going over the next 6-12 months with Mr. Trump in the oval office.  Regarding interest rates we would suggest the Fed is going to keep rates low for years.  The US dollar is the “king of the midgets” and has performed admirably well recently, mostly because other currencies including the Euro and Canadian dollar are worse places for your capital.  Our view is the US dollar will be relatively range bound.  We also believe a trade deal will get signed between the US and China and markets will bounce and then move on to worry about something else.

Few people expected the equity markets to rebound this well in 2019 and it has certainly been a good year for returns thus far.  We were fully invested until recently and expect the equity markets to have a pause here, perhaps over the summer, and yet trend higher into the fall and next year.  In our opinion, the US elections next year should ensure stable and rising equity markets.

Paul Beattie is a founder and Portfolio Manager at BT Global in Montreal

An exciting and new commodity cycle and lengthy bull market for commodity stocks is about to start. While our company is focused on the energy sector, we believe base and precious metals will also be very rewarding.

By the end of June, I see the Dow Jones Industrials Index breaking below the 26,000 level. We should then see a turbulent market during May to July, providing another low risk buying window.

Investors should become as informed as possible prior to this coming opportunity and be ready to purchase securities in these areas when they become bargains. Once or twice a year they go on sale so get your buy lists ready so you can pounce when stocks are being sold off irrationally.

The reason for a new commodity cycle is basically the lack of capital investment to replace declines. In energy it is a shrinking Reserve Life Index and a new entrant’s increasing demand that makes for a powerful cycle. In Chart #1 one can see that Japan affected the 1970’s cycle, China the 1999-2008 cycle and it is India impacting the 2016-2024+ cycle.

There have been only two major energy cycles in my 40+ year career so far, and the third one started in February  2016 when crude bottomed at US$26/b (Chart #2).

In the last cycle we saw WTI crude oil lift from US$10.65/b in late 1998 to US$147.27/b in mid-2008. In this cycle we see WTI moving from the low in early 2016 of US$26.05/b to a new all time high above US$150/b during the Euphoria Phase. Strong demand, low inventories and supply problems usually occur at the commodity cycle peak.

Stocks should move alongside the move in energy prices. In the last cycle the S&P/TSX Energy Index rose from 90 to 470 in eight years (Chart #3).

Stocks like Canadian Natural Resources (CNQ) rose from $1.81 in 1998 to $45.27 over the following 10 years. It was not an easy first phase. During the 1999-2003 bottoming period (Chart #4) or what we call the Skepticism period the stock was a Yo-Yo having six moves of 28-56% until finally breaking out in 2003.

This is the same scenario we see energy stocks doing now and we recommend buying during the shakeouts with a multi-year investment horizon. There should be many 5-10 baggers in the energy and energy service stocks this new Energy Bull Cycle.

We are currently in the Skepticism Phase of the new Energy Bull Market.  During this phase it will be bumpy with large market swings. Focus on natural gas and light liquids producers; but stay away from heavy oil, oil sands and thermal stocks for now. Hold some cash and use this next period of market weakness, likely this June, to raise your portfolios to your comfort zone.

Josef Schachter is a 40-year veteran in the investment business, a frequent guest on Money Talks and keynote speaker at the World Outlook Financial Conference and a regular commentator on BNN/Bloomberg’s Market Call.  The Schachter Energy Report provides comprehensive coverage on 32 Energy and Energy Service Companies as well as overall Market and Energy Sector Overviews. You can Subscribe at schachterenergyreport.ca  or go online to review sample copies of our Research and Market Update Tweets.  

What to watch for when investing:

When we look to invest, our focus is global. Most investors are too focused on their domestic economy and fail to understand how global capital influences all markets. If we look at what is happening globally, we get a true sense of potential investment winners.

Global debt is soaring and currently totals $244 trillion, which is unpayable, meaning we are heading for a global debt crisis.

Our investing strategies for 2019:

Governments continue to pile on more debt and after 10 years of forcing low interest rates, they are still afraid to allow them to rise. In fact, Switzerland at -.75%, Japan at -.10%, and the ECB at 0% will not even let their central bank rates move above 0%.

Bonds

What these central banks have done is destroy their bond markets and that means we will be seeing a global bond market crash, meaning defaults. In Switzerland, Germany, Sweden, France, Portugal, Spain, & Japan, 2-year gov’t bonds pay a negative yield, meaning bond holders actually lose money every year. The US 2-year bond meanwhile pays bond holders a 2.3% yield.

Question: If you are a Swiss, German, Swedish, French, Portuguese, Spanish, Japanese, Greek, or even Canadian investor with money that you want to invest ‘safely’, which bonds would you buy?

Answer: US bonds. Why? – because they pay more yield and they are in $US.

That is exactly what the smart global investors are doing. They know their domestic economy is in real economic trouble, so they are moving their capital out of Europe, Japan, and most other countries, and into US bonds, equities, and the $US.

Currencies:

Martin often says…’if you get the currencies right, everything else follows.’

Global investors are moving their money into US markets, which means they must buy $US which is why the $US has been rising and was up over 10% in the last year.

The Euro has lost over 10% to the $US in just over a year.

The $CAD has lost 9% to the $US in the last year.

We have advised Canadian and European investors to convert their $CAD and Euros to $US whenever there is a favourable correction in the trend. For Canadian investors, look for rallies in the $CAD near .80 and buy $US. We will continue to recommend trades for our Trend Letter subscribers to use US ETFs to short the Euro, and Japanese Yen when our model triggers a BUY Signal for those trades. See example here where we are currently short the Euro using an ETF.

That trade is up over 32% in just over a year, plus the currency gain.

Stocks

Here is the Trend Letter’s latest projection. Note that our model (gold line) tends to lead the markets.

It projected the current decline and sees a bottom in mid/late May at the low 2700 range. We will be looking to send Trend Letter subscribers fresh new BUY Signals if that low 2700 support level holds. Note: If that 2700 level does not hold, then we could be in for a much bigger correction.

NOTE: This will likely be the last melt-up of this long 10-year bull market. We believe there are still  substantial gains to be made with a potential target of over 3400 for the S&P 500. We expect that technical stocks will do even better than the S&P 500 or Dow Industrials.

Our Trend Disruptors Premium service is likely to produce some big winners in a final melt-up scenario. This service identifies opportunities for getting ahead of the curve in new technologies. It covers Artificial Intelligence (AI), Virtual Reality (VR), Augmented Reality (AR), 5G, Blockchain, and many other new technologies that we see as having a profound impact on how the world does business, similar to how the internet re-shaped our lives in the 1990’s.

BEWARE: Once we get that last melt-up, we expect to see a massive melt-down, a bear market that could very well be the worst stock market collapse EVER!

That is why we have our hedging service Trend Technical Trader (TTT). TTT is designed to profit during stock market declines, and the bigger the decline, the bigger the gains TTT trades can generate.

Gold:

Gold is often used as ‘insurance’ for a stock market crash, so we will be recommending more gold trades as this cycle plays out. Our expectations of a strong $US due to the global flow of capital into US markets, means that gold will need more time before it really takes off.

Trend Letter was first published by Martin Straith in 2002 and has an incredible record of making accurate projections, identifying key market trend reversals, and providing subscribers a true edge in becoming successful investors.

The first recommendation was to buy gold (2002), buy uranium (2003), call the US real estate top (2005), and issue a final warning to subscribers to get out of the stock market ( May 2007) – just weeks before the final top and crash into 2008.

Since then the string of uncanny calls have netted subscribers’ great gains in equity, commodity, precious metals, bond and currency trades.

Trend News Special Offers for Money Talks listeners

Click the image below to see the full presentation

MM Special Report

So, what am I concerned about heading into the rest of the year, and what will likely be the best investment for the rest of year…there is a lot to worry about.  

• Rising trade tensions once again between the U.S. and China. 
• Tariffs which impact corporate profitability and consumer spending. 
• Higher interest rates on a debt-laden economy 
• Weakening global economic growth 
• Weakening corporate profitability and outlooks. 
• Excessive market valuations. 

The list goes on.  But all of these issues are just the “fuel” waiting on the right catalyst.  

What will that catalyst be? No one knows.  I am not trite.  

The issue that trips up the market and begins the sell-off process which balloons into a credit-related event is ALWAYS something the market is not aware of or focused on. It is the “surprise” of the event which shocks markets into major reversals.  

What could it be? My best guess is probably something like a Deutsche Bank. It looks a lot like Lehman did back into 2007. The risks and warnings signs were all there; we just dismissed them under the guise of “this time is different.”  

The biggest risk for us right now is simply the amount of “leverage loans” which has built up in the system over the last decade due to low-interest rates.  

One of the common misconceptions in the market currently, is that the “subprime mortgage” issue was vastly larger than what we are talking about currently. 

Not by a long shot.  

Combined, there is about $1.15 trillion in outstanding U.S. leveraged loans — a record that is double the level five years ago — and, as noted, these loans increasingly are being made with less protection for lenders and investors.

Just to put this into some context, the amount of sub-prime mortgages peaked slightly above $600 billion or about 50% less than the current leveraged loan market.

Of course, that didn’t end so well. 

Currently, the same explosion in low-quality debt is happening in another corner of the US debt market as well. 

As noted by John Mauldin: 

“In just the last 10 years, the triple-B bond market has exploded from $686 billion to $2.5 trillion—an all-time high. To put that in perspective, 50% of the investment-grade bond market now sits on the lowest rung of the quality ladder.  And there’s a reason BBB-rated debt is so plentiful. Ultra-low interest rates have seduced companies to pile into the bond market and corporate debt has surged to heights not seen since the global financial crisis.” 

As the Fed noted a downturn in the economy, signs of which we are already seeing, a significant correction in the stock market, or a rise in interest rates could quickly cause problems in the corporate bond market. The biggest risk currently is refinancing the debt. As Frank Holmes noted in a recent Forbes article, the outlook is rather grim. 

“Through 2023, as much as $4.88 trillion of this debt is scheduled to mature. And because of higher rates, many companies are increasingly having difficulty making interest payments on their debt, which is growing faster than the U.S. economy, according to the Institute of International Finance (IIF). 

“On top of that, the very fastest-growing type of debt is riskier BBB-rated bonds — just one step up from ‘junk.’  This is literally the junkiest corporate bond environment we’ve ever seen.  Combine this with tighter monetary policy, and it could be a recipe for trouble in the coming months.” 

Let that sink in for a minute. 

Over the next 5-years, more than 50% of the debt is maturing.  

As noted, a weaker economy, recession risk, falling asset prices, or rising rates could well lock many corporations out of refinancing their share of this $4.88 trillion debt. Defaults will move significantly higher, and much of this debt will be downgraded to junk. 

The point here is there is more than sufficient “fuel” for a crisis akin to what we saw in 2008.   

However, if you wait for it to occur, it will be too late to do anything about it.  

But, this isn’t an issue that will likely come to play in 2019, given we are already halfway through the year.  

For the rest of this year, we like CASH.  

Let me explain. 

Currently, investors have become extremely complacent with the rally from the beginning of the year and are quick extrapolating current gains through the end of 2019. As shown in the chart below this is a dangerous bet. In every given year there are drawdowns which have historically wiped out some, most, or all of the previous gains. While the market has ended the year, more often than not, the declines have often shaken out many an investor along the way. 

Let’s take a look at what happened the last time the market started out the year up 13% in 2012.

From a portfolio management standpoint, the reality is that markets are very extended currently and a decline over the next couple of months is highly probable. While it is quite likely the year will end on a positive note, it is quite probable if you went to cash today, you probably won’t miss much between now and then..  

Why cash? 

1) We are not investors, we are speculators. We are buying pieces of paper at one price with an endeavor to eventually sell them at a higher price. This is speculation at its purest form. Therefore, when probabilities outweigh the possibilities, I raise cash.  

2) 80% of stocks move in the direction of the market. In other words, if the market is moving in a downtrend, it doesn’t matter how good the company is as most likely it will decline with the overall market. 

3) The best traders understand the value of cash. From Jesse Livermore to Gerald Loeb they all believed one thing – “Buy low and Sell High.” If you “Sell High” then you have raised cash. According to Harvard Business Review, since 1886, the US economy has been in a recession or depression 61% of the time. I realize that the stock market does not equal the economy, but they are highly correlated.  

4) Roughly 90% of what we’re taught about the stock market is flat out wrong: dollar-cost averaging, buy and hold, buy cheap stocks, always be in the market. The last point has certainly been proven wrong as we have seen two declines of over -50%…just in the last 18-years. Keep in mind, it takes a +100% gain to recover a -50% decline. 

5) 80% of individual traders lose money over ANY 10-year period. Why? Investor psychology, emotional biases, lack of capital, etc. Repeated studies by Dalbar prove this over and over again.  

6) Raising cash is often a better hedge than shorting. While shorting the market, or a position, to hedge risk in a portfolio is reasonable, it also simply transfers the “risk of being wrong” from one side of the ledge to the other. Cash protects capital. Period. When a new trend, either bullish or bearish, is evident then appropriate investments can be made. In a “bull trend” you should only be neutral or long and in a “bear trend” only neutral or short. When the trend is not evident – cash is the best solution. 

7) You can’t “buy low” if you don’t have anything to “buy with.” While the media chastises individuals for holding cash, it should be somewhat evident that by not “selling rich” you do not have the capital with which to “buy cheap.”  

8) Cash protects against forced liquidations. One of the biggest problems for Americans currently, according to repeated surveys, is a lack of cash to meet emergencies. Having a cash cushion allows for working with life’s nasty little curves it throws at us from time to time without being forced to liquidate investments at the most inopportune times. Layoffs, employment changes, etc. which are economically driven tend to occur with downturns which coincide with market losses. Having cash allows you to weather the storms.  

Importantly, I am not talking about being 100% in cash. I am suggesting that holding higher levels of cash during periods of uncertainty provides both stability and opportunity. 

With the fundamental and economic backdrop becoming much more hostile toward investors in the intermediate term, understanding the value of cash as a “hedge” against loss becomes much more important.  

Given the length of the current market advance, deteriorating internals, high valuations, and weak economic backdrop; reviewing cash as an asset class in your allocation may make some sense. Chasing yield at any cost has typically not ended well for most.

Lance Roberts is Chief Strategist for RIA Advisors and Editor of Real Investment Advice