MLD CORE FUND – JULY LETTER

A Bull, a Bear, and a Black Swan go into the woods… and the Bull came back

With June behind us we look forward into July, looking month over month is about as futile as predicting the weather in Alberta. We can agree upon what happened and guess as to what will happen. We have a chance for sunshine and hailstorms and rain. Over long periods of time we have seasons and patterns. The title for this month’s letter is A bull, a Bear and a Black Swan go into the woods. The Black Swan is Covid19, a rare event, something that surprises the market out of nowhere, the bull and the bear are obvious. As the world continues to deal with the effects of COVID-19, and a myriad of other issues, recent data signals that the worst of the economic damage is likely behind us. Data shows sequential improvement for most of the world’s key economies, a trend that will probably continue in the short term. Longer-term, there’s an emerging consensus for a quick and complete recovery.

We believe that we’re past the cycle low for the economy and the financial markets, and that the recovery is under way. However, we suspect the speed and magnitude of the global policy response are responsible for the rapid transition into recovery mode. In fact, we may end up experiencing the shortest recession in history, beating the brief six-month recession in 1980. COVID-19 is extraordinary in many ways, the market’s ebbs and flows included. The S&P 500® recorded the fastest peak to bear market decline and the fastest bear market exit ever. The Dow Jones Industrial Average recorded the shortest bear market in history at just three days.
All the above rolled us through June with a bit of a mixed bag, a true tale of two tapes.

We saw Global equities rise driven by additional stimulus announcements from the U.S. Federal Reserve, retail sales surge (not that hard from 0), signalling that the economy is improving from depressed levels. The Fed added an additional 1 Trillion of Infrastructure spending by the U.S. Government and Market sentiment normalized with volatility measures in stock markets retreating from their peak, a sign that investors are shedding caution even as uncertainties linger in the global economy.

Then the Bears are come bumbling back. And we now have the biggest net short position in the SP500 in 9 years

But…. Before you run for cover

Remember that we have the Federal Reserve driving stimulus into the market in almost limitless-mode (RULE: never fight the Fed!) note: The Fed has deployed less than 10% of the bullets they have already committed to fire so there is plenty of ammunition left. There has been much criticism of how slow the FED has been to deploy this money. I can only imagine how hard it would be to spend trillions of dollars. I only hope it is more effective than our Canadian CERB. Fun fact. Sales of boats, ATV’s and motorcycles are at record high and they can’t keep them on the shelf. So, while people cried for help and the government answered with pseudo-free money. Many people have gone out and done some very Darwinian things, I hope the US gets it better than we did.

And…a contrarian bullish indicator: Investors are sitting on the biggest pile of cash in 28 years.

If there are ANY positive developments with Covid-19, I mean ANYTHING, something like: only small manageable second wave, vaccine, positive news and the money market investors get the slightest amount of FOMO (fear of missing out) and come back as buyers…then the shorts will be squeezed and we will see a massive surge in equities.

But what if there is a second wave? What if things turn worse?

There is the Fed supporting… and the veritable ‘boat-load’ of cash on the sidelines to support markets. We expect some choppiness, as Texas and Florida struggle with surging C19 cases and wall street is pontificating over what a Biden-Democratic win would look like as Trump trails in the polls and we plan on using this choppiness to deploy more capital into equities as we had taken outsized gains and repositioned the fund defensively by raising cash.

NOTE:

Year to Date (YTD) and 1-Year Performance.
MLD Core Fund continue to outperform both the SP500 and the TSX60 with 1⁄2 the volatility.

POINTS OF INTEREST

• Equities were higher in June, with the S&P 500 logging a modest rise after more solid gains in May and June. Stocks rallied earlier in the month on continued optimism about an abating Covid-19 epidemic and the momentum from a reopening economy, only to falter as growing coronavirus hotspots (largely in the US South and West) threatened to derail the progress and renewed fears about a long and bumpy recovery. Treasuries were mixed without much overall movement in the curve. The dollar was notably weaker on the euro cross and slightly better against the yen. Gold was stronger, rising 2.8% for the month and closing above $1,800/oz for the first time since 2011. Oil was better as well, taking support from hopes of increased global demand and lower output due in part to the OPEC+ production agreement. WTI settled up 10.7%.

• From a sector perspective, tech led the market with a boost from hardware and software (with AAPL +14.7% and MSFT +11.1% among the notable gainers). Consumer discretionary saw support from auto suppliers and homebuilders (and particularly AMZN +13.0%). Industrials was helped by airlines, though the industry’s early month gains were gradually whittled away. Materials were largely in line. Copper, construction materials, and precious metals were among the gainers while select chemicals and steel names were lower. Consumer
staples underperformed, weighed down by tobacco and beverages. Communication services lagged, with telecom and media firms generally down (and GOOGL (1.1%) among the decliners). Hospitals, managed care, and MedTech were weaker within healthcare. Financials were lower, with banks among the drags. There was some help late month from regulators loosening the Volcker Rule, but dividend limits and buyback restrictions out of the Fed’s stress tests were more onerous than expected. Integrators, oil services, and refiners were generally down in energy despite oil’s monthly rise. Utilities trailed the market.

• In some ways June was a tale of two months, with the market at first continuing its strong April/May rebound on positive coronavirus trends, the progressive lifting of state and local lockdowns, positive demand commentary from corporate earnings calls, signs of improvement in the economic data, faith in continued central-bank interventions, and some expectations of continued fiscal support. There was ongoing discussion about lackluster sentiment and positioning as contrarian indicators. Analysts noted investors were still underweight equities against historical averages and highlighted broad skepticism about the upswing in equities (which through 2-Jun was touted as the greatest 50-day rally in the S&P 500’s history). There were continued warnings that the market was not adequately reflecting the still-uncertain conditions on the ground, and there was widespread talk about the possibility for a “V-shaped” economic recovery.

• The tone began to shift soon after thanks to signs of growing coronavirus hotspots around the country, particularly in large states such as Florida, Texas, Arizona, and California. Several states in the US South and West that had been spared some of the worst of the early waves of the epidemic now began to see increasing (and in some cases record- setting) rates of new-case growth and hospitalizations. In this environment, on 26-Jun the White House’s coronavirus task force held its first press briefing since April. Concerns that the resurgence of the epidemic could derail the economy’s reopening were given credence when officials in several states paused or rolled back the lifting of some restrictions such as restaurant and bar re-openings. Troubling coronavirus news from overseas (including a new breakout in Beijing, since reported contained) did not help.

• At the same time, while Congress and the White House both signaled another round of stimulus funding could be on the way, there remained a large gap between the $3.5T bill that House Democrats passed and GOP proposals closer to the $2T mark. It also remains unclear what form this relief will take, though the Trump administration is said to favor at least some direct aid to households. Questions about aid to struggling states and municipalities, a possible extension of expanded unemployment benefits, liability protections, possible tax cuts, and industry-specific incentives are yet to be answered and may remain open until later in July.

• In this environment, the Fed continued with its pledge to use all its tools while also stressing that the economy may need additional fiscal support if the recovery is to be a robust one. But while it kept rates near zero at its 10-Jun meeting and clarified its QE plans, it did not deploy any explicit forward guidance or yield-curve control, saying these were discussed but remain open questions (presumably to be answered in future meetings). The Fed continue to deploy its manifold facilities, launching its much delayed $600B Main Street Lending Facility after many modifications, though the program got off to a rocky start. The markets took the Fed’s decision to begin buying individual corporate
bonds through the SMCCF as a positive. At the same time, there was also focus on how little some of the Fed’s emergency facilities had been used.

• US-China relations also remained a key variable during the month. There has been a lot of attention on the status of the “Phase One” trade agreement and pledged Chinese purchases given pressure from the pandemic and rising tensions with the US in other major areas (including the early spread of the virus, the crackdown in Hong Kong, and US denunciations about human rights violations in Xinjiang). At one-point, White House advisor Navarro said the US- China trade deal was “over,” though this was quickly walked back by the president. However, there were also reports that top Chinese diplomats had warned their US counterparts that the US should not go too far with what it called “meddling.” At the end of the month, however, Treasury Secretary Mnuchin said he still thinks China will live up to its trade-agreement commitments.

• Presidential politics crept back into the narrative this month. While the wave of protests following the death of George Floyd in Minneapolis did not have much direct impact on the market’s price action, the disruptions did serve to highlight the different approaches of Trump and Joe Biden, the presumptive Democratic nominee. Biden has led in many head-to-head national polls for some time, though he saw his margin widen during the month of June. More significantly, several state-level polls have shown Trump is currently trailing among likely voters in several battleground states Trump carried in 2016. Some analysts and commentators used the opportunity to discuss the possible market impacts of a Biden administration that could result from items such as a rollback of the 2017 tax cuts or greater regulatory oversight. However, others noted Trump was consistently trailing in the polls against Clinton in 2016 and that the election is still several months away (with the progress of the coronavirus epidemic a key variable).

Technical Perspectives

A Bull, a Bear, and a Black Swan go into the woods… and the Bull came back

Summary

Our technical work suggests a choppy consolidation is likely in Q3 for equity markets. However, this should set up an upwards re-acceleration in tandem with our market cycle model, shifting into phase 2 in Q4 2020 (see Figure 8). The secular bull market reasserted itself last quarter as most equity indices had their strongest quarters since 1987. In our most recent quarterly note, we stated that we believed the fallout in financial markets from the COVID-19 pandemic was a Black Swan event, like the 1987 stock market crash which delayed but did not derail the secular bull market in equities from 1982 – 2000.

In our view, a new cyclical bull market is underway that should support broad equity market upside into 2022. Our market cycle model work has highlighted that both Information Technology and Consumer Discretionary should outperform at the beginning of a new 4-year cycle, and this is what our sector work has picked up since the market bottom on March 23rd. However, Financials should also outperform and that missing piece of the puzzle joined the party in mid- May. This new cyclical bull market is within the framework of a secular bull market in equities that our technical work suggests began in 2009 and has upside, by time, into the late 2020’s/early 2030’s.

U.S. Dollar strength should persist if the secular bull market in equities continues. This headwind remains intact and reinforces the ongoing secular bear market in commodities. Our technical work suggests that a new secular bull market in commodities should emerge in the early 2030’s. Commodity weakness will remain a drag on the resource heavy TSX Composite, and as a result we anticipate the long-term underperformance relative to the S&P 500 to continue (see Figure 10). Information Technology and Financials remain the overarching theme and are our favourite sectors within this secular bull market. We favour indices with a strong tilt towards both. Resources are likely to be a drag longer term, and we highlight those global indices with the highest weighting of Information Technology and Financials, less Energy and Materials (see Appendix 3 – 6).

Holding the “Line in the Sand” S&P 500 – 10-Year – Weekly

Assumptions underlying our Financial Market Analysis

Underlying our current analysis are two key assumptions:

1. We are in the middle stages of a secular bull market in equities that our cycle work suggests has upside into the late 2020’s / early 2030’s (see Figure 5). In our view, COVID-19 is a black swan event that has temporarily reset the ongoing secular bull market in equities.

2. The US Federal Reserve is likely to continue to increase interest rates over the life of this secular bull market in equities. We will be closely monitoring the behaviour of the Federal Reserve with regards to raising interest rates once this economic crisis passes. Inter-market analysis (See Figures 1 – 4) suggests that an increase in interest rates should support an increase in the US dollar.

Fund Holdings:

Fidelity Systematic Canadian Bond Index ETF
Brookfield Infrastructure Partners L.P.
Edge MSCI Min Vol Global Index
Invesco S&P/TSX Composite Low Volatility Index ETF
Enthusiast Gaming Holdings Inc 9.000% 12/31/2021
FTSE Developed EX North America High Dividend Yield Index ETF iShares Core S&P/TSX Capped Composite Index ETF
Evolve Active Global Fixed Income Fund JPMorgan Chase & Co
MSCI EAFE Index ETF
US Dollar $
Floating Rate High Yield ETF
Purpose High Interest Savings ETF
True North Commercial Real Estate Investment Trust Gold X Mining Corp
Microsoft Corp
Purpose US Cash ETF
Lundin Mining Corp
Last mile Holdings Ltd.
Moody’s Corporation
Canadian Imperial Bank of Commerce 10/03/23 MTN Apple Inc
Halma PLC
WD-40 Company
First Quantum Minerals Ltd.
Paychex Inc
Amadeus IT Holding SA
Cura Partners Inc 8.000% 10/30/2020
U.S. Medical Devices
Shopify Inc Put 655 10/16/20
PIMCO Monthly Income Fund
Invesco S&P 500 ESG Index ETF
Invesco S&P 500 ESG Index ETF
Purpose Gold Bullion Fund (Non-Hedged) Purpose Global Bond Fund
Invesco U.S. 0-5 Year Corporate Bond Index ETF Starlight Canadian Residential
CAD $
Canadian Long-Term Bond Index ETF
Starlight Global Infrastructure Fund
BMO High Yield US Corporate Bond Hedged to CAD WPT Industrial Real Estate Investment Trust
Amazon
Alphabet Inc., Class “C”
National Bank of Canada 0.000% 10/30/2024 04/30/19 Parex Resources Inc
Mastercard Inc
M3 Inc
Franchise Cannabis Corp
Canadian Imperial Bank of Commerce 09/27/2024 Coca-Cola Co
Constellation Software Inc.
Caterpillar Inc
Diploma PLC
Gold X Mining Corp Convertible Bond
J2 GLOBAL INC
Altria Group Inc
S&P/TSX Global Gold Index Fund
Apple Inc Put 275 10/16/20
Apple Inc Call 315 10/16/20

Read the full technical report here:

https://docs.google.com/viewerng/viewer?url=https://mywealthmanagement.ca/wp-content/uploads/Full-Technical-Note.pdf