Market Insights

[music] Hello I'm Greg Bonnell and welcome to MoneyTalk Live brought to you by TD Direct Investing. Every day I'll be joined by guests from across TD many of whom you'll only see here. We'll take you through what's moving in the market and answer questions about investing. Coming up on today's show will hear from Kera Van Valen from Epoch Investment Partners with her take on the outlook for income stocks. And will bring you our conversation with TD Securities Bart Melek on the tug-of-war in the energy market between tight supply and growth concerns. Plus in today's WebBroker education segment, will have a look at how you can find analyst ratings on the platform. Before we get all that today let's get you an update on the markets. Obviously the big event of the week has now transpired. Chair Jerome Powell Holding Ct. in Jackson Hole. He gave his comments and basically we are going to dive a little bit and just moments time. Fighting against inflation may take some time yet. We are seeing selling pressure on both sides of the border. Both sectors on Bay Street and Wall Street in negative territory now. The TSX Composite Index, down a little bit, selling is widespread… Checking how Shopify is doing here. Down 5 1/2%. Gold also, weakening not only in terms of precious metals themselves in the wake of Jackson Hole but also the mining games. … Down 5.7%. South of the border let's check in the S&P 500. Just sitting on that line of being down almost 2% on the session. A bit of fluctuation after Jerome Powell's comments at 10 AM Eastern time. That brought a read of the American market now down 83 points as we said, the tech stocks are being hit on both sides of the border. Let's check in on the NASDAQ now, down almost 2.7%. Almost 350 points… Hewlett earnings are being swept down it to the tune of 5.6%. And that's a market update. Alright money talks Anthony Okolie joins us to dive deeper into the comments of Jerome Powell. Right now the reaction is pretty negative. >> This is a big event that markets were waiting for. From the comments, it sounds like he was very hawkish. When you dig into his speech, the federal tools used to intact inflation, he also warned he expects a cost to the US economy. He added that high rates will likely stick around for some time. Again, all of this very much hawkish. It is likely that he will pivot based on his comments today. >> That's really what the Summer rally was about that we saw. Hitting a bottom in June, at least in near-term bottomand starting to rally off of that. It seemed like the market was saying "we are hearing what you're saying Jerome, the flight and fight against inflation is not an easy one, this is the only tool we have in terms of tightening monetary conditions. " There's going to be a pivot. It seems today that perhaps there was an effort on Jerome Powell's part to say… He didn't say the word "pivot" but there will be a long fight. >> Exactly. We did get that better-than-expected inflation report. I think that gave some optimism to the markets. The Fed tried to say "even if we did get a good report it doesn't mean the inflation fight is over." Data dependent, we have the big US inflation report that we have for August, the jobs numbers as well. Those are big key data points that the Fed will be looking at. But again, certainly from his comments, he is unlikely to pivot towards that tone. >> Of course the speculation in bed still emplaced, is it going to be 50 or is it going to be 75, and how people will play into that decision. >> Exactly. Prior to the inflation that report that's being more aggressive of 75 basis points… I think it's still too close to call. They interviewed the Pres. on Thursday. He said it's a coin toss between the two rate increase options. We'll have to wait. We have we still have those two big reports. They are not ruling out 75 basis points especially for surprise on the job front. >> Every piece of data matters these days. Thank you Anthony. >> My pleasure. >> Anthony Okolie will join us later on the show to discuss the spending data out of the United States. Now let's give you an update on the stories in the world of business. OPENTEXT shares are in the spotlight today. As the water level Ontario-based tech firm announces a $6 billion US acquisition. OPENTEXT says it has a deal to buy British software company Micro Focus international. With the lion share of the price tag being funded with the new debt. Micro Focus counts Airbus and Kellogg among its enterprise clients. Dell Technologies is says the outlook for demand from his business clients is clouded by fears of an economic downturn and soaring inflation. CEO Chuck Whitten says customers are reducing the size of their orders and buying only from their immediate requirements in the face of that uncertainty. Dell is forecasting sales up to $25 billion in its third quarter below the streets estimate. Modernity is suing rivals Pfizer and Biotech for patent infringement. In a news release modernity says it filed suit to protect the mRNA technology it says it pioneered and spent billions of dollars developing ahead of the pandemic. The lawsuit alleges Pfizer and its partner Biotech copied that technology. The suit was filed in a US District Court in Massachusetts. The allegations have not been tested in court. … Speculation about a Fed pivot. 19,910, about 262 points. More than 1/3% on Bay Street. The S&P 500, that broader read of the American market now is decidedly lower than 2%. 2.2% to the downside at this hour. It was a good start to the year for dividend stocks. as investors move to play defence amid the upmarket route. But with the wider equity market rallying through the Summer, higher appetite for risk has put a bit of a chill of the space. According to Kera Van Valen Portfolio Manager at Epic Investment Partners heading into the fall, we may see that better performance return. She joined me earlier to discuss. >> There is certainly no shortage of uncertainty. We have stubbornly high inflation, rising interest rates, slowing economy coming into question about whether or not we are tipping into a recession. We still have new COVID variance and then you have Russian invading Ukraine which then revives conversations between the conflict between China and Taiwan. So we think there is a very strong place for more defensively oriented equity stocks and equity portfolios in general. Volatility is likely to remain high. The structural support that you saw, more speculative growth is gone. That structural support extremely accommodative central bank moves in the most recent years. We think it's going to come back to being focused on companies that are generating sustainable free cash flow, that have cash flow today and I will continue to grow the cash flow into the future. And that consistently reward shareholders in the form of dividends. We think that will continue to be valued. Again, there's no shortage of uncertainty. A lot of conflicting data out there whether it be strong employment numbers, but at the same time you hear the lower and consumers stretched as a stimulus is gone and the inflationary pressures are felt using whether it be Walmart commenting, AT&T sang "people are delaying paying their bills" etc. Certainly a lot of conflicting data. We feel that more defensive income oriented stocks are well-positioned to help navigate through this uncertainty. >> Over the years when I talk to people who take a look through these income and dividend paying stocks, the one message that always resounded in my ears was "these might be turbulent times, we don't know what's going to happen next in the equity market but they are getting paid it to wait to see what happens". >> I think that's a fair observation. But I say it's twofold. Not only are you collecting the income, it is an equity strategy. Equity of stock that you're holding. So it can continue to grow. As the company faces growth, you can capture productivity, the companies will continue to grow. So you do get paid that income along the way. But you also get to purchase rising equity markets. >> When it comes to dividend investing strategies as well, there are obviously companies that pay dividends and that falls within the stream. There are dividend growers as well. Is that part of the screening when you're taking a look? Are you growing the dividend over time? >> Is absolutely important to have growth. The growth is what allows for the sustainability of dividend payments over time. Without the growth, you're essentially paying a liquidating dividend and that just cannot be continued forever. You need the growth in the underlying fundamentals of the business or the operations of the business to sustain the dividends over time. Growth is extreme important to the sustainability of dividends. >> I think investors are going through the platform screening for yields. Some yields can be rather eye-catching. Other some dangers there? That's the beginning of the exercise right? You start to wonder "okay, why is the dividend yield so high?" Can it be too attractive sometimes? >> Absolutely. Which is where the sustainability of the dividend comes into play. So simply screening on high yields might mean that that dividend is not sustainable over time. The market might know that they are facing secular growth challenges. There might not be room for reinvestment in the business. Those dividends would not be sustainable over time. The last thing you want to do is invest in a high income generating security only to have that income disappear. So you do really need to find, to screen out companies that are something paying high dividends mainly reflecting the challenges in the growth opportunities going forward. > Good stuff as always. Let's talk about some of the disciplines that you follow it Epoch investing. How do you set up your criteria when looking through the space? >> We touched on some of it which is growth that is extremely important. You want to find companies that have sustainable and growing free cash flow. Coupled with management teams that emphasize returning cash to shareholders in a discipline framework. So the capital allocation policy is very important. We like to think in the mindset of a CFO. How does the company generate the free cash flow? How they allocate the cash flow? That's truly how you're gonna determine the value of the company over time. By all means, if you can earn above your cost of capital, you should be reinvesting in the business and making acquisitions. That is the fastest way to create value. However, there is not an unlimited supply of opportunities to earn above your cost of capital. So it's very much about the discipline of returning any excess free cash flow to shareholders in the form of dividends, share buybacks and debt reduction. So we want that combination of a capital allocation framework that emphasizes cash distribution back to shareholders. But the growth element is critical in terms of sustainability of the cash flows over time. >> When investors are making these choices, the company earnings… They're trying to get a sense of where management is taking the company. What would be the warning signals? What are the kind of things you don't want to hear from management if you're looking at in terms of income play? >> Sure. You want to know that dividend is coming from a reaffirmed source of cash. There has to be a balance of reinvesting in the business and making more modest goals on acquisitions. That's what we want to be hearing. So where the challenges are is when you need to borrow to find your dividends, you need to sell Avid you need to sell assets to find dividends : those are not sustainable. Large transformational acquisitions in or outside of your core competency, that could also cause you to after revisit your dividend plan. But really, it's really trying to understand what is the credible growth story over time? It's not investing for each quarter. Over the long run how do you feel about capital allocations?. Do you reinvest? If not it's a discipline. from our perspective, dividends, share buybacks or debt reduction, all three are ways. When we think about dividend, we think about cash dividends and share buybacks and then also paying down debt. >> Are there certain sectors that make more sense in this kind of strategy? Will do a deeper dive a little bit later but are there certain areas where we say ^"this is a more stable area"? > I would say historically you would lean a bit more into telecom utility stables but the truth is it's become a lot broader. You can find income oriented stocks across a variety of sectors. And actually, one of the benefits of the technology is that as companies are reinvesting in the business, you can actually invest less absolute dollars to get the same level of productivity. This means that free cash flow is high. Which allows companies to sustain higher dividend payout ratios and return cash in the form of share buybacks. We are finding you can find income across all sectors and that something that we, quite frankly, look for within our portfolio is to be as diversified as possible. Now, does it lean more towards telco communication services question Mark yes. Pharmaceuticals and healthcare? Yes. But you still can find a variety of sectors. Income oriented stocks which is quite exciting. Even within the technology space, you combine dividends and share buybacks. Confined a lot of tech stocks that continue to return cash to shareholders, quite insistently, quite consistently in the form of dividends and share buybacks your fear. > That was Kera Van Valen, Portfolio Manager at Epic Investment Partners. Now let's get to our educational segment. When researching a potential investment, joining us for a tutorial to find that data on WebBroker, is Caitlin Cormier, client education and deep. Caitlin, great to have you back on the show. Where can clients find out more about stocks and analyst ratings? >> Thanks so much glad to be here. One thing investors can use to help make decisions about stocks, many different options is analyst ratings. So we have some really great tools within WebBroker to help clients find that information. So let's hop right into the platform. Were gonna click under "research" and under under "markets". This is the homepage for analyst information. Not about specific security but about different securities within the market. The first page will come to you here it's the most recent rating. So any changes that are taking place, recently, we can scroll through and see there are a lot of changes that happen today. Either keeping the rating, choosing fivefold selling… You can see all of that information here. So if you want to know kind of what the most information is, we can choose only five star rated securities to see, we can choose ones that are potentially a by. We do want to know what people are saying could be a good buy. We can filter by country, by market capitalization as well as sector. The lots of different options here to filter and see different information about these ratings. You can also click on "trending stocks". See stocks covered highly by analysts that have a lot of coverage as well as just kind of popular in general. Again, we are seeing those different ratings there. Giving us a bit more information about those stocks specifically as well as giving us our overall consensus in the past 90 days on those individual stocks. Finally, we can do a filter there as well. If you're looking again for a certain period of time, maybe we are looking for a different market capitalization sector, or even potentially best, worst or most rated stocks. Lots of things we can put in there to have some idea about what's going on with ratings currently. >> All right. Often on as you made out obviously, the jump into the analyst part of the WebBroker platform starts with being curious about the stock. What if an actual analyst catches your eye and you want to find out more about them? >> Exactly. Maybe there's somebody who you have some interest in finding out some of the ratings. Making some predictions that have worked out for you in the past. Maybe you want to see what other things they potentially cover. We can absolutely do that within WebBroker. So again, will just pop back into the platform. We are going to choose, in this case, any secure measure at the top the list. We will click on that security name and we want to remember this analyst. We are going to click right here on the company. When we get to the research page, were going to navigate to the "analyst" tab here. That will take us to the coverage of that individual's stock. But again, what were looking for is that analyst. As we scroll down, we can see the top one here. This is the individual we want to follow. So a regular do is to click right in his name. That's going to give us his win/loss rating. It will allow us to view his profile and see his average return for his ratings. If we click on "view profile", that will actually take us over to the analyst profile within the analyst centre. Again, it's giving us that same information before, his ranking, his number of ratings… Other companies that he follows… You can see this particular analyst is in the financial sector. And again it shows those different companies that he follows. So if I click this "follow" button and then go back to my follow analyst tab, this is going to show me any analyst I currently follow. I can just click that information there to get that quick snapshot of any updates that they've done. In terms of price Target and position. If you want to follow somebody specifically you can definitely create a little list here. >> Our thanks to Caitlin Cormier client educator with TD Direct Investing. Thanks so much. It's been a choppy ride for oil hovering around $90 a barrel. Today investors continue to weigh recession fears with concerns about tight supply. Earlier I spoke with Bart Melek Head of Commodities Strategy with TD Securities to discuss the outlook for the energy sector. >> It looks like there were up continue to be downside pressure. One reason of course is very poor performance in China. In fact TD Securities believes that growth for this year will probably have a to handle on it. 2 to 3% growth rate in China is very low by historical standards. Certainly very low compared to what we have been used to. At the same time, I think there's a growing group of investors who believe that the world might actually be headed for a recession. The Federal Reserve may not pivot in early February like we've seen the bond market price. That we can have higher rates for longer. That all means that oil demand, now currently estimated at well over 2 million barrels a day for growth in 2023, may not actually materialize. Indeed, TD Securities, in fact I have modelled it to be significantly lower. Maybe 1.2, 1.5 million barrels. When I take that data into my model, I come up with a surplus in the third quarter. Probably a balanced market in the fourth quarter. That basically means that the crisis pricing or the big risk of disruptions getting priced out of the market and that explains much of what we've seen on the downside with crude markets. >> You brought along some great shards. Let's show one that illustrates the commodity demand. Walk us through the picture of what this means for our audience. >> What this is is a proprietary estimate of where trends are moving for commodities. This is very much based on the price signals. Those price signals don't come out of a vacuum. This is very much based fundamentally on very poor Chinese data as we, I think, all know now. We continue to see a COVID zero policy in that country. Industrial activity is pointing to contraction over the next few months. We've seen recently the stalling of movement tracking or mobility data. It's also showing that mobility is not in recovery is much as we thought. But aside from the demand side of the equation, there is a big risk of a large risk and increase in supply coming from Iran. That is on the potential solution to the Iran nuclear problem. Where the United States and, you know, we quite define them as P5. Permanent members plus one with Germany, thinking of making a deal which would allow Iran access to the global market again. Of course they would have to conform to some limitations on the nuclear program. But essentially, that is thought to be potentially as much is 1 million barrels of crude within the next 12 months. >> You had a great chart on that as well. The prospects are of a deal… Let's see in terms of, this is a question to write? They have oil to put up on the global market… This explains it pretty quickly. >> We were estimating based on the history of 2015, when the fields at that time were not really damaged, we see no evidence that the current fields in Iran has been damaged permanently. So they can most likely introduce .2 million barrels of new supply within a month. Some .7 million barrels in the next six months and… Within 12 months. There is one important element to remember, we have some 100 million barrels of inventory in petroleum products include crude that can be deployed in fairly quick order. The last time around, when the P5 plus one nuclear deal allowed Iran to reenter the global market, we've seen a reduction in price from 50 to, that was the price when the deal was announced… And just over a month after that on August 29, we saw $32. That's something I've written about last Wednesday in the publication. >> If we didn't get a deal, let's play the other side… If we didn't get a deal because we were talking about this for quite some time, are there other areas? I think of OPEC and its ability to be assertive, swing participant, saying "perhaps we can't wrap up as quickly as the world thinks we can in terms of tightening". Certainly. That's been a problem for quite a long time. OPEC has promised to deliver a lot more crude than they actually did. In fact, this time around, last month, they promised 648,000 barrel increase. They didn't deliver. I think there is very little possibility that they could deliver as much crude as many people think they have. That could be strategic. That could be due to constraints in the oil fields. But also, we know that they have the ability to keep markets quite tight for a variety of reasons. Some strategic, some natural logistical reasons… The issue of course within OPEC is the countries that have the quotas don't have the supply. The ones that don't have the supply, have the quotas. And so there would have to be some sort of reordering of policy within the organization. But I don't think at this point, that's going to be an issue. Everyone is focusing on a slow down in demand and certainly the forward markets, we've seen strategic traders remove some of that positioning. We have seen outflows over the last month or so from long positions into more neutral stance. >> Speaking of policy, heading into a midterm election cycle in the United States. The Biden administration has good reason to want to bring down the price of the pump over the past several weeks. It has come down. But to push them even lower. Basically, voters get angry when more and more money is going into the tanks. How influential is the Biden administration in all these dynamics that we are seeing in the crude trade? >> First of all they have directed petroleum reserve in the United States to release a significant amount of crude. Some 1 million barrels a day. Without that, these markets would have been much tighter. While we are somewhat negative, we can't really say we are overly negative. We are still looking at prices in the 80s for our quarterly forecast going into 2022, the final three months of 2023. We essentially think that those SPR releases will ultimately stop as planned. Even if Iran does come in, if it does create an oversupply for a time, OPEC will strategically remove some of the promised crude increases from the plan and stabilize these markets. So, while we do think for now that there will be downside pressure, we don't think it will be around. >> At these levels, as you mentioned, still flirting around $90, is the oil and gas industry all that concern? When you're getting this for a barrel? >> I think, based on what we know of the cost structure, places like Saudi Arabia and Russia and the Canadian oil… I think these prices, everybody is covering their costs. Would you like to make more money? I think the answer inevitably is of course they would. But are there big concerns that this is going to be a problem? I think for now I don't think it's in the cards. >> That was Bart Melek head of quantity strategy at TD Securities. Of course the big event of the week that the markets were waiting for is Jerome Powell at Jackson Hole. But before we got those comments from the chair of the US Federal Reserve, with another pretty important piece of data. Personal consumption expenditures came in. Anthony Okolie takes a look at that enjoins us now is more. Anthony. >> Thanks Greg. The Fed's preferred inflation measure showed pressure ease in July. Price index RPC index, showing a year over year rise of 6.3% in July. That's down from 6.8% in June. The index actually came in negative for the first time since April 2020 following 0.1% month over month in July. The core PCE, gained .1% month over month. The forecast on both counts, also in the report, personal income growth in the US for July came in at 0.2% month over month. Below consensus estimates. When you look at nonpersonal spending, it lost momentum in July, rising just .2%, that's after a downward revision in June. And spending in real terms, you have to look at real terms because inflation is been so high, it was up after a flat reading in June. With inflation eating into consumer spending power, the personal savings rate in the United States remains under pressure. It dropped to 5% in July. TD economic support says that this report was a good downside surprise. Some spending is needed to keep inflation under control. But with real disposable income, we are looking at a six month average and a monthly income growing over the same period. It suggests that households in the US could continue to dip into the pandemic savings more more. Greg? >> Very interesting as you said. The Fed's preferred metric. We also saw inflation in recent weeks and is well in Canada come down a little softer. What dynamic is at play right now? Debt forgiveness for students with student loans or people with student loans or people who used to be students and have those loans? Any comment on that? >> TD believes that US consumers cannot continue to exceed their spending. At some point they have to pull back on their spending. They expect the long-term spending will converge over the long term. But when it comes to student debt relief, it's been a wild card. It's likely to boost future income according to TD economics. For those people who benefit. >> Interesting stuff as always. Thanks Anthony. >> My pleasure. >> Money talks Anthony Okolie. And let's check it on the markets. At 10 AM Eastern time, you have Jerome Powell with the big event of the week. Basically you want to break down in one sentence, at least to my ears, he's basically saying the inflation change will take some time. Today, it is a money-losing session. … Down one of the quarter percent in terms of the selling. It is pretty broad-based across all sectors at the start of the show today. In terms of what is under pressure. Tech is under pressure to a great degree. Think about OPENTEXT. At the top of the show, a big acquisition to the tune of $6 billion. OPENTEXT shares were under pressure before we saw the bottom market selloff which includes pretty sizable downdraft and tech names today. 42 bucks and $0.20 a share. Down a little more than 12% right now. Let's check on the S&P 500. Now losing some ground. The NASDAQ, down 2.8%. Definitely some weakness in the tech space. On my screen right now WebBroker, down to the tune of about 2.3%. So bit of a telephone out there. Stay tuned on Tuesday, Jennifer Nowski will join us, Portfolio Manager at TD Asset Management. We'll be taking questions about commodities, stocks. A reminder that you can get in touch with us any time by emailing us at moneytalklive@td.com. Thanks for watching today and thanks for watching all week. We'll see you Monday on MoneyTalk Live. [music]