Thoughts before the end of earnings season
This week, we briefly mention 4 different topics: August preliminary Purchasing Managers’ Indices (PMIs) were released, Canadian Banks have started to publish their earnings, there was an intensely followed speech from Chairman Jerome Powell and we noticed positive commentary from US consumer companies. Thus, our Outlook is a bit of a “mixed bag” this week, but we found the items interesting (if contradictory), so we thought we would mention them.
- Preliminary PMIs for August were released on a composite basis this week for some parts of the global economy. Other than Japan and the US, most have deteriorated below 50 which means management expectations over the short-term are negative. This is not a great development, and we are eager to see the balance of the data.
- The Canadian banks have started to report earnings for the 2nd quarter. It appears that investors remain concerned about Provisions for Credit Losses (PCLs), which have doubled over the past three quarters from more normalized levels. The total amount of expected loss still appears to be manageable in the context of historic maximums but the trend is definitely in the wrong direction. Only two of the major banks have reported, we will update again next week after earnings season comes to an end.
- Earlier this morning, Federal Open Market Committee (FOMC) Chairman Powell spoke and reinforced the committee’s message that, while inflation has come down from a high of 5%, it has yet to reach the FOMCs target of 2%. It remains stubbornly high and still above 4%. Chair Powell indicated that the committee will not adjust their long-term target higher (some were expecting a revision to 3%) and will remain restrictive until they are able to reach their goal. He also mentioned the increasingly difficult geopolitical environment as an ongoing risk that makes management of the process to achieve their goal more difficult.
- We found the following quotes from large US retailers very intersting in the context of what we would consider to be the three negative points above:
• “… fears of a recession or at least a severe recession have largely subsided…” – The Home Depot ($HD), Executive Vice President, Edward Decker
• “… the customer, with moderating inflation, is feeling a little bit more room to spend money… ” – Ross Stores ($ROST) CEO, Barbara Rentler
• “We like our level of inventory right now. We feel very good about it. And it’s not just our inventory, our in-stock levels…” – Walmart ($WMT) CFO John David Rainey
“This means that” we remain cautious. Last week, we noted that most of our mandates have excess cash. We have continued to raise cash this week where opportunities have presented themselves and now all of our portfolios have excess cash. The question of a coming recession remains hotly debated in the investment community and around “the desk” at Pathfinder. We continue to watch very closely.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.