The Wall Street journal penned a great article this week. (‘Greedflation’ is Real—and Probably Good for the Economy.) It points out that companies have used inflation as an excuse for generous price increases and its backed up by first-quarter earnings results. That may be one reason a recession is permanently six months away. At the crux of the matter is the politically charged question of whether corporations are shifting the burden of inflation to households. One-third of the growth in U.S. unit prices from 2020 to 2022 can be explained by higher corporate profits and only half by higher wages. Companies, which in normal times are wary of angering customers with big price changes, seem to have seized on the excuse of generalized inflation to shield their margins, with drops in actual sales mostly offset by higher prices. Yes, inflation may be higher as a result of corporations flexing their pricing muscle. But it is probably also the reason why the recession that everyone is expecting may never actually arrive. On that note, the S&P 500 has not seen a new high in 350 trading days. This is one of the most extended stretches since 1950. Meanwhile, the German stock market bottomed in October 2022 and is now at an all-time high even though they officially entered a recession only this week. Lesson 1: markets are forward looking. Lesson 2: not investing because you are waiting for a recession is a losers game.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(-) Bank of Montreal (BMO-T) reported a top and bottom-line miss. From a high level, BMO posted weakness across all segments, but Canadian banking was a particular standout. Earnings from Canadian banking came in 8% lower Y/Y driven in part by higher provisions for credit losses. The fact that net interest margins were flat sequentially and loan growth edged lower also didn’t help. This quarter will go down as a miss. Valuation is attractive, and trades at a modest discount to the peer group on a price-to-book basis. Shares yield 5.21%. Owned in Cash Flow Portfolio.

(-) Bank of Nova Scotia (BNS-T) This was a mixed bag of a quarter from BNS. There was nothing in the Q2 report that would change our view on BNS over the short term. The stock remains cheap, but we continue to remain skeptical given lack of clarity on the bank’s plan to improve its long-term earnings power/profitability. We may sell the shares but will wait until we find a replacement. Owned in Core and Cash Portfolios.

(~) Costco (COST-US) reported a miss on sales but a beat on EPS. Net sales grew 1.9% Y/Y, with comparable sales up 3.5% excluding fuel and FX. E-commerce comps declined 9% as the digital capacity still lag peers but the opportunity is in early innings. While the valuation is at a premium of peers, the company remains best-in-class amongst big-box retailers due to its unrivalled value proposition, a 90% membership renewal rate, astute working capital management, and global growth opportunity in the long run. Owned in Core Portfolio.

(+) JPMorgan Chase & Co. (JPM-US) JPM’s recent investor day demonstrated the strong momentum of its strategy under Jamie Dimon’s leadership. We like its ability to break down the silos between its four business lines and successfully cross-sell (by size: consumer banking; corporate and investment banking; commercial banking; and asset management). The overall credit remains strong with no notable deterioration. We continue to see JPM as a core holding in portfolios. Shares yield 2.96%. It resides in the US Portfolio.

(-) Louis Vuitton (LVMUY-US) LVMUY has been accelerating for over three years but its share are slumping - now down 10% off its highs. Valuations have largely depended on two things: China’s post-Covid recovery continuing apace and a soft landing in the US luxury market. At least one of those is in doubt. The US, alongside South Korea, has been the driver of luxury fortunes for the past three years. However, US spending on top end goods has been falling for the past year or so with US credit-card spending, tracked by analysts at Citigroup Inc., has been weakening for the past year or so. LVMUY generates 23% of its sales from the US. That said, it has some of the world’s most muscular brands, led by Louis Vuitton and Dior, and also generated 36% of its sales from Asia. We will continue to own in the Core Portfolio

(++) Nvidia (NVDA-US) The world’s top AI company, Nvidia, reported incredible performance in their earnings and is now firmly back above all-time highs. As of writing this, the valuation is just 5% away from hitting the $1T mark, a milestone achieved only by Google, Amazon, Microsoft, Apple and Saudi Aramco. Most of this year’s S&P500 and Nasdaq performance can be traced back to AI-leading technology companies. NVDA has a leadership position in several secular growth verticals and is a top designer of discrete GPUs used in various end markets such as autonomous driving, generative AI, and gaming. Owned in Core, US, ESG+ and Opportunity Portfolios.

(+) Royal Bank of Canada (RY-T) reported Q2 EPS C$2.65 vs FactSet C$2.79. Revenue C$13.52B vs FactSet C$12.86B. Results this quarter reflected higher provisions for credit losses, with a PCL on loans ratio of 30 bps, mainly attributable to provisions taken on performing loans in the current quarter, largely driven by unfavourable changes in the bank's credit quality and macroeconomic outlook, vs releases in the prior year which reflected reduced uncertainty from the COVID-19 pandemic. Increases quarterly dividend by 2.3% to C$1.35 from C$1.32. Shares currently yield 4.27%. Owned in Core and Cash Flow Portfolios.

(+) Toronto Dominion Bank (TD-T) A decent set of numbers from TD with revenue in Canadian and U.S. banking segments up 11% and 14% YoY, respectively, driven by strong loan growth in the personal and business banking in the US. But similar to BNS yesterday, reported expenses saw a big jump (up 16% YoY) driven by personnel costs, impact of FX and higher spend to support business growth. TD remains in excess capital position with CET1 of 15.3%, and the bank turned off its drip and announced a small buyback of 30M shares. Shares currently yield 4.56%. Owned in Cash Flow Portfolio.

(+) Verizon (VZ-US) It is anticipated that the company will be restructuring customer-service operations which may involve significant layoffs. Verizon currently has 117K employees. Verizon is primarily a wireless business (nearly 80% of revenue and nearly all operating income). It serves about 93 million postpaid and 23 million prepaid phone customers. Shares currently yield 7.28%. Owned in Cash Flow Portfolio

Weekend Reading

Vicious Traps by Morgan Housel Take patience and confidence. They both sound great. But mixed together they often form stubbornness, which is a disaster. COLLAB

The Liabilities of Success It’s easy to idolize the accomplishments of those who are more successful than you, but it’s hard to understand the price they paid for that success. This is why you have to think deeply about what liabilities you are willing to take on prior to embarking on a new project. DOLLARS AND DATA

Tech Stock Hail Mary The latest buzzword in earnings reports and for public relations departments is A.I. This is all about getting late in the FAANG stock market era and starting to fall behind. It is a classic stock market “Hail Mary!” SMEAD CAPITAL

Worlds Apart: Risks and opportunities as deglobalization looms The world is at an inflection point. After decades of close trade ties and economic progress, globalization is being unwound. With trade relations becoming more fragmented and the potential for a great power rivalry between the U.S. and China, it’s paramount to understand the economic realities of the new paradigm. RBC INSIGHT

Asia As A Time Machine To The Future Seven Areas Where Asia Gives Interesting Insights Into the Future CITI GPS

Where China is beating the world On high-speed rail, EVs, and solar, China is doing truly amazing things. NOAH OPINION