September was a lot calmer than last year with both markets climbing a little higher. It is amazing to me we are at these levels with all the negative tones in the media. However the negative is concentrated on political issues and not economic issues. Even though we get dramatic changes on a day to day basis markets continue to climb higher.
The facts still show a growing economy, under 4% unemployment, interest rates that remain low with world pressure to push them lower and very little inflation. If it is just the mood that is negative, this sure leaves the potential for more upside should the mood improve. Yes we still have Chinese trade talks, Middle East tensions, Brexit and whatever tweet comes out next as issues.
We are finally seeing the market take some action on companies that are extremely overvalued. The likes of Lyft, Uber, Peloton and the pulling of WeWork from listing on the exchange are finally signs of common sense returning as the valuations these companies had with no profit in sight was ridiculous. Softbank has been a big reason for these valuations as this fund was flush with cash and investors bid up these companies way beyond what they should have been. This is one of the outcomes of very easy money (ie. low interest rates). It creates too much cash and makes the value of companies reach bubble like valuations (air pockets) which in turn when the bad news hits it hits hard. I thought the raising of rates would cause reevaluation however it looks like common sense and past experience is going to take care of this. Two reasons this is good for us; the first is we didn’t buy these companies so we are avoiding that destruction of wealth and the second is this should give the overlooked and profitable companies we own proper higher valuations.
It will always be interesting in the month of October and this year will be no different but we are ready to deal with all issues and take advantage of mispricing in the short term.
Paul Belous, CIM
Vice-President & Portfolio Manager