The Canadian Investor - Will Regulators Approve National Bank’s CWB Acquisition?

Episode Date: June 20, 2024

In this episode of the Canadian Investor Podcast, we go over the US May CPI data and the US Federal Reserve's rate hike announcement. We break down the latest CPI figures, highlighting the trends in energy, services, and food prices, and discuss what these mean for the inflation outlook. Following this, we delve into the Federal Reserve's decision to keep rates unchanged, examining the nuances of their quantitative tightening and economic activity assessments.  Additionally, we discuss Nvidia's significant impact on the S&P 500, Adobe's impressive earnings report, and Dollarama's resilient performance amidst economic challenges. We also cover National Bank's ambitious bid to acquire Canadian Western Bank and its implications for the Canadian banking sector.  The episode finishes with Simon going over the recent downgrade of Allied Property REIT's debt and what it means for the office REIT going forward.   Ticker of stocks: ADBE, DOL.TO, AP-UN.TO, NA.TO, CWB.TO, NVDA Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. Welcome back to the Canadian Investor Podcast. I'm back with Dan Kent for our Thursday episode. Dan, how's it going? And did you want to tell people that you put all of your life savings on the Oilers winning the Stanley Cup? You know what? It's funny because I did look

at the odds, but they weren't they weren't good enough when they were down when they were down three nothing you could get 15 to one and i was like that's just that's just not not good enough uh funny thing like when uh when they were two two and nine to start the year my buddy wanted us to put a bet on them to win the cup and at the time they were i think it was 29 to one. And I still didn't think that was good enough. And that bet, you know, I never know it might pay off. Oh, I mean, you could probably, yeah, you could probably sell it and still make a little bit of money, but it's funny you say that. Cause I thought about it. I'm not a big sports gambler, but, uh, I was like, you know what? I feel like the oilers are way better than the two and nine record

but uh i guess they were right they're at uh in the finals and definitely there's there's still a chance so that's that's uh you know as a true oilers fan you still gotta believe i guess i will admit it's a lot less stressful watching now now that there's like nothing but i mean nothing to lose really if it was like two and two i'd be so nervous for these games but now that's three and one i'm just like whatever watch the game see what happens yeah exactly yeah exactly that's it well we'll get started because i'm sure uh people are well versed on what's happening with the stanley cup final especially when we have a canadian team Canadian team that's playing in the final. It doesn't happen every year.

Now, we'll start off with a little bit of macro, and then we do have a lot of Canadian content, some companies reporting, Dollarama. We have also Allied Property REIT that was downgraded by Moody's. You're going to talk by the, I guess, impending merger of National Bank or I guess the acquisition of National Bank acquiring a Canadian Western Bank. I kind of muffled that a little bit, but you'll be talking about that a bit later. So we have a decent amount of Canadian content, especially as things are slowing down. We're kind of in between the shoulder season, if you'd like,

of earnings. So it's definitely slowing down a little bit, but again, it's going to pick back up in the next couple of weeks. So it is, you know, it's cyclical. So we're kind of used to that. Now, the U.S. Fed meeting as well as CPI. So it was one of those weird days where in the U.S. CPI data came in the morning and then in the afternoon, it was the rate decision announcement by the Fed. It's funny because the market kind of whipsawed a little bit based on the CPI data and then what the Fed said afterwards. So it's always funny that the markets are hanging on to what the CPI data looks like and then what central banks are saying. And obviously the mother of all central banks, the Federal Reserve in the U.S.

Now, May CPI headline inflation came in slightly lower than expected at 3.3% year over year. It was flat versus May, so on a month over month basis. over month basis. Most of the energy components, interestingly enough, were down compared to April and had a modest increase year over year. So for example, gasoline was down 3.6% compared to April and up 2.2% year over year. So the reason I'm mentioning that is those headline figures have been trending better, although I will make the case that they are starting to stagnate, at least in the US. I hit a bit of a plateau in terms of going back down to the 2% target. But in my view, I think energy remains one of the biggest concerns here because energy has been relatively low price, which has been bringing down overall CPI. and people have to remember to energy effects pretty much like maybe not

all the goods and services but the vast majority of them yeah almost all the goods and services in the economy in one form or another so when you have those prices that go down or go up it has an indirect impact on a lot of them and a direct impact obviously on a lot of baskets as well yeah and i mean we're seeing oil has gone up i was just looking at it here from start of june it was 74 a barrel and now it's over 81 so oil's seeing quite a big surge so we'll see if uh that those energy prices which that's why they isolate that energy out of like the core numbers just because it's so volatile. But I mean, as we move forward, if oil continues to rise, I mean, ultimately, it's going to put more pressure, probably higher gasoline prices, which, as you mentioned, pretty much impact nearly everything.

I mean, transportation costs, all that type of stuff. It hits hard. Yeah, exactly. And even food, right? it hits hard. Yeah, exactly. And even food, right? People will look at the food component, which was up 0.1% compared to April and 2.1% year over year. But the problem here, again, is energy. Energy is a significant input in the price of food because of transportation costs, but also the cost of production. So there's still a significant risk, in my opinion, of this picking up. And I do find it a bit funny that they strip out, you know, energy, even though I do understand the logic behind it being volatile.

But energy as a whole, whether you're talking about oil, whether you're talking about natural gas, renewable energy, I mean, it's the base of our economy. So it's kind of funny that they're like, we'll just strip out one of the most important components because it's too volatile for our liking. I just I find that a little bit. Yeah, a little funny the way that they kind of try to justify that. But having said that, core CPI rose 3.4% year over year because it does strip out energy and food, which are more volatile, and rose 0.2% versus May. All in all, a decent CPI print, I would say, especially because the headline number came in a bit below expectation. But again, still not at the Fed's 2% target. And I will share something here with our joint TCI listeners that will see. And this is directly from one of the Fed or actually the Bureau of Labor Statistics.

And it's over a 20 year period. Granted, it's a long period of time. But for those just listening, just so you can visualize it, you can really see kind of a little bit of a flat line with inflation after the peak that we saw in 2022, now going rapidly down. But now it's been kind of stuck there at around that 3.3% range or so. And, you know, obviously, I think it's a bit too early to tell at this point. But I think that's something the Fed is definitely looking at, because it's not necessarily trending in the right direction. It's kind of just going sideways at this point. Yeah, it's definitely getting sticky.

And I mean, like food is still, even though it's slowed down quite a bit, it's still very expensive. I mean, putting a ton of pressure on people in terms of cost of living. I mean, I just went out for my anniversary like yesterday and we went to we went to like uh yeah thank you we went to like a reasonable restaurant like it was pretty good but it was a hundred that's why that's why you weren't responding to my text okay yes i was you have a good reason i was busy all day yes but it was it was170 for a couple steaks, pretty much, and one alcoholic beverage. So, I mean, it's just crazy how expensive it is right now. And I mean, at some point, do they kind of accept

3% as the new target and then start adjusting from there? Can they get it back down to 2%? I mean, they kept it relatively at the 2% mark from post-financial crisis all the way up to 2022. So it'll be interesting to see if they can get it back down to there. I don't think they will, personally. The biggest driver, obviously, there's a lot of different factors in, but one of the biggest factors, and I'm not sure we talked about a lot on the podcast, is you had right that was in full force from i would say the mid late 1990s up until probably four three four years ago and now we're seeing more and more the deglobalization kind of trend from different countries so trying to bring back a lot of industries back home and that will in logically will probably put some more pressure on prices.

I think it's going to be difficult personally. And one of the things that I haven't gotten to yet is that services remain pretty sticky. So you're looking at services about in the 5% range from year to year, increasing 0.2% versus April. So that's really dependent on wages, clearly. So that is one that's staying pretty sticky. And the last thing I'll talk about here for CPI is there's also trufflation. I know we've talked about it before. So they're independent. They take thousands of data point to show where CPI is at. And for them, interestingly enough, they have it at 2.15% versus the US reported rate of 3.3%. They use a little bit of different calculation when inflation was extremely high back in 2021-22. They actually had

it higher than what the CPI data was showing. So I figured that was just interesting to show the other side of the coin here. This just kind of isolates how specific things where consumers will be impacted more, right? It would place more emphasis on things like food and stuff like that? I think so. I think the basket are a bit different I haven't look as it's extremely detailed the way I look at the data I believe that they use a bit of different way to calculate rents as well because rents are notoriously lagging because clearly you know if you lock in a term with your rent you're good until you renew right especially if you're looking at states that are not rent

control or some kind of rent control in place. So that increase has a lag effect. So I think that could be part of it as well, but I'm just speculating. I haven't looked into like the nitty gritty of how they use the data. Yeah, I mean, it seems pretty realistic. I mean, just in my own personal experience,

I've noticed costs slowing for sure. Like they're still high, but they're not like, you know, when we were in 2022, 2023, I mean, it was just crazy how expensive things were going, how fast things were increasing. So I've definitely noticed a slowdown. It's definitely getting there. Yeah. Same for me. I think things are relatively more stable. I would say I'm definitely more cognizant.'m yeah i'm a sucker for you know meat that you have to eat within a day or two and it's like 30 off or whatever it is i'm more conscious about prices but i agree with you i think staying things have stabilized a little

bit more in terms of food at least but i think it's important to remind people that that doesn't take away the 20 25 increase whatever it is that we've seen since 2020. That increase is still there. Exactly. So it's the future. The rate of increases is slowing down, but that's why people are probably still feeling the pinch quite a bit. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

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the size of their balance sheet in assets, which are primary treasury holdings, but there's other types of assets. And it means that they are not replacing those bonds as they come to maturity. And you can clearly see that it is starting to, I mean, it has gone down in terms of the size of their balance sheet. I do not know, you know, in terms of how long they'll be able to do that. I suspect that they'll probably start quantitative easing again at some point next year. It looks like they're starting to slow down the quantitative tightening, but it is definitely something that's continuing here. And he mentioned that the economic activity is still expanding at a solid pace, although it has moderated from 3.4% in Q4 of last year to 1.3%. I don't know about you, but that's not very solid in my book.

But I guess we have a different definition. Yeah. Wasn't that pretty much the same as Canada as well? I think it's similar to Canada. Yeah, I think it's similar to canada i know there's a tool i think it's the atlanta fed that comes out with that it's like gdp now and it is just like i think very frequently and you can see that the estimates are constantly kind of going lower lower in terms of the projections for gdp in the u.s so i mean it's not bad i guess if you compare

to other countries. I know some countries in Europe have seen some recessions already or are trending there. It's just, yeah, it's not looking that great, in my opinion, especially when you start digging a bit more in the data. He also said that growth in consumer spending has slowed but remains solid. Again, that is funny because in the press conference he's clearly trying to send some messages but he talks about general numbers and just the general numbers that kind of justify the actions that the fed are taking but he also doesn't talk about the new york fed and the consumer credit usage in the u.s which is way way up and you're seeing credit card

balances that are trending up buy now pay later use trending up as well so yeah it's kind of extend and pretend and people are still spending but they're it's going to come do a bit later down the line right they're spent they're not spending their money they're fine they're financing the spending which is i mean maybe he means growth as in uh growth is solid as in like considering the circumstances i mean i'm not sure but yet i mean i don't know how you can say it's strong yeah i mean i think he's just going there and he's trying to convey right it's just about the message and people hang on to all of his words what he's saying and try to come up with you know what they're gonna do based on that i just trying to convey, right? It's just about the message and people hang on to all of his words,

what he's saying and try to come up with, you know, what they're going to do based on that. I just find it a bit interesting because using credit, you're essentially just pulling spending forward, right? So you're pulling future spending forward. So I'm not sure how great that is, but whatever. I mean, he has access to that data, but I do think they are very careful on which data point to use. And at least I'm sure they look at all of them, but I also think they are very careful on what they say during those releases and press conferences. He also said labor markets have become in better balance, but job growth remains strong despite unemployment picking up to 4%. He also had a bit of a slip in the press conference where he mentioned that job reports may have been slightly overstated, which is a little bit of a contradicting point. And that's been definitely something that I've known for a while. I've read quite a bit and it doesn't show in the headlines. The headline, it's always a job report that's coming up. But these job reports will usually get revised down the line because

a lot of it are based on estimates and they have all these formulas that you use to come up with these job reports. And obviously they can be revised up or down, but they've been revised down more and more, you know, months after the release. So I found that part was pretty interesting because the Osmo said the quiet part out loud. Anything you want to add on that part? No, you explained it well. I haven't just with how busy I've been. I haven't had a chance to look into the meeting this like this most recent meeting. But yeah, nothing to add.

Well said. Yeah. And I guess the last point here is the future expectations for the Fed's fund rate or the interest rate. That's what they call in the US. The US dot plot, which is simply a survey completed by all the FOMC members, and they reveal that most members expect rates to be cut by 25 basis point or not at all this year. And a lot of the rate cuts are being pushed forward. And then people know that I like to look at the CME FedWatch tool and meeting probabilities. Again, there is almost no chance of a rate cut now on the July 31st meeting coming up. The next one, 91% or 92% if I round up that there

will not be any rate cuts. The market is actually putting a two third chance of a rate cut for September. And I still think I'll be honest, I think the market is wrong. I just don't know how the Fed would be able to justify a rate cut in September if they don't do in July without essentially getting Trump to say that they're trying to impact the US election. That's my, that's the way I view things. I just think it's a political time bomb if they actually do it in September. And I actually think if they're going to cut, it's more likely that they do in July than September. So I disagree with the market there just because of what the perception of that would be. Yeah, I don't think it would look very good.

I mean, we're looking at they still are pricing in what a two-thirds chance in what would that be September. So, I mean, it's not necessarily a guarantee. The surprising thing to me is they're pretty much saying, what would this be? 98% chance in, what would that be? June of next year that we're a hundred basis points lower. So that's pretty interesting to me. I mean, that's like, they're pretty much, I mean, betting huge that, you know, we're going to see a 1% decline in policy rates over the next year or so, which is if they don't cut, if they predict no cut now, but they predict 1% cuts by next year, that would probably mean they're going to get pretty aggressive at the start of 2025. Slashing rates, it's going to be interesting.

I'm interested to see how many basis points canada is down since by then i mean we're probably looking to cut one more time or maybe they do kind of a a cut hold cut hold until you know the u.s maybe catches up a bit but uh it's going to be interesting this stuff is impossible to predict like you just never really know especially when it's so like data driven now like they're just you know if they keep getting solid prints it'll keep getting delayed so yeah it's uh it's all a guessing game right now for sure i mean it always is let's remember late last year they were predicting i think we'd be down like 50 basis yeah exactly lower in march i think

or at least the first one coming in March. And clearly that hasn't happened. And according to this, there is almost a, not quite, but 99% chance that rates will be lower by the November 7th meeting, which I believe is like a day after the election or something like that, the US election. So that I can see a bit more, but it'll be interesting. It just obviously don't

bet your house on it or your life savings on that because clearly even the markets have been wrong. Yeah, exactly. It's way too hard to predict. Do you have any other thoughts on that or do you want to move on to NVIDIA's insane run? Go for it. Yeah, let's move on. So this isn't really specific specific to NVIDIA, like in terms of earnings or results or anything, but I just read this, it's probably yesterday. They are accounting for more than one third of the total return of the S&P 500 this year. So I think it to be exact, it's like 34 and a half percent. So shares are up more than 170% year to date. And it's certainly adding, I mean, a bit of concentration risk in regards to investing in the S&P 500.

If Nvidia stock remains relatively stable, the S&P will probably be fine. But if there's some sort of correction in terms of Nvidia's price, I mean, the index could be hit pretty hard. of Nvidia's price. I mean, the index could be hit pretty hard. If we look to the S&P 500, it's up around 16% year to date. They have a ProShares S&P 500 ETF and they have like, you can do X tech, X financial, you can isolate any sector you don't want to own. So if you look at that ProShares X tech ETF, its returns go down to just under 8%. So you're looking at tech making up nearly 50% of the S&P 500's returns. And of that, NVIDIA is making up a huge chunk of those returns. And I think there may be a bit of recency bias when it comes to the S&P 500 right now.

I mean, the vast majority of my audience over at StockTrades is Canadian investors, and I can't remember a time ever if I've ever seen as many people inquiring, sending emails, messages about investors looking to get exposure to the S&P 500. investors looking to get exposure to the S&P 500. Like nobody was really asking about it two or three years ago, but now it's just, you know, it's just skyrocketed in popularity. And I mean, it's not that surprising considering like how badly the TSX is just getting hammered over the last while. So it's the worst performing major index in 2024, and it's gotten beat down over the last three, five, and 10-year timelines. So if we look over the last 10 years, the TSX has a compound annual growth rate of 3.68%. The S&P 500 sits at 10.9, while the NASDAQ is at 15%. So in dollar terms, if you were to have bought the TSX composite 10 years ago, you'd have around 141,000 today. With the S&P 500, you'd have 282,000 US and with the NASDAQ,

411,000. And the performance gap actually gets wider. The S&P and the NASDAQ have outperformed the TSX more over the last five years. And this is primarily due to that big tech post pandemic surge and how well they've done. The one thing I do find interesting though, is post tech bubble in 2000, the Canadian markets were actually the best performing North American index for the next 15 years. So I wouldn't necessarily call them, you a good performing index so the tsx over that 15 year period returned about 3.76 percent annualized but many of the u.s markets were effectively you know dead in terms of overall returns over that time period the s&p 500 returned 2.27 percent and the nasdaq one percent i'm not saying this is going to happen again. But as I mentioned,

I'm seeing a very high amount of Canadians inquiring as to how they can buy the S&P 500, which is probably coming at the expense of Canadian stocks. I mean, maybe they're getting fed up with the lack of returns. So I mean, I'm not super bullish on Canada, but there's zero doubt our market is deeply discounteded, you know, relative to the US markets, where it will go from here is nobody's guess. You know, I know a lot like to compare this current technology surge to the to the 2000 tech bubble and how valuations are, are arguably higher than they were back then. I don't really think that's necessarily the case in terms of you know, the the major tech companies, but among the smaller players in the tech space, primarily AI related, valuations are

crazy high. But yeah, I just found it really interesting. I looked at that tech bubble and just noticed how well the Canadian markets perform coming out of that relative to the US. And I'm just noticing right now, absolutely nobody has interest in the Canadian markets and there's just a huge huge surge in interest for the US markets. Yeah well it's interesting you're saying that because I'm actually doing I'll do a segment next Monday with Brayden about like ETF flows in Canada and the US mostly Canada and that's

one of the findings that I found is there seems to be a lot more interest in kind of US equities in terms of inflows, especially since the start of the year, year to date. So they have all that data. So that was something that I found pretty interesting versus Canadian equity inflows. That's quite low. And I guess it's just FOMO, right? Fear is a wonderful drug when it comes to putting some money in is there's the fear of missing out. Whether you look at, you can look at fears both ways, right? It could be fear of losing money, but fear of not getting any of those gains. And what I have up here for Join TCI listeners is I have the last 10 years, three funds that track a bit what you were saying.

So you have the SPY, so S&P 500 index, clearly the best performer here at over 233%. You have the equal weighted ticker RSP that is at 155%. And I'll specify these are total returns so it includes dividends. So the discrepancy between the two, the equal weighted and the regular S&P 500 is just massive and actually really widened in the last, I would say two years and especially this year. Like the gap is a bit alarming. I'll just be honest. gap is a bit alarming i'll just be honest it is a bit alarming yeah i mean it's all you can pretty much trace it back to companies like nvidia i mean apple

microsoft amazon tesla to a certain extent but i mean not so much now but yeah it's just like i think this is the heaviest concentration among like the top weightings in the S&P 500 that we've seen. And like they could continue to do well moving forward for sure. They could continue to and you could buy the S&P 500 and do just fine. But I think like it's something people need to consider. And like I said, it's a lot of recency bias. It's, you know, people possibly trying to chase returns. I mean, the stocks are expensive right now.

There's no doubt. And I mean, as you mentioned, there's a lot of money flowing out of Canadian equities and into US, which is, I mean, it might be justified. The Canadian market still definitely could struggle moving forward. I mean, our economy is not as strong. We don't have any of this large tech exposure i mean we have there's two major tech players here i think it's shopify and constellation software maybe but outside of that i mean you're getting much more exposure

don't forget blackberry oh yeah blackberry yes the once darling yeah it's like yeah we just uh i mean our index is so cyclical there's a lot of gold there's a lot of oil and gas energy things like that i mean even financials to a certain degree so i mean it it just kind of alarms me like how many people are asking me like they're fed up with canadian stocks they're looking to enter the US markets. And I mean, I just thought I would note, it's not a guarantee that the TSX will rebound, but the stocks are a lot cheaper on the TSX than they are the S&P 500. That's pretty much a given. Yeah. And the last line here, so people can visualize, I mentioned the equal weighted 155%, 233 for the regular s&p 500 and then you have the xic which tracks the the tsx composite index and that one is at 96 so just gives you a little bit of an idea over the last 10 years and the last thing i'll mention that i wanted to mention here if you compare

i think things are quite stretched like that that's my personal opinion. Obviously, it could continue like this, like you said, for months, if not years. But I think Apple is the perfect example of this. If you look at Apple revenues, essentially, like they've stagnated over the last three years or two years or actually they've gone down. So and Apple is just like going up. Like there's no tomorrow and that's where I think they're starting to be a disconnect with the market is literally Apple's revenues are falling people got excited by share buybacks and then their new worldwide developer conference where they announced that they were using open AI to put on their iPhones going, I think, in the fall.

It's not even them that built this. It's OpenAI built on ChatGPT, basically. And the stock popped. Why? Because they think people who are trying to make ends meet will jump at buying a new $1,500 phone just so they can use that. I think it's just absolutely crazy. I'm sure they'll get a small bump up, but to justify how expensive Apple is,

that's the kind of stuff, like, don't get me wrong, Apple is very profitable, and it's not necessarily the tech bubble of the 1990s, but with what you're saying, the inquiries you're getting, even some people asking me that I know are not into investing at all. There's just a lot of warning signs going on, classic kind of bubble signs that we're starting to see. I'm not saying it's going to happen, but I think we are overdue for correction. Could come tomorrow, could come in a year from now,

overdue for a correction could come tomorrow could come in a year from now five years but just be aware of that i would say yeah i think it's it's safe to say that there's i mean the markets are are crazy high in terms of value on the u.s end whereas you know on the canadian end they might be discounted for sure there's almost no question i mean you can look at you know very similar companies that trade in the US and Canada and the valuations are nowhere near the same. I acknowledge that the markets are probably pretty rich right now, but I still buy every week. I don't try to time it. I mean, I buy every single week and if they correct, they correct. I'll continue to buy every week when they're lower.

But the one thing that, you know, just the inquiries and the questions I'm getting, it seems like a lot of people might be looking to, you know, like you said, you know, FOMO chasing returns type things, which typically, you know, it has a chance to not end well. Yeah, no, definitely. And I mean, I do the same with my work pension. But for my own investment, I've definitely been investing, but also adding more to my cash position. So I'm kind of hedging a little bit over there, but I think we've talked enough about that. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using

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Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and

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and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Recorded record revenue of $5.31 billion. Adjusted earnings per share came in at $4.48 a share. So these top the company's estimated figures it would have issued in the last quarter in terms of its next quarter guidance.

So they had expected revenue of $5.3 billion and earnings of around $4.40. The quarter was so strong that the company ended up boosting its annual guidance. So both earnings and revenue grew by double digits on a year-over-year basis. It was certainly a strong quarter considering how much Adobe has struggled since the peaks of the pandemic. So revenue is declining in their product and service segments, but the vast majority of Adobe's revenue is generated through subscriptions. is generated through subscriptions. So their annual recurring revenue, which would be a key performance indicator when it comes to companies that are subscription-based

is growing in pretty much every segment. Creative ARR, which I'm pretty certain just because I have their creative cloud platform, it would be their Premiere Pro, their Photoshop, products like that. It's up 12% year over year. Their document cloud is up 25%, which I believe is like Acrobat, like their PDF reader, things like that.

I'm sure it has more than just this, but I know it's heavily based on Acrobat. And their digital media is up 14.9%. So as mentioned, the company updated its fiscal 2024 guidance it now expects revenue of 21.4 to 21.5 billion and earnings of 18 to 18 20 cents so this would represent revenue growth to 10.7 percent over fiscal 2023 and earnings growth of earnings growth of 13.2 percent so creative cloud is generating pretty strong renewals and new customer additions. I mean, the company says the bulk of it is because of customers wanting to access its Firefly generative AI imaging platform. I mean, to be honest, I haven't really tried this

out. I have just used ChatGPT. I know ChatGPT can be pretty frustrating at times when it comes to, you know, image generation. I guess it wouldn't be GPT. It would be Dolly, which is their image generator. I mean, I don't follow Adobe all too much. I've always viewed it as pretty expensive. So I actually just found out about this Firefly thing looking into the earnings today. So I'm definitely going to check it out i depending on the cost i mean the one thing about gbt is it's kind of the dolly if you have their premium plan is kind of just bundled in so i haven't checked out the cost of firefly but they

said it's gaining you know gaining huge ground but yeah it's like i said i've always found the company kind of expensive it trades at 37 37X. It's free cash flow. I would imagine this is just because of how sticky the business is. I mean, it's got crazy high margins, nearly 90% gross margins, 35% operating margins. Renewal rates are high. I know I have Premiere Pro for our video editing. I know there's like probably a dozen other platforms that are way easy to do, but I just know how to run Premiere Pro. So we just keep it acrobat reader, like reading PDFs, all that type of stuff.

So I mean, it's, it generates a lot of free cashflow. It has very high margins, which is, which is probably why it's so expensive because it's only growing, you know, 10 to 12%. So to trade at 37 X free cashflow, pretty expensive. Uh, they put a ton of that free cashflow back to buying shares. They bought back 4.6 million on the quarter, which represents just over 1% of the total shares outstanding. But yeah, it was, uh, it was a pretty big rebound quarter for Adobe. Yeah, exactly. And what I'm showing here for a joint TCI is simply what you were saying, right? Revenue compared to subscription revenue. I would say what quick math here.

It's about what? Ninety two percent, I would say. Ninety three percent of revenue. So let's just say that I think they're almost the entirety. Yeah, the products and the services like just off the top of my head were about three hundred million or something. And then like subscriptions were like five billion on the quarter or something. That's completely, yeah, just off the top of my head.

I don't have access to the quarterly reporting game, but it was something like that. Like it's, subscriptions are just the moneymaker of the business. And apparently NVIDIA just got an alert on my phone while you were talking. I think it passed Microsoft as the world's most valuable company. So I guess the index must be doing well. It's up another 4% today. Must be that stock split.

It's cheaper now. I mean, I don't know what to say anymore about NVIDIA. It's just insane. I don't say anything anymore. Yeah, I'm happy to own it through some index funds that I have. Clearly, I have a decent stake in it because it's such a heavy weight in those indices. So I'm happy to watch it there. But yeah, unfortunately, I think a lot of people will get hurt by this trying to chase returns. Yeah. There's something to be said about, you

know, like if you're buying a portfolio of individual stocks, I mean, missing out on something like this is it, it hurts definitely because I mean, a lot of people probably don't own Nvidia because of how expensive it is, but you know, in a, in a broad based index fund, you would have at least some exposure. And when it's making up, I mean, we got to be over 35% now of the indexes returns on the year. It's pretty hard to have an individual stock portfolio that's going to outperform that. I mean, maybe if you're really heavy on some particular companies, but yeah, it's on a crazy run. Who knows how it'll end? Well, we'll go at a company that's probably 100 and something times smaller than NVIDIA, but still a very good company.

So I'm talking about Dollarama earnings here. So it was Q1 fiscal year 2025. They have a weird reporting schedule. So sales increased 8.6% to 1.4 billion. Comparable sales were up 5.6%. now they did mention that same same store sales were stabilizing growth is now primarily driven by essential item not surprising we've seen the we've heard the same thing from other retailers whether we're thinking walmart costco canadian tire obviously walmart costco being more of a beneficiary over here, but we have also

Loblaws that's in that essential category as well that's been doing well. Canadian Tire a little less so mainly because they have a lot of non-discretionary items, but it just kind of confirms what we've been seeing from retailers. Operating profit margins were up 90 basis point to 21.3 percent eps was up 22 percent to 77 a share they open 18 new stores 15 of those which were actually dollar city that's their latin america brand um i know a lot of people are not familiar with that but they actually have a lot of store in latin Latin America and their expansion is actually they're expanding there even more so they currently have 547 stores and they're now thinking that they'll have about 1050 stores by 2031 their previous estimates they were saying

850 stores by 2029 so it is interesting that this seems to be a pretty big growth vector for them going forward. They repurchased 146 million worth of stock during the quarter. So overall, I mean, a pretty good quarter by Dollarama. Obviously, things are slowing down a bit. I think that's normal. was a lot of I think you know a lot of demand for their goods but I think now things are stabilizing a bit more but people are still going there as they're trying to stretch every dollar but I think it really depends on the type of consumer because dollarama tends to have more like kind of smaller units whereas you have like a costco right you'll have really good value but it's bigger units you whereas you have like a Costco, right? You'll have really good value,

but it's bigger units. You also need to have a car typically to go to Costco. If you don't, you're going to have more of an issue going there. You know, if you use Uber, I mean, it probably won't be good value in the end when you factor in the cost of Uber, whereas Dollarama, it may be a better fit for people that are more in the city or maybe people that are single or just two people living together. So overall, good quarter. And as you can see with the graphic here, I mean, the results are just fantastic for them since 2015. I mean, revenues are just going up in a straight line and to the right and same thing for free cash flow. Yeah, and I think they bought like a majority stake in dollar city it was probably like five or six years ago now

and it's it's turned out pretty well i be i believe even like maybe even a week ago it was they actually upped their stake even further so i think they now own it might be like 65 it's over 60 of the company now but originally they bought a 50 i think 51 yeah i think they now own, it might be like 65, it's over 60% of the company now, but originally they bought a 50% stake. I think 51. Yeah. I think they had like just the majority. It was a majority stake, I know for sure. But I mean, what was the, I can't remember the dollar store that I went over in the States last week.

But anyway, the. Oh, a Dollar Tree? Dollar Tree. I mean, the results are just like crazy different. I mean, Dollar Tree is pretty much flatlining on everything while Dollarama is just continuing to rip up. I mean, I'm kind of wondering like why this is. Like, is it because the Canadian consumers be, you know, pinching even further and, you know, going to something like Dollarama, whereas the the u.s consumer maybe is a bit more resilient but i mean the operating margins are like like i said they're nearly five fold like dollarama's operating margins are nearly 5x dollar tree sales are growing like it's they're just

absolutely killing it yeah and free cash flow per share has been just on the way of what's one of my favorite metrics, obviously, for companies that it's applicable for. So no, I mean, it's hard not to like what they're doing at the end of the day. So I don't think there's much more to add here. No. Do you want to talk to us about the big news of what I fumbled earlier, National Bank buying Canadian Western? Yeah. So this like it kind of came out of nowhere. They just, you know, I just noticed one day that both of them were halted. And even then I didn't really think like anything like this would happen, but yeah, National made a bid to purchase Canadian Western bank for around 5 billion. This was 110% premium to Canadian Western's current stock price.

So the acquisition, if it goes through, will no doubt give national exposure in Western Canada. So BC and Alberta represent about 24% of Nationals assets right now. Canadian Western's assets are around 62% in Alberta and BC. Overall, it will nearly double Nationals total assets in Alberta and British Columbia. So it's a pretty notable acquisition for them. The companies like Canadian Western's current provision profile is very similar to Nationals. They both have PCL ratios, total PCL ratios coming in around 25 basis points, while Nationals 24 basis points and Canadian Western is 25. So prior to the acquisition, Canadian Western Bank traded at 0.58x book value. So National paid a little more than 1.2x book price to buy it. This is actually a higher book multiple than a company like Scotiabank and CIBC. So National is a much

larger bank. So I'd imagine this does open up quite a bit of room for growth now that they have control of CWB's assets. It should open up CWB customers to maybe a bit of a wider product base. regulations would apply but they mentioned that because canadian western is a smaller bank it's under more stringent regulatory requirements than something like national so national should be able to yeah i think it was uh god i can't remember the guy's name he's a he's pretty popular on twitter but he said canadian westerns are under more stringent regulations because they're a tinier bank, whereas something like National isn't. So the acquisition should unlock more value. Yeah, I'd like him to elaborate on that because that's not what I read. Because they're Canadian systemically important banks, right? So they have more stringent kind of CT1 ratios for the larger banks in Canada

because there's a systemic risk so i'm kind of confused by that tweet i'll be very honest yeah yeah let me see here oh it was uh barry schwartz so he said the tweet was cwb is a small bank and as a result a substantial portion of its capital is stuck given regulatory requirements by merging with national a significant benefit will be the ability to release assets on cwe's balance sheet that can be put to work one plus one equals three okay and there was no like clarification as to as to what exactly he meant and i like i said like i didn't i don't understand it overall so i just kind of you know chalked it up to as just me not understanding the you the regulatory landscape.

But I'm not exactly sure how it would work. Maybe he might provide some clarification. I'll ask him. I'll put a message on the tweet, and we can talk about it next week if he does. Yeah, no, I'd just be curious. Maybe because there's a smaller bank, right? They just have less assets, and they they just have less assets and they have they probably just have less capacity to provide loans overall like maybe that's what he was

kind of referring because that's kind of what i got at with the first mention like just with how big national is they should be able to you know utilize the assets more and um there's a ten dollar a share arbitrage opportunity as of right now. So this is about a 25% discount to the acquisition price. So I would imagine this is due to the regulatory risk of it potentially being rejected, possibly just now to the gap of closing the deal as well. So we're in mid 2024 and that deal is not expected to close until the end of next year so if you buy now the deal eventually goes through you know probably by the end of 2025 you'll if you just bought and hold you held you'd earn 25 obviously if everything or you can buy

nvidia and double your money yeah exactly exactly so yeah that's what these guys are thinking that's why the gap is there that's why at first i thought there would actually be some political posturing here i mean i know alberta and quebec the governments haven't exactly got along we had the energy pipeline i maybe thought you know the uh alberta government would come out and kind of, you know, raise an issue about this, like a Quebec based national buying, you know, a Western bank, like especially one. I believe Canadian Western is highly energy focused. But Danielle Smith came out, said the acquisition is a strong sign of confidence for Western Canada. But she did state she'd prefer the bank to continue to be headquartered here. She also mentioned that she hopes the acquisition by National doesn't change the approach Canadian Western has always had, which is, you know, they deal a lot with energy companies, things like

that. So this further consolidates the banking space in Canada. I mean, the big six just continue to get larger. I mean, outside of Laurentian and Equitable, like what else is there? I mean, the big six just continue to get larger. I mean, outside of Laurentian and Equitable, like what else is there? I mean, you got the big six, Laurentian, Equitable. There's EQ Bank. Yeah. And then obviously as credit unions, like pretty much. Yeah, pretty much. I mean, we love our big banks in Canada.

And I don't, I mean, I've been pretty critical of that as like there's a lack of competition in the banking sector. And I think it's just hurting customers in general. That's why I think we love our sponsor, EQ Bank, is because they're trying to innovate in this space. Yeah, I will be having, by the way, one of EQ Bank's executives on in about a month from now to talk about their new notice savings account with I think are quite interesting in terms of product. But yeah, I mean, I just, I don't think they'll, I think they'll just approve it because they'll probably try to spin it as like, well, you know, it's going to provide more competition

because National Bank is the smallest of the big six banks and now it'll give it more kind of exposure out west as well. So I feel like that's how they're probably going to spin it. National Bank will have about 500 billion in asset under management. The closest one to them, I think, is CIBC at one trillion. So it's still a pretty big gap. And when it came out, I did a couple of tweets on it and national bank with this acquisition would be around the 10th largest bank in the US in terms of total assets. And that's why you talked earlier, total asset is a pretty common way of just measuring the size of a bank. So it just gives people an idea how large Canadian banks are because national bank would still be in the top

10 or right around it with this acquisition in the US. Yeah, and I think Canadian Western was around $36 billion. A bit more, yeah. I think I have it here. So 41, I think, was the latest data. So, I mean, you're looking at one of – this seems like a big acquisition, but I mean it's relatively small when you consider like how big national is and how tiny canadian western is but it's i mean it technically maybe that's why there's a gap like you said i would imagine the deal goes through too but it

does just remove another player from the canadian banking space and just folds it into the six players that already just absolutely dominate. Like, I wonder if somebody like TD Bank or Royal Bank were to make this, if there would quite possibly be a bigger issue rather than the smallest one, National doing it. I'd be interested to see if that would raise some concerns probably not but because rbc just bought hsbc as well but yeah i'll be honest i've kind of lost fading regulators when it comes to that so i'm just like yeah i mean td i think the only thing stopping them in the u.s is the the anti-money laundering so i'm sure they they would find a way to step in it if they did an acquisition like that in Canada. But I'm a bit, you know, take this with a grain of salt. I'm definitely

critical of the big Canadian banks. Anything else on that before I touch on the news regarding Allied? Nope. Nope. That's it. Okay. So yeah, like I mentioned earlier, so Allied property REIT had some being used. So Moody's Ratings said that it was cutting the ratings for Allied's debt from BA3 to BA1. Now, what does that mean? If you don't know what the debt stands for, essentially, the reason why it made headlines is because that's the demarcation between investment-grade debt and non-investment-grade or also known as junk debt. So for those watching here on Joint TCI, you'll see what Moody's actually all the different ratings that they have. I think

in total, they have about 20 different ratings, about 10 in each investment grade and non-investment grade. And I'll kind of say the implications first on how it can impact. So first, they said that the outlook would remain negative. So that means that Moody's thinks there is a higher likelihood that the company's debt will be further downgraded in the next one to two years. And this comes on the heels of Allied writing down some of its assets last year to the tune of $500 million. Moody's mentioned that they were cutting the debt rating because of weakening occupancy levels. So there are two main impacts with this downgrades. First, it will make refinancing their debt more

expensive, and it will probably scare some investors that hadn't noticed the issues mentioned by Moody's in the downgrade. So what am I doing? So people know that I've held Allied in the past. Yes, I said held because I sold Allied in early May. I sold Allied. Join TCI subscribers would know. The main reason that I sold was following the most recent earnings call that came out. I think it was April 30th, if I remember correctly.

My thesis when I originally bought it was that, number one, I thought office real estate bearishness was overblown for Allied because it owns high quality asset, more specifically type A, which is the top type of real estate assets with amenities that employees want. So my reasoning was, well, this should do well because it'll be more attractive for employers because they'll want to have a nice space to encourage employees to come back to work. There's been my second point was that there's been a huge slowdown in new office building starts for obvious reasons, because there's a surplus of supply which I thought longer term would help the company like Allied as the demand supply imbalance became in better balance third here Allied had reasonable debt levels for a REIT the fourth reason was most of its debt wasn't maturing for

at least a few years down the line. And last but not least, Allied was trading at extremely cheap valuations. Well, things started to look not as good in terms of the investment thesis I had. So for me, it started changing last year when I spoke on the podcast a few times following the earnings. Obviously, the write-down of $500 million was not great. But the other thing that was noticeable, and I noticed that quarter after quarter, is that occupancy kept slowing down each quarter.

And on the calls, management kept pushing back when it expected occupancy to trend back up, being more and more evasive on the timeline, which was starting to be some clear red flags. Not that, you know, it was them misleading investors. I think they simply really don't know when it's going to pick back up. And despite them paying down a big chunk of debt following the sale of their urban data REITs in the summer or late summer of last year, the debt metric have been slowly getting worse in the first two quarters of this year. And on top of that, their adjusted fund from operation and funds from operation payout ratios, which are key for REITs, just like Alline,

have been trending higher. They've kind of stabilized a little bit, but they're definitely on the higher end here. And with all of its assets being in Canada and the uncertain economic landscape, I think it's easy to make the case that potential customers or companies obviously will either cancel lease plans or push and dag down the line once there's more certainty about the macroeconomic and their business going

forward, which is something they have mentioned on the call quite a few times. Now, in terms of my investment, I ended up losing about 25% if I factor in dividends. Obviously not great to take a loss, but it was a relatively small bet on my end. At the peak when I started, the position was a bit less of around 2% of my portfolio. And then I sold it was closer to 1%. The discrepancy is simply because the rest of my portfolio has performed well, so it became a smaller and smaller part of my overall portfolio. Look, obviously, with the news of the downgrade, it looks like a good move that I sold at the time that I did. It could definitely rebound down the line. It could end up being a terrific investment for people that invest in it now. It's hard to say, but I just think there's just so much

uncertainty, much more uncertainty than when I started my position in late 2022 and kind of fully got my position going in early 2023. So it just goes to show, I mean, you can make different bets and different investment thesis. They might not always pan pan out maybe i should have been a bit more patient maybe i sold that around there you know a bit too early uh we'll have to see but that's the the reasoning i went about yeah we we talk about allied a lot and uh i actually still like them i mean the downgrade is definitely not good i think the the junk status is a little more like alarming you know word wise than it probably actually is there's there's a lot more steps that can go down in terms of you know it can get much worse in that regard um the one thing

i would say would probably be well received and i know a lot of people think this is nearly impossible but they should just don't say it don't say it they should just cut the distribution and just yeah pay start paying down debt um there's no reason why like it's paying out 12 there's just very little reason why you need to pay out a 12 yield just cut your distribution pay down the debt and i actually think it's speculation by me obviously but i actually think an announcement like that the market would would receive it well like i actually think the price would go up if they ended up doing that but who knows if they

will because like you said their payout ratios are trending upwards but like in terms of a reit it's still got a distribution that is is relatively well covered but like why not just pay out less but management seemed to yeah i remember when i listened to last call management was pretty steadfast on them not cutting the dividend again i mean it would not be the first management team to make an about face and say that and then you know a few months down the line or a quarter or two down the line cutting the dividend. But I guess, yeah, the other thing too that's a bit up in the air is because there's just a lack of transaction for the type of building that Allied owns right now, right? So these are, you know, typically most of their buildings are quite

large. Some depends on some, but most of them are. And the office real estate building has been office real estate space in terms of transaction has not been there has not been any. So it's very hard to value the assets. And there's definitely a risk that there could be some further write downs as well. So that's not out of the realm of possibility. So there's definitely a lot of risk. But I agree with you. There could be a lot of upside for Allied. It's just too many risks for me. I just don't like, I'm not feeling like holding this for five years and then just realize that things haven't really gotten that much better in five years, right?

Yeah, it's like you right now, Allied is trading at just looking at it, a 68% discount to net asset value. So, it's pretty safe to say that the market is expecting further write-downs, which is probably going to happen. Like you said, they're not exactly buildings that move quickly. Maybe something like a residential REIT would maybe be a bit more accurate. something like a residential REIT would maybe be a bit more accurate. But yeah, I mean, I'm still relatively optimistic for them. I mean, they're fairly cheap. They're not, like I said, they're probably not trading at a true near 70% discount to their net asset value, but they're certainly cheap.

There's a lot of downside negative sentiment sentiment, I would say in this space. It's hard to imagine they don't turn around at least somewhat in the future, but it's pretty up in the air right now. Yeah. Yeah. I think well said. I think we'll leave it at that for today. It's been a fun episode to do. A bit longer one, but I think it was still fun. We do appreciate all the support again, if you haven't done so, if you can give us a review on whatever platform you're listening to us, always help. You can find me at Fiat underscore iceberg, and then not at, um, then, and then, sorry, I having trouble with that one. So Dan, why don't you tell us where we can find you?

Stocktrades underscore CA. Perfect. So I think we'll end it on this before I fumble any more words. So thanks for listening. We'll catch you next week. Yeah. Talk to you later, everybody. The Canadian Investor Podcast should not be construed as investment or financial advice.

The host and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.