Weekly Market Comment: July 10, 2020

If only a giant golden asteroid would hit earth. We'd all be billionaires!

There is a growing debate about the prospect of inflation, sparked by the record global stimulus and money printing. It’s the same debate we saw a decade ago, which culminated into a major bubble in metals and metal stock prices. Today, we see gold has climbed just over $1,800 which is getting is close to the $1,917 price seen in the last cycle. As Credit Suisse estimates, a 2% rate on the U.S. TIPS (Treasury Inflation-Protected Securities, a bond that offsets the effects of rising prices by adjusting its principal value as inflation rises) would imply $2,300 gold. That would be quite positive for our gold bullion position, which we originally put on as a hedge (insurance against) to what were record highs for the stock market. While we still consider it a hedge, it is also worth noting that the second quarter was the strongest for gold since 2016. It remains not only an inflation haven, but a coronavirus/fear haven too.

A Washington "what if" scenario

How would a Joe Biden presidency affect Canadian companies? According to a CIBC report, clean energy (of which Canada is a leader and we own in Legacy) and cannabis (of which Canada is also a world leader) would stand to benefit the most. Less profound impact could be seen in tech, where Biden is pretty much “hands off” and moderate, while deficit spending on social programs could pressure inflation (and therefore benefit gold). One clear negative would be for TC Energy’s Keystone XL pipeline projects, which would likely get reviewed yet again despite the green light given by both the Trudeau and Trump administrations. Corporate taxes under Biden would certainly go higher, especially if both branches of Congress were under Democratic control. That would directly reduce corporate earnings but would also reduce the record-breaking deficits we see today (all else being equal). Source

On Wheels for the masses

The global pandemic has driven a lot more business toward food delivery as people elect to eat out but within the safety of their own home. The uptick in demand has been a boon for food delivery companies, ranging from DoorDash (the biggest in the American market, valued at about $16 billion) to Uber Eats and other smaller players such as Postmates. Consolidation within a young industry is normal but investors should remember that food delivery remains a money loser. Not only are these companies competing hard with one another, but struggling restaurants have been demanding price breaks. And who can blame restaurants, one of the hardest hit industries by coronavirus. The toll of unsold hamburgers affects ranchers, metapackers, chefs, and restaurants.

A small Legacy update

In terms of our Legacy portfolio holdings, we added Algonquin Power this week. When the well-run independent power producer trading at a 16-17x PE with interest rates this low, the stock rarely remains gets low. We previously sold a half position higher and are re-loading. The company raised the better part of $1 billion, with one unnamed institution taking a whopping $350 million of the issue. The near 5% dividend rate makes these prices all the more attractive.

Notable Reads

TSX was up 0.75% and S&P 500 gained 1.76%.