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We will be giving some macro-economic market updates on a weekly basis. No equity recommendations will be given in this commentary and we encourage you to contact us if you have questions regarding our observations.

BEACONS OF THE WEEK

The two main purposes of a Lighthouse are to serve as a navigational aid and to warn ships (Investors) of dangerous areas. It is like a traffic sign on the sea.

Planier Light, Marseille, France

This lighthouse is located off the south coast of France. The lighthouse was first constructed in 1826. The current lighthouse was built in 1876 and stands at 218 feet tall.

Świnoujście Lighthouse, Świnoujście, West Pomeranian Voivodeship, Poland

This lighthouse was constructed in 1828 and stands at 212 feet tall. The lighthouse is tallest brick lighthouse in the world as well as the tallest in Poland.

*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *

Tariff revision

And just like that President Donald J. Trump’s big bad tariffs are already delayed. On the morning of Trump’s inauguration, he said he would lay out his trade policy shortly but would not be inputting tariffs yet. This contradicts the rhetoric regarding tariffs that have unfolded since Trump’s victory in November. He has threatened Canada, Mexico, China, and even Europe with trade sanctions in a move that he hopes will strengthen the U.S.

According to reports, Trump is reevaluating America’s trade relationships with China, Mexico, Canada, and other nations in the early days of his presidency. The USMCA is directly mentioned in a note Trump sent out on Monday to his allies regarding trade policy.

The memo lays the groundwork for the Trump administration to review trade policy and solve America’s trade deficit problems. This initiative is one of many executive actions that Trump signed on his first day in power. Trump’s goal regarding tariffs is to shrink the U.S. trade deficit and solve other geopolitical issues he sees with these countries.

We will have to see what his study concludes and if it will lead Trump to impose tariffs on China, Mexico, Canada, and other countries across the world. We think these tariffs could be a threat and a negotiation tactic from Trump to get what he wants. He knows these tariffs will impact other countries more than the U.S. and is seemingly flexing America’s muscles. We also expect any form of tariffs to not be directed at all industries and believe there will be certain exceptions specifically for select industries in Canada.

And just like that after writing the piece above on Monday, it was reported that Trump will put tariffs into effect on February 1st. Buckle up, this could be a major shock to the system. If the tariffs are broad, expect prices to jump quite quickly. Can you say inflation round two?

Trump inauguration

If you watched the Presidential inauguration on Monday, you probably noticed a few things that caught your eye. We will summarize what we found interesting below and what it could mean for us.

Beyond Trump’s family, his inner circle, and Cabinet, there were a few marquee attendees at Trump’s inauguration on Monday. CEOs of some of the largest companies in the world were not only present for Trump’s big day but they were sitting front row.

Elon Musk, who is a huge Trump supporter and advisor to the President was front and center at the ceremony as were a few other technology leaders. Tim Cook, Jeff Bezos, Mark Zuckerberg, Sundar Pichai (Alphabet CEO), and Sergey Brin (Alphabet Founder) were all in attendance. A who’s who of the technology world, is truly remarkable. The ceremony painted a picture of unity and American exceptionalism.

Pictured: Jeff Bezos (left), Sundar Pichai (center, behind JD Vance), and Elon Musk (right).

Five Magnificent Seven CEOs or founders are in the front row. These men control $11.5 trillion in market cap. We expect their companies to benefit from Trump tremendously. Do not be surprised if any of the companies that the men above control make acquisitions or broaden their reach over the next four years.

We think the photo above will be in textbooks for centuries to come. After all, these men have fueled innovation, and growth, and have single-handedly changed commerce and society. Without them, you could argue that the U.S. would be nowhere near as dominant. If you do not think the U.S. is dominant, take a look at the chart below.

Another thing that we noticed on Monday was Trump’s focus on energy and immigration policy. Expect the borders to be sealed promptly and an increase in oil production. Trump declared a national energy emergency in his victory speech on Monday. New projects (pipelines, offshore drilling, permits) will be approved and the deregulation of the energy sector (and others) will occur after heavy regulation under the Biden regime.

Another small thing that a user online pointed out regarding Trump’s speech, he did not mention Bitcoin or crypto. This caused Bitcoin and the broader crypto markets to pull back on Monday afternoon. Trump is expected to be the most pro-crypto President ever and is someone the crypto community has fully embraced. Numerous advisors to the President are supportive of the asset class which will further the crypto agenda. We think the crypto pullback is an overreaction by the crypto community as it was just one speech where Trump did not mention it. It is not like he completely flipped his position and said he was out on the technology, he simply discussed more pressing and important issues like inflation, energy policy, and immigration. However, Trump did sign a flurry of executive orders on his first day in power, and none of them involved crypto. This left crypto bulls disappointed after months of excitement.

Regardless of how you feel about Trump, as an American ally you should hope that he is successful in leading the U.S. However, as Canadians, there are limits to this support as we enjoy our independence as Canadians!

 

Energy prices

Oil prices have run up over the last month. After over a year of oil prices moving lower, prices seemingly bottomed in November and began increasing in December and to start 2025. The price of oil surged by almost $10/barrel in a matter of weeks. Why did this happen? A few reasons. The U.S. is a large oil importer of Canada and Trump’s tariffs on Canada look real and look like they will include energy (Premier Smith of Alberta and many other Canadians have been lobbying for oil and gas to be not included from the tariff list). Another reason prices have moved up is that an economic soft landing looks more and more likely. A soft landing will not impact demand largely. Finally, the OPEC+ production cuts look longer lasting as members remain committed to supporting prices rather than increasing production (or flooding the market).

We have been mentioning these points for quite some time despite the price of oil pulling back last year. We are glad prices warmed up to the end of the year. However, we do not think this price trend is over. We think prices could move even higher in the short term despite Trump’s increased production mandate. We think prices will increase in the short term due to another action we expect Trump to take in the coming days. We say this as he hinted at it on his first day in the White House.

Trump pointed to halting all oil purchases from Venezuela, claiming ‘we do not need their oil, we have our own’. This move comes as Trump is expected to take a much harder-lined approach against the Venezuelan government. Trump’s administration hopes their moves will economically handicap the Venezuelan government which is led by an Authoritarian Dictator who has destroyed the lives of his people. Why does this matter? The U.S. quietly increased imports of Venezuelan oil under the Biden Administration after reversing Trump’s original 2019 ban. Chevron was given a sanction waiver that allows the company to drill in Venezuela – Biden extended the waiver for six months a few weeks back.

This supply (although minimal) will need to be replaced and the market will notice it disappearing. We think prices will at least in the short-term notice and increase. We will say this policy by Trump makes sense whether you like or dislike him. The U.S., Canada, and all their allies should never be buying oil from a dictator like Maduro.

We think the best way to play this complex oil industry is to buy quality U.S. producers that can capitalize on increasing domestic production and decreasing imports. We also want to own the companies with the lowest cost per barrel. On a side note, we also are looking at a very undervalued sub-industry in the energy sector that is high risk-high reward which we think could go on a serious run. We will report back soon with our findings.

Overall, the energy industry trades at the most attractive ratio in our eyes. The sector trades at a relative and historic discount. The energy industry also has the lowest P/E ratio amongst the 11 major sectors in the S&P 500. We are glad that we did not turn our backs on the sector despite last year’s volatility.

 

Capital inflows

U.S. markets got a huge boost in Trump’s first week as allocators announced large investments in the U.S. On Tuesday, Trump along with the SoftBank CEO, OpenAI CEO, and Oracle CEO announced that the three would be creating a new company that will grow artificial intelligence infrastructure in the U.S.

The companies will invest $100 billion in the project to start, with plans to pour up to $500 billion in the coming years. Trump claimed the company will create 100,000 jobs. Larry Ellison, CEO of Oracle said the group’s first project is already under construction in Texas.

These are three powerful and influential men in the tech world. We mentioned a few others earlier in this publication. Are you noticing a trend? Trump and U.S. tech.

Many have labeled Trump 2.0 as the golden era for America, technology, and AI development.

We are pleased to hear that tech CEOs and leaders in the industry continue to remain focused on expanding AI infrastructure. Last year we highlighted tech companies’ partnerships with utility providers which will power data centers. This year they continue this trend but with a President who seems very open and supportive of their endeavors. Although Nvidia might be the splashy winner in AI, there will be many others who benefit from this innovation including two different portfolio companies that we own across client portfolios. One continues to rapidly expand its operations as demand for liquid cooling technology increases as AI data centers grow, and the other is a true value play in an industry where everything trades extremely expensively.

For now, it appears that American dominance across equity markets which we mentioned earlier (specifically in technology) will continue at least for now. Although we do not hold all these companies in client portfolios, we can respect the founders, CEOs, and executives who have grown them into conglomerates. Whether you like it or not, if these technology companies disappeared you would notice.

 

American staple beats yet again

Procter & Gamble (PG) reported its second-quarter earnings on Wednesday (fiscal year end June 30th). As investors in PG, we were very pleased to read the details. PG beat Street revenue and earnings estimates. This is the 9th straight quarter they have beaten earnings-per-share estimates. On a year-over-year basis, EPS grew by 34% and revenue grew by 2%. EPS jumped by a wide margin due to an impairment charge on PG’s income statement last year. Core earnings per share only increased 2% over the year. The company’s CEO linked the strong results to organic growth. He went on to say that the company’s results for the first six months put PG on track to meet internal guidance.

The company continues to report strong results despite some economic weakness across the world and in the U.S. However, PG provides a variety of consumer staples that have not been adversely impacted by this cycle. Although 1-2% earnings and revenue increases do not seem impactful, the consistent and stable growth makes us happy as shareholders. We are not expecting revenue to double or some major innovation in a Crest or Dawn product, when we look at PG, we want to see strength, stability, and management that can navigate any type of economic environment.

PG also returned nearly $5 billion to shareholders during the quarter, a combination of dividends and share repurchases.

PG shares jumped over 2% on the morning of this release and are up 12% over the last year. However, shares have pulled back 7% from their 52-week highs over the last 6 weeks. This pullback presents a buying opportunity we think is attractive, especially at the relative valuation PG trades at. Analysts link PG’s recent share price pullback to Chinese volatility and some logistic issues. Moving forward the logistic issues are expected to improve.

On a forward basis, we like PG’s valuation even more with earnings expected to expand over the next 12 months. We see an upside for PG moving forward driven by disciplined leadership, organic growth, and strong innovation which is expected to drive down costs.

Disclaimer: MacNicol & Associates Asset Management Inc. holds Procter & Gamble (PG) shares across various client accounts.

 

Another all time high

On a final note of this week’s issue, the S&P 500 hit another all time high on Wednesday. We did not screenshot it, but the index briefly was over $6,100 for the first time ever.

This is the S&P’s first all time high in over a month. For now, it seems like markets really like Trump and the volatility that comes with him and it is not worrying Wall Street.

MacNicol & Associates Asset Management                                                             

January 24, 2025

 

Click here for the PDF: The Weekly Beacon -January 24 2025