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Forward Guidance

Martin Pelletier & Joseph Wang on Stock Market Concentration, Cash-Futures Treasury Basis Trade, Structured Products, and New York Community Bank

Mon Feb 12 2024
InvestingMarket EnvironmentTech StocksCredit ProblemsStructured Products


Joseph Wang and Martin Peltier discuss their approach to navigating the market environment with their clients. They take a goals-based approach, focusing on retirement and minimizing variability in returns. The rise of passive investing has influenced the market profile, with benchmarking driving investment into tech stocks. New York Community Bank has faced challenges with credit problems in their portfolio, particularly in multifamily rental apartments and Manhattan offices. The structured product market in Canada is worth $40 billion annually, with potential for growth.


Passive investing has driven investment into tech stocks.

Benchmarking has influenced the market profile, resulting in a concentration of growth in tech stocks.

Credit problems in New York Community Bank's portfolio.

The bank has faced challenges with credit losses and increased regulatory requirements after reaching a $100 billion asset threshold.

The structured product market in Canada is worth $40 billion annually.

There is potential for growth in the structured product market.


  1. Navigating the Market Environment
  2. Deficit Spending and Credit Problems
  3. Bank Regulations and Mortgage Renewals
  4. Valuations and Market Risks
  5. Tech Stocks and Market Speculation
  6. Treasury Futures and Fixed Income Investments
  7. Managing Risk in Fixed Income Investments
  8. Structured Products and Risk Management
  9. Structured Products and Market Opportunities
  10. Investment Strategies and Economic Outlook
  11. Interest Rates and Economic Outlook

Deficit Spending and Credit Problems

06:42 - 13:31

  • The GDP and deficit spending are expected to remain elevated in the foreseeable future, which is positive for risk assets.
  • The CBO's forecast of the budget deficit may be worse than what they predict due to assumptions made on factors like tax cuts and interest rates.
  • The allocation of the deficit towards military spending versus supporting the US economy is unclear, but money spent abroad may have an impact on certain segments of other economies.
  • Programs like Medicare, Social Security, forgiving student loans, and interest rate payments directly impact the US economy.
  • Younger adults have experienced a significant change in wealth compared to older age groups, potentially influenced by stimulus measures and loans.
  • Official statistics do not include crypto assets like Bitcoin, which tend to be owned by younger people and can understate their wealth.
  • New York Community Bank has faced challenges with credit problems in their portfolio, particularly in multifamily rental apartments and Manhattan offices.
  • Recent law changes have made it more difficult for landlords to raise rent prices for uncontrolled multifamily apartments, potentially impacting the value of collateral for loans made by the bank.
  • The bank's asset values have been negatively affected by potential credit losses and increased regulatory requirements after reaching a $100 billion asset threshold.

Bank Regulations and Mortgage Renewals

13:07 - 20:44

  • Banks that reach a $100 billion asset threshold in the US come under tighter regulations and need to raise more capital, which they often do by cutting dividends.
  • The stock prices of banks with cut dividends and underperforming asset portfolios are being significantly affected.
  • The Federal Reserve does not view this situation as systemic, and some Fed officials are not worried about it since banks have had time to prepare for the new regulations.
  • While some smaller banks may be overexposed to struggling segments of the commercial real estate market, there are thousands of banks in the US, so not all will be affected.
  • Regional bank stocks in the stock market have not shown fear of contagion or severe risk of failure like in previous cases.
  • Recent deposit data shows an increase in deposits from December 31st to February 5th.
  • In Canada, $900 billion worth of mortgages are coming due in the next two years, and they are being renewed at higher rates. Canadian banks have better control around lending but face risks related to these renewals.
  • Immigration is driving high demand for housing in Canada, particularly in areas like Alberta where housing prices are lower compared to Eastern Canada. Strong asset values protect Canadian banks despite mortgage resets coming due.
  • The US economy is preferred over the Canadian economy due to negative GDP per capita growth in Canada. Big US banks like JP Morgan have performed well.
  • Monetary policy has more impact on mortgages in Canada compared to the US since many mortgages need renewal every five years. Affordability is becoming a major issue due to expensive housing prices relative to incomes.
  • Cutting rates may worsen affordability issues while increasing payments for those who already bought homes during the pandemic. The Bank of Canada faces challenges balancing these factors along with currency impacts and what the Federal Reserve does.
  • Oil serves as a saving grace for the Canadian currency and provides flexibility for the Bank of Canada. Without oil, there would be additional currency pressures.
  • The influx of 1.5 million immigrants per year in Canada contributes to inflation that monetary policy cannot fully address, particularly in the housing market.

Valuations and Market Risks

20:15 - 27:03

  • Housing inflation in Canada is a significant problem due to high household debt and immigration.
  • Despite rate hikes, housing prices in Canada have not been negatively affected.
  • Microsoft is larger than all Canadian companies combined, highlighting the size difference between Canadian and international companies.
  • NVIDIA's stock price performance demonstrates the importance of timing when investing in good companies.
  • The value of a company on judgment day (when it is sold) has a significant impact on returns.
  • No company has been able to maintain a free cash flow multiple of over 30 times or sales multiple of over 10 times for 10 years.
  • The impact of technologies like AI and the internet on valuations needs to be considered when evaluating investments.

Tech Stocks and Market Speculation

26:46 - 33:42

  • NVIDIA plans to spend $10 billion over the next five years, aiming to generate $1.6 trillion in value, but it is unclear how they will achieve this.
  • The speaker mentions one company that came close to achieving similar multiples but does not reveal its name.
  • The current market situation draws parallels to the dot-com era, with companies having cash and oligopolies forming.
  • Certain well-established companies have high valuations, such as Microsoft at 50 times free cash flow and Apple at seven times sales.
  • NVIDIA's forward price-to-earnings ratio is around 33, indicating it is not cheap.
  • Unlike the dot-com era, many companies going public now have real earnings and are legitimate.
  • The risk associated with speculative trading has shifted from publicly traded securities and stocks to segments like crypto, NFTs, meme stocks, and SPACs.
  • It is challenging to predict how far the market will go given these factors.
  • Shopify is a significant player in Canada's tech index and represents a large portion of their TSS (Toronto Stock Exchange) index.

Treasury Futures and Fixed Income Investments

33:16 - 40:13

  • The primary issuance of treasuries is expected to be around 1.6 trillion this year.
  • Hedge funds are buying cash treasuries and selling futures to profit from price differences between the futures market and the cash market.
  • Treasury futures are expensive relative to cash because asset managers are tremendously long treasury futures.
  • Asset managers are levering up to beat their benchmark, the Bloomberg AG index, by selling some treasuries and investing in higher yielding credit instruments.
  • Asset managers add back duration exposure by delivering up and buying Treasury futures to match the duration of the AG index.
  • This trade is popular and creates demand for Treasury futures, driving the basis trade.
  • The trade will continue until there is a shock to credit investments or spread widening triggers treasury selling.
  • In times of market stress, if investors need liquidity, they may have to sell their treasuries, leading to a treasury sell-off as seen in March 2020.

Managing Risk in Fixed Income Investments

39:47 - 47:23

  • There are embedded risks in fixed income investments that investors may not realize, as seen in the destruction of duration neutral funds during the market downturn in March 2020.
  • The performance of fixed income investments can be influenced by factors such as the economy and the Federal Reserve's response to interest rates.
  • To manage risk, some investors use long-dated bonds as a risk instrument and structured products for added duration exposure with downside protection.
  • Traditional 60/40 investors should consider whether the spread above an index is worth the associated risk.
  • Keeping rates low for an extended period can lead to tail risk exposure, as seen when shorting volatility resulted in significant losses during market volatility.
  • Cash futures basis trades can offer returns over cash but can also result in capital wipeouts during extreme market conditions.
  • Canadian funds may focus on US treasuries due to their liquidity and transparency compared to the Canadian market.
  • Productivity and economic outlook favor investing in the US rather than Canada, where GDP per capita has been stagnant for a long time.
  • Inflation concerns have led some individuals to invest in cars as an inflation hedge, while others prefer holding US dollars.
  • Structured products offer exposure to underlying assets with leverage but come with increased risk if something goes wrong.

Structured Products and Risk Management

46:54 - 53:37

  • The speaker discussed structured products and their benefits, including exposure to underlying assets and protection against counterparty risk.
  • They mentioned using Canadian banks as counterparties for structured products.
  • The speaker explained how they de-risked their investment in the Russell 2000 by selling their exposure and investing in a structured note on the index.
  • The structured note pays a 10.6% coupon annually as long as the index stays above -30%.
  • The speaker emphasized that structured notes are used in the context of the market and can be customized to meet specific targets.
  • Energy represents only 8% of their portfolio, while the Russell 2000 provides a more stable return with a 10.6% coupon.
  • Structured notes are part of their bond allocation, allowing them to have long exposure to both bonds and equities.
  • Around 28% of the bond portion is allocated to fixed income structured notes, while around 80% is allocated to equity indices or stocks.
  • They mentioned doing structured notes on blue-chip stocks like S&P, Canadian banks, and utility companies for high yield bond exposure.
  • The speaker acknowledged that these trades involve short volatility and tail risk management but highlighted the ability of active portfolio management to add value and manage downside risk through maturity dates and buffers.
  • Clients need to recognize that there may be some downside reflected in valuations but with protective barriers in place.

Structured Products and Market Opportunities

59:35 - 1:06:50

  • Structured products in Canada offer sales commissions of 3-4% to advisors, creating a lucrative market.
  • Some investors are not fully understanding the workings of these structured products, including the impact of dividends and tail risk.
  • The structured product market in Canada is worth $40 billion annually, with potential for growth.
  • The oil and gas exposure in the portfolio is currently at 8%, which is considered a nice balance between S&P (smaller) and TSX (larger).
  • Canadian companies are preferred due to their capital discipline and focus on returning cash flow to investors through dividends and buybacks.
  • Canadian oil companies benefit from being paid in US dollars while having costs in Canadian dollars, resulting in higher profitability.
  • The 8% weighting in oil and gas is significant for a conservative investor aiming for a 68% allocation.
  • Dividend-paying Canadian companies offer attractive yields of 6 to 8% with free cash levels of 15%.
  • The speaker tweets frequently about energy and tech but remains emotionally detached as they rent these spaces rather than owning them.

Investment Strategies and Economic Outlook

1:06:23 - 1:10:57

  • The speaker tweets a lot about energy and tech because it's fun, but they try not to get too emotional about it.
  • There is a trade opportunity in Canadian mid-cap companies that have been abandoned by investors.
  • Energy companies like Baytex, Tamara, Bali, and Crescent Point could buy back all their stock if energy prices stay flat.
  • India is experiencing strong growth in the energy sector.
  • Investing in Canadian dividends and US dividend players, as well as utility companies, could be profitable.
  • The speaker believes interest rates could decline faster in Canada than in the US.
  • Fed Chair Jay Powell's interview suggested that rate cuts are more likely to happen around May or June.
  • The market is now pricing in about five rate cuts this year.
  • The Fed wants to avoid overtightening and maintain a soft landing for the economy.
  • Labor force participation is not increasing anymore, which may lead to lower monthly employment increases.

Interest Rates and Economic Outlook

1:06:23 - 1:10:57

  • The market has already priced in about five interest rate cuts.
  • Labor force participation is not increasing, suggesting lower increases in monthly employment.
  • The Fed's actions will be data-dependent and the data has been volatile.
  • The Bank of Canada may cut interest rates faster or more vigorously than the Federal Reserve due to a weaker economy and higher consumer leverage.
  • If the Fed cuts rates five times, Canada may cut rates seven times.
  • The overnight rate in Canada is 5%, while the Fed funds rate is 5.375%.
  • Joseph's work can be found at and his Twitter handle is @fedguide12.
  • Martin can be found on Twitter at @mPeltaCIO and his firm's website is