Inflation – what is it good for?
In the last few weeks, inflation has made its way from the Business section of the newspaper to the front pages. Almost weekly we hear the price of gas and groceries has gotten more and more expensive. The price of gas is up nearly 50% in the last year, 12 per cent alone in May. Most of the time we ignore the headline, until we need to get groceries or buy gas for our cars.
So, what exactly is inflation?
Glad you asked. Inflation is when the price of a product steadily increases while purchasing power decreases. The current cause is too many dollars (thanks to government subsidies during the Covid-19 pandemic, and too few places to spend your money) chasing too few goods (thanks to supply chain issues caused by the pandemic).
Typically, inflation increases about 2% per year. A little bit of inflation is good because it indicates a healthy, growing economy. However, inflation has nearly quadrupled in Canada and gone up more than fourfold in the USA. The previous week, the rate of inflation in the US rose to 8.6%. This past week, Canada reported its highest inflation rate in almost 40 years, at 7.7%. That means that the cash in your savings account will lose 7.7% of its value in 2022. For example, $100 on December 31, 2021, would have the buying power equivalent to $92.30 on December 21, 2022. Every time I fill up my car with gas, I can feel the result of inflation in my pocketbook. Every time I go to the grocery store, I see the effects of inflation as the same grocery list costs more than it did last year.
These higher than anticipated inflation numbers all but guarantee that the Bank of Canada will hike interest rates by 0.75% at its next meeting in July, in an attempt to get control of runaway inflation.
According to Reuters, it’s estimated the average Canadian saved C$ 8,300 over the last two years thanks to the Covid-19 pandemic. However, because of inflation, two-thirds of the buying power of that $8,300 has disappeared and some recipients are having to reach into the money they saved to pay for everyday essentials rather than saving the money for future needs.
Not only do your hard-earned dollars not go as far as they did in 2021 but inflation can also erode your investing gains. Inflation also impacts investing because the central banks, Bank of Canada, and US Federal Reserve, raise interest rates to get inflation down to the desired 2 – 3% range. When interest rates go up, it costs companies more to service their debt. Rather than spending money to service their debt, that money that could have been spent to grow the business, thus slowing down the growth of the company. This is especially true for high growth technology companies, like a few that are in any of my three Portfolios.
That is the short, laymen’s explanation of inflation. As long as you get the idea that inflation is a bad thing that impacts you both now (pushing up the cost of just about everything) and down the road (eating into your investments), then I got my point across. 😊
Now, lets take a look at the past week….
Weekly Market Review
Monday: A strong start to the week for the Toronto Stock Exchange Composite Index (TSX) as the Energy (higher oil prices) and Communications sectors had a good day. In the US, the S&P 500 Index (S&P), the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite Index (Nasdaq) were all closed for Juneteenth.
Tuesday: The TSX put together a second day of gains on the strength of the Energy sector. The American Indexes joined in, with each Index posting a gain of greater than 2% and all eleven S&P sectors were up as investors picked up shares of the mega cap technology companies that were beaten down last week.
Wednesday: So much for a second consecutive day of gains in the stock markets with all four major North American Indexes falling back today. In Canada, inflation jumped to 7.7% in May, close to a 40-year high. It was largely fueled (pun intended) by rising oil prices which lead to higher gasoline prices. As a result of the higher-than-expected inflation rate, the Bank of Canada (BoC) is most likely to raise interest rates by 0.75%, possibly 1.0%, at their next meeting. The price of borrowing money in Canada is only going to get more expensive. Sigh! On the TSX, the Energy and Basic Materials sectors fell the most, dragging down the TSX.
In the US, the three US Indexes were up and down all day before ending the day just under the breakeven bar. The Energy and Basic Materials sectors were the worst performers in both Canada and the US.
Thursday: A good day for the American Indexes as all three rose, not such a good day for Canada’s TSX as it had closed at its lowest point since March 2021. The TSX was weighed down by the two sectors which had carried it for most of 2022 so far – Energy and Basic Materials. Both fell more than 5%. The Technology sector was the big winner on the TSX, gaining 4%.
It was a similar story in the US, with the Energy and Basic Materials the worst of the eleven sectors. However, that was offset by gains in the Healthcare, Utilities, Consumer Staples, and Technology sectors.
Friday: This week ended on a positive note as all four Indexes gained ground today. The TSX rebounded from yesterday’s lowest level since March 2021 thanks to the Technology and Healthcare sectors. Rising oil prices helped the TSX Energy sector end with a win after having a rough week.
In the US, it was a great day for all three Indexes as investors picked up some beaten down companies. All eleven sectors of the S&P posting gains of at least 1.5%, helping the S&P to its best single day since May 2020.
For the week, the TSX was up 0.7%, the S&P rose 6.5%, the DJIA gained 5.4%, and the Nasdaq jumped 7.5%.
Weekly Portfolio Review
I thought it would be another week of declines. Instead, it was gains across the board for the Indexes, with the American Indexes having a great week, especially the Nasdaq. In a reversal of what has been happening in 2022, the Energy (oil) and Basic Materials sectors (mining companies) are down over 6% for the week, while the Technology sector had a nice little bounce this past week. This is reflected in the resource heavy TSX up less than 1% for the week and the technology-oriented Nasdaq and S&P each up over 6.5%.
A strong week for the Nasdaq, generally means a good week for the Portfolios, and this past week was no exception. All three Portfolios rose at least 2% for the week on the strength of the various technology companies in the portfolios. I suspect this is a mini rally rather than a bottom has been reached and the market will continue to drift downward, especially as the July session of the US Federal Reserve approaches.
Companies on the Radar
Currently, there is only one companies on the Radar List as I added Alvopetro Energy Ltd. (TSXV:ALV) to Portfolio 3:
- Amazon (NASD:AMZN): The leader in e-commerce sales, the leader in cloud services (Amazon Web Services), one of the top providers of streaming services through their Prime service; and they quietly have their finger in a number of other pies. Amazon scored a 3 out of 10 from Thomson Reuters, and a 3 out of 3 (Strong Buy) from TD Direct Investing, for a 6 out of 13 score. Morningstar has a FVE of $169.33. With almost any other company I would stop and not spend any more time on this company. However, it is Amazon (currently trading at US$ 106.22), with a target price of US$ 178.66 for close to 70% upside, so Amazon will be moving on to the next stage – Multibagger Analysis.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended June 24, 2022: UP 
- Roku (NASD:ROKU) signed a deal with Walmart (NYSE:WMT) on a new advertising feature called “shoppable ads.” Viewers will be able to buy from Walmart directly from their television when using a Roku device. Payments will be processed through Roku Pay, their payments system. This adds another stream of revenue for Roku, and I suspect it will be the first of many deals of this nature.
- Lattice Semiconductor (NASD:LSCC) won the Best-in-Show award in the Processor & IP category at the embedded world 2022 exhibition and conference. Lattice’s CertusPro-NX FPGAs ships are intended to “accelerate application development for the Communications, Compute, Industrial, Automotive, and Consumer markets.”
- Crowdstrike (NASD:CRWD) has won SC Awards Europe 2022 Best Emerging Technology category for their CrowdStrike Falcon XDR (Extended Detection and Response) solution. The SC Awards Europe are for the best cybersecurity products and services.
- On the heels of the US Supreme Court overturning Roe v Wade, Disney (NYSE:DIS) announced they would provide travel benefits for any employee that has to travel for abortion services.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
No dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 2
Portfolio 2 for the week ended June 24, 2022: UP
- On June 17, Rogers (TSX:RCI.B) announced they planned to sell Shaw’s (TSX:SJR.B) mobile division to Quebecor, Canada’s fourth largest mobile carrier. This deal will turn Quebecor from a largely provincial (Quebec) based carrier to one with a national footprint with customers in BC, Alberta, and Ontario. More importantly for Shaw shareholders like myself, it is a crucial step in obtaining regulatory approval for the merger with Rogers.
On June 24, Rogers, Shaw, and the Canadian competition bureau agreed to enter meditation to resolve the antitrust concerns of the competition bureau. If all parties can come to an agreement, its likely the Rogers and Shaw merger will receive the greenlight from the competition bureau.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Dream Industrial Real Estate Investment Trust (TSX:DIR.UN) DRIP
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 3
Portfolio 3 for the week ended June 24, 2022: UP
- At Shopify’s (TSX:SHOP) semi annual showcase of product updates, Shopify announced a partnership with Twitter to display products on user profiles to facilitate sales through Twitter and other social media; synchronize a merchants’ local inventory with Google to let nearby customers know when products are available in store; and, they will offer merchants a tap to pay service that allows merchants the ability to process transactions through their iPhone (sounds like what Square, er, Block (NYSE:SQ) has been doing for a while now)
Activity
Bought
Alvopetro Energy Ltd.: A Canadian oil and natural gas company, developing assets in Brazil. I like that the company has:
- Seasoned management with experience in Brazil.
- The Energy sector is riding the energy tailwind so there is demand for their product.
- A Return on Invested Capital over 23%
- A 5+% dividend.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
No dividends this past week.
Quarterly Reports
No quarterly reports this past week.