How the Bank of Canada could cure inflation — and four other market thoughts

It’s the last week of September and my brain is still in a bit of a summer fog, so I can’t quite connect five points on a single theme this week. Instead, here are five random market musings.

Greed might be back

Despite an overwhelming sense of dread overcoming most investors, with continued worry about a recession, inflation and interest rates, we are starting to see some signs that greed might be returning. Now, greed and worry don’t necessarily match, but greed is always prevalent, somewhere, in any type of market environment.

Greed, for a while, was back. The only positive here is that reality at least set in — quickly. Following news of more insider selling, VinFast’s stock is now US$18, down 81 per cent from its peak less than a month ago.

SPACs are dead

Investors in special purpose acquisition companies give a group of managers a bunch of cash and then give them two years to make an acquisition with that money. Investors have no idea what will be bought (though the deals need shareholder approval). If nothing is bought, investors get their money back. Essentially, it is like giving a kid a bunch of money to go into a candy store. They might be conservative and buy one candy bar, or they may go crazy and buy everything in the store, leading to a sugar crash.

Giving random managers a bunch of money to buy whatever they want is not a good investment strategy

VinFast, discussed above, went public via a SPAC. Investors buy into SPACs in the hope that management will make a great acquisition, so they get in early on a newly public company. This can happen once in a while, but let’s look at the big picture here.

IPOs are back

A bit contrary to the two thoughts above, but initial public offerings are finally making a bit of a comeback this year. We have watched Arm Holdings PLC and Instacart (under Maplebear Inc.) go public in the past month, amongst some other lower-profile deals. IPOs are exciting and great for underwriters (large fees). The problem, though, is they offer a mixed view on the market’s outlook.

Some investors view more IPOs as a sign that the market is healthy since investors are finally willing to take a chance on new companies. Others see more IPOs as a sign of a market peak, as insiders of private companies decide to cash in on high valuations. So, like any market indicator, IPOs can send mixed messages.

We tend to think, the recent activity so far is a positive sign for the market. It is good that companies can raise money, and we are nowhere near the frenzied IPO pace of some other historical market cycles.

Bank of Canada could cure inflation

What’s up with the energy sector?

We get questions every day from our customers on energy stocks. They all ask the same thing: “If oil is at a one-year high, how come my oil stocks aren’t doing anything?” Frankly, we have a very hard time answering this.

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)

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