July 2026 Update

Here we are into the dog days of summer, finally! For the market, summer means less trading and less news, as people's vacation schedules reduce the volume of work. For the fund, though, we’ve been making selective changes and trying to capitalize on some of the movements we’ve seen.

First, let me say that things are going reasonably well. Despite the first half of the year being marked by issues such as the war in Iran and the closure of the Strait of Hormuz, things are not as bleak as they might seem. In my conversations with many of you, I know some are fearing the worst and assuming we are negative on the year, but that is not the case! At the end of June, we are nearing a double-digit return in the fund. I haven’t made major changes to the holdings, but we’ve added a couple of companies and adjusted some position-sizing.

I don’t generally like to get into specific companies in these updates, but I will make an exception and mention SpaceX here. We do not own shares, and I wouldn’t expect to in the foreseeable future. This isn’t a case of me saying “never”, it’s just that, because I view investing through the lens of owning businesses, the buying price matters. I drove by some kids on the street yesterday selling lemonade, so I’m going to use that to try to explain SpaceX's financials.

So, let’s pretend those kids selling lemonade generated $18.70 in revenue (just sales, not profit)for the entire year. They took that $18.70, plus an additional $4.94, and spent it all on high-tech ice machines and experimental flavors. That means they’re losing a lot of money, but those flavors and tech might pay off in 2030. How would you feel about buying that operation off them for $1,460? What the kids are effectively selling you on is the idea that those high-tech and newly conceived offerings will serve every thirsty person in the city! This is the situation with SpaceX today. I’ve moved the decimal point to make this more relatable, but the numbers are the same. So, when it comes to this stock, I’m not saying I’ll never own it, but I’m saying we won’t be buyers at this valuation.

Moving on, let’s talk about the economy in general and how the markets are today, heading into the fall. The first thing to note is that things aren’t that bad. They aren’t that good either, but there are still some good opportunities. The two main drivers of the economy for 2026 have been energy and AI. The rise in energy prices is primarily due to the war in Iran and the associated issues in the Strait of Hormuz. At this moment, I am not sure whether the Strait is open to shipping. My thought on that front is that energy prices will be higher than they were pre-war, for a longer period of time.

Regarding AI, we’re seeing unprecedented spending and investment in infrastructure.   Many of the largest businesses on the planet are spending enormous sums in the AI arms race, and some people are starting to ask a few questions about the sustainability of that spending. Along with that spending, the impacts of AI on the workforce and jobs continue to be debated. The biggest conversation regarding AI is whether it is a bubble, and I would fall on the side that it's too difficult to know for sure at this point. One thing that I would commit to, though, is that we will build too much infrastructure for the overall AI buildout. We just don’t know how many data centers we need to meet demand. We know that what we have today isn’t enough, and we need more, but "more" isn’t a real target or a set figure. So, the difficult part of investing in this sector now is that we are knowingly heading into a period of long-term overspending, but in the short term, this will probably pay off. It’s impossible to know when we cross from one side to the other.

So, with the current state of the market, the one other factor that isn’t there yet but is coming soon is the US midterm elections. Traditionally, this is a time of uncertainty and unease in the market. The market doesn’t love uncertainty, and despite all kinds of polling and prognostication, no one can say with certainty what the outcome will be. As a result, I anticipate that September and October will be somewhat choppy and likely won’t move much in either direction. That will change once the results are known and the market has a better idea of who will have the power to make policy decisions and pass legislation.

Finally, I did want to comment a little on inflation. With oil prices expected to remain a little higher for a longer period, we have to think inflation will be sticky. This means interest rates could rise. At this point, both the Bank of Canada and the US Federal Reserve are expected to hold rates through 2026, but depending on how things go over the coming months, we could see an increase in 2027.

With all of that said, let me wrap this up and wish you all a fantastic summer. In this part of the world, you only get a few months to soak up the sun, so hopefully you have a chance to get some rays and enjoy the warmth!

Vic