A Comment -- General Comments From an Expert (A Commentary)

What proportion of bank earnings are not from the loan book? Much less than 50% of their revenues come from loans. But if those loans good bad, they will overwhelm earnings. This is what short-sellers are arguing--big loan losses. Provisions for credit losses in the US are double than in Canada; this shows how competitive their lending environment is. We have a different attitude here from walking away from loans, so he doesn't see a mass exodus from paying off loans in Canada unless there is a massive macro-economic shock globally, largely American.

He's not excited by the tech sector, even with Apple beating earnings today. After a pretty good run, markets are now overbought. Tech and cons. discr. drove that downturn. He's not bearish, but we need another pullback now and those two sectors are more vulnerable. Apple's chart: it may hit last year's high, but tech overall will be more contained and choppier going forward. Google is a good example of how vulnerable tech is given today's 7.5% drop after earnings; it also tested last year's highs and sharply turned down. He's being staples, REITs, and a US bank stock that had been punished.

What is your momentum indicator? It tells you whether a stock is overbought or oversold. He uses stochastics, RSI and bollinger bands together.

Earnings season has been good. No surprise, because they were beaten so down in recent months. But 8-10% earnings growth going forward? Really? The Fed says it won't raise rates, basically saying that the economy is pretty fragile. The quality of this market isn't great. The percentage of stocks making new 52-week highs is only 10% of the index, not 30-40% and not broad. It's common to see this low percentage late in the cycle. He thinks we're making a big top here, but markets could be grinding here because of liquidity. The FAANGs: MSFT blew the doors off their earnings report last week due to their strong cloud service. Intel has also made a new high, but fell 10% due to a miss in the topline and bottom line in their earnings report. So, it's been a mixed picture in tech and the US market. In the U.S. consumer sales are anemic and there's a massive build in inventories in Q1. We could see a zero quarter coming if sales don't pick up.

Bank stocks vs. utilities in terms of PE As people get older, they want a safer dividend, so more utility products are coming out in the market to meet that demand. Utilities are defensive. The PE on utilities have been pushed up much more than they otherwise would. They're expensive and therefore risky. Bank PE's are lower, because their income variability fluctuates more. Banks could lose billions in a down cycle. Risk-wise, he slightly prefers the dividend from utilities in this phase of the cycle.

Educational Segment. The trouble with U.S. monetary policy--too big and failing. Each week, he hears the question about not liking GICs or bonds, so can you recommend an ETF to give me a better yield. Bond yield have been pushed really low by central banks--and Trump wants them even lower. The average yield-to-maturity is 2.5%. The real return is zero worldwide. So, if you buy bonds, you will get nothing--inflation erodes your purchasing power. What will central banks do during the next downturn? How can they lower interest rates further? This makes it hard for the savers. Also, there's $265 trillion of debt across the world. What if interest rates rise 1%? So, there's been an astronomical transfer from the savers (retirees) to the corporations and governments through lower rates. This won't work going forward. What happens to the savings of retirees--and the world is rapidly aging?

We're at the end of a credit cycle as in 2000 and 2007: people have borrowed too much, some sectors overheated then the market corrects. 17 countries have yield-curve inversions, so supply and demand for credit are peaking. Equity markets are at all-time highs, but that attracts only more bullishness. A key indicator is margin debt. In 2000 and 2007, there were all-time highs in margin debt. We saw a similar pattern in margin debt in the late-2018 sell-off. Also similar to 2007, the US housing market was falling apart in the summer and equity markets made all-time highs in October. He fears the eventual outcome will be quite nasty. There's excess money-printing by central banks globally. Central banks, though, are being a little pro-active this cycle by raising rates last year, which is good. He thinks central banks will stabilize any correction. By doing this, maybe we'll see a 30% correction instead of 50%+ during 2008. Still painful, but we saw a 20% move in the past 6 months.

Earnings have beaten expectations and the market has dramatically moved up since December, but the S&P is up only 8% year over year. Now, the shape of the technical pattern on the S&P is the same as last September's, so we will see the same big correction or a rotation out of energy and into gold and precious metals? Gold is a safe haven, though he's not a gold bug. He likes Kirkland Lake Gold for its growth. WTI oil will likely stay high due to geopolitical tensions, but he doesn't see $80/barrel. He doesn't foresee a crash, but merely a slowdown in growth and no recession till the end of 2020.

Market Outlook. Always optimistic on oil, he still thinks the global balance is still tight. He is becoming more bullish this past week as there is concern of growing Iranian constraints. Exports could fall by 700,000 bpd -- this could push OPEC to peak capacity. With no safety cushion, issues in Libya, Venezuela and others could keep markets very tight. He expects Alberta curtailment to last into 2020. Valuations are at their lowest levels in his 16 years in the business. Free cash-flow can be used by companies to buyback large quantities of shares. You could see companies privatize themselves. His base outlook is $60 WTI and $17.50 WTS differentials. The market is simply not operating efficiently right now. A great time to buy.

Alberta curtailment? There are a lot of politics involved. The integrated and non-integrated companies are at odds with the impact of Alberta's curtailment of production. Nobody planned for $50 WCS differntials. Alberta wanted to correct this problem and until the Feds can get more pipeline capacity this was the best solution. He expects the curtailment to extend into 2020 for the greater good of Albertans and Canadians.

Speed of US national debt increasing. It's been said that US growth rate has outpaced others. Economy is growing at 2-3%, but the deficit is increasing at 7%. For any other country, the currency would be down 20%. Decent growth, good corporate earnings, but the debt issue is lingering. The only reason they're growing is because of their debt. Tougher to grow late cycle. Not a massive red flag right now, but eventual result will be a lower US dollar. Bid to the US because Europe has been tough for so long.

European growth. German demographics are terrible. No inflation, no growth. It's a problem globally that we don't see the inflation and growth that we used to. Bond market is reflecting this.

What is the US national debt? True number is 22.5 trillion. Size of economy as of Q4 is 20 trillion. Nominal debt to GDP is around 102-105%. Issue about unfunded pension liabilities can muddy the numbers. Difficult political environment in US, and this issue is a runaway train. Be mindful in the next 5-10 years, and what that can do to markets.

It's been a tough week for earnings (though some companies have done well). He's carrying more cash than usual and has been taking some shares off the table. We're seeing the end of the cycle. The dilemma for central banks is how to normalize rates, but be aware of the markets selling off swiftly when rates are raised, like last December. We'll see some misses in industrial stocks, because--for example 3M, they are dealing with a strong US currency and competition from Europe. He suggests buying European blue-chips at the current CAD exchange rate. Europe is not blowing up. If Brexit happens, it happens; Europe will survive it.

How to value insurance companies during climate change? Look at price-to-book. Also, how is the current valuation compared to 5-10-year averages?