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

Is Energy good value right now? – He thinks it is tough for a value investor to be in energy right now. He only holds 3% of energy in his portfolio. We just don’t know how long the supply glut will continue for.

How do you stay disciplined? – He suggests having a checklist. Look for companies that can protect high earning growth returns. Does the company deploy capital in an intelligent way? Does the company re-invest cash-flow to grow the company? Lastly, look for opportunity to purchase value – the lower the price relative to its intrinsic value.

Are Canadian banks good value? – They are currently good buys and recent quarterly earnings are good. BNS-T had great international growth. The group trades at a discount to the long term PE. They are an oligopoly in the Canadian space – a strong position. The banks have done a good job at risk control.

Markets. An improvement this week. Canadian markets could still catch up this year, if we can get energy onside. Some stocks are down so far, he could see them coming back 50-60%. There's lots of potential, but he's not bullish on energy until the world changes its mind. Good value in the sector, but may be 6 months to a year before people realize that.

What's going on with interest rates? Powell did change the game, but not as much as people think. We're amazingly free from inflation, so there's not the same incentive to push things up. We got too far ahead in terms of interest rates. We could stay at 3% for a while, so stocks will do OK. If the curve starts to invert, that would indicate trouble ahead.

US economy. US economy still has some steam in it. Deals are getting done, so cycle could carry us well into 2020. There's still infrastructure spending to come, which could extend the cycle.

The recent correction. We're at the bottom of this particular correction. Corrections are a standard part of markets, and this one has less justification than most. The fundamentals of inflation, unemployment and corporate profits all look good.

Market For almost a year now people have been talking about a correction coming. Because we've had 9 years of pretty strong gains in equity markets there is still optimism left in the market. Referring to Jerome Powell comment from the FED yesterday, after seeing just a small glimpse of good news we see buying coming back into the market. Looking at 2019 you have to ask yourself whether you are in the camp of things slowing down and being more defensive, or if that was just a little breather in the market and if we are going to get back to rosy days. He tends to be more conservative, thinks now is an ideal time to become more conservative heading to 2019. Doesn't see the same type of growth catalyst for 2019. Not overly optimistic.

Interest rate hikes slowing down Going into this year they reduced their weight to interest sensitive and defensive equities such as utilities and telcos, and those names did suffer in the first half of the year. As we went through the year central banks have soften their language both in Canada and the U.S., and now we are seeing these defensive names becoming popular again. Tech is down 9% within this quarter, whereas the defensive names they like such as utilities are up 4%. Seeing a shift back into defensive and interest sensitive names.

Dividend growers or dividend yield? It's always about dividend growers as it speaks more about the overall wealth of the company. If you are too focused just on the yield and you buy a company that pays a 5-6% dividend without looking at the fundamentals, their ability to raise de dividend may be impaired, and not only that but the share price may also go down more than the dividend yield.

Move from bond ETFs to preferred shares or floating rate ETFs Just because the word bond is present doesn't mean that it can be synonymous with safety. Even in the world of bonds there is a wide range of risk ranging from governments bonds all the way to the other extreme being high-yield bonds. Preferred shares can be seen as fixed income part of a portfolio but it is important to recognize they don't have the same characteristics as bonds. The good is that the tax treatment of preferred shares is generally as a dividend, so if investing in a non-registered account you get the benefit of paying less tax on the yield. The bad is that they rank lower should things go bad with the company. If you are a bond holder you get paid ahead of a preferred share holder. There are several different types of preferred, such as perpetual which are very sensitive to interest rate, all the way to fixed rate-resets, and there is other considerations there. Preferred shares can be an alternative to bonds but it is not as simple as looking at the yield, from tax to credit quality, as well as what type of preferred you buy.

Wall street banks vs smaller regional banks in recessionary environment? It depends if the earnings are coming from banking operations or wealth management and investment banking. You have to ask yourself what exposure you want to consumers. He feels pretty optimistic about the U.S. consumers primarily due to debt to income ratio being considerably lower in the U.S. vs Canada.

Market Outlook - A lot of normalization going on the Market right now. Higher volatility. Investors have been blessed with low volatility for a long while. This is kind of a reminder that volatility is part of the investment process. The US shows more average market valuations. The economy is still growing. Shorter term is surprising that a few words from the Fed can move the market so much. That is why he prefers to look at the fundamentals of a company. He prefers US banks over Canadian Banks now because of the growth south of the border. Still thinks Canadian Banks have a place in Canadian investors.

Breaking news: US Fed Chair Powell has just commented, urging caution, that the impact of hikes is uncertain. The Fed pause narrative has picked up steam. We will certainly get the Decmber hike, but may take a pause after that. Growth stocks have dominated almost every investing style until the past few months and is now done. He sees more rotation into profit-oriented stocks. Inflation has come off because of the falling price of oil.

Interest rates: why do Feds keep referring to historical rates? Historically, back to 1947 interest rates in the U.S. were 2.7% on the 10-year (close to current levels). Rates went from 2.7% to 7.7% over the next 20 years. Traditional bonds fared the worst, but stocks did fine, annualizing at 6-7%. So, stocks can bear rising rates as long as it's not a shock. That's why Powell and certainly Trump want a pause to see hikes digested. Interest rate cycles are nothing new.