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

Market. The German chancellor resigned. He has been saying Europe has been fragile for years. The real story is that even when we went through the Greek crisis 6-8 years ago, we are now going through the Italian version and he thinks it will be ugly. It is a question of who is going to write a question the next time it is necessary. This is the beginning of the unwinding of the strength of the European block. Interestingly the markets are up today. This is going to get worse before it gets better. He sees 2020 as the biggest recessionary risk. This is a trade at best. As we get close to mid-term US elections, uncertainty reduces and the markets like that. He thinks the market highs might be in and we might be building a top over the next year.

ETF to short the market. Horizons have the ones in Canada that go inverse, but don’t use leveraged if you want to hold for some time. Shorting S&P vs. shorting specific stocks has not done much better.

Educational Segment. The funding market – The Euro market call. Euro dollars are financial markets linked to the libor market. All the banks in the world participate in it. The Euro dollar still goes out 10 years. Each contract is a three month interest rate. It is a series of three month interest rates that equate to the year. The curve graphs a year, a month and a day ago tell us that the yield curve is starting to change. 2020-2021, rates are expected to be slightly lower in Europe. This is where we have to worry – when we get the inverted yield curve a year out. In history the average correction in recessions is 29%. We are starting to see late cycle behavior.

Market. He does not pay that much attention to broad bellwethers. He wants to beat the indexes, not match them. He finds that the fund size is not an inhibition to active management. 75% of active managers have less than 15 years experience and so may be incentivized to hug the index. There is no substitute for experience. There is lots of scope for interest rates to continue to rise slowly. When they are lower, the price value of a basis point is greater. The FED should want to continue to move up the front end of the curve so they have dry powder.

The VIX is not correlated with equity markets. It is more correlated with credit markets. Credit spreads have remained benign in the last 6 months.

Why not to buy a sub-index ETF. He is an active manager and not an indexer. DXG and DXU are ETFs he actively manages.

Canadian banks: All are 10-15% off their highs and have broken below their 200-day moving averages. If you're long-term, you'll get paid a decent dividend to wait. Eventually the big 5 banks will come back. Good P/E's. You can buy them now for the long term. He prefers TD for its U.S. exposure, and the weak Canadian dollar. The banks could fall another 5% along with this market. Nobody knows.

A wild day today when the market flirted with a correction. Confusing times. But be positive and constructive. It's painful while it lasts, but he doesn't see signs of an end to the bull market. In 10% corrections since 1928, 60% of them didn't fall further. On average the third year of a US presidential term sees 16% returns, 21% if Republican. A recessionary indicator he saws says there's 0% chance of recession. Since 1978, the average return the year following a correction is 18.5%. That said, we don't know how the trade war (US-China) will resolve. That fear of a trade war triggered today's selling. He thinks the selling is largelty algorithm-driven, perhaps 66% according to one study. Look for sound businesses trading at reasonable valuations as earnings grow year over year. He still
sees earnings growth in 2019. The TSX has a lower/better valuation than America's, but Canadian relies on energy which will remain slumped. He favours the U.S. market.

Where are the FAANGs and S&P going? Two of the FANGs are highly valued while the others are reasonable. The higher ones are falling faster. He invests fundamentally for the long run. A rally could start tomorrow or the day after the Midterms or six weeks from now. He's comfortable with the fundamentals in the economy, pending a black swan event.

He's not quite ready to buy this correction. The volatility still bothers him. We're -9% YTD in the TSX. Remember in June 2008 the TSX was at 15,200. So, we're net flat since then. It has paid off to invest in the U.S. He wants to see three or four days of calm before stepping back in. We will rebound from this correction, which feels terrible when you're in it. Things do look cheap, but wait a little. If you have dollars, maybe buy a third now, then another third closer to Christmas. The fundamentals remain good.

Outlook for Canadian banks? Canadian banks will benefit from higher interest rates. They have pulled back below their average long-term multiple. Historically, they manage their loan books well when rates rise higher. Mortgage growth is slowing, but there won't be a mortgage distaster. The banks will likely raise dividends. You can buy them now.