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

Gold: $1,200 is important support. We saw a head fake when it broke below that and we're trying to climb back towards it. The hedgers (the smart money) are at record long positions while speculators are at record short, and the last time this happened was 2016 right before a sharp run-up. Moves in gold stocks can be strong. But gold also faces the headwind of the U.S. dollar.

Not much has changed in the markets in the past 18 years. There's little to buy today (like in 2000). FANG and pot stocks have replaced the dot-com stocks of 2000 as their market caps have expanded to extremes. He won't short this
market, but will hold cash. The FANG stocks worry him. In January, the market peaked at a fair market value. There's strong support at 2,600 on the S&P. He wants to do something now, but is not comfortable doing anything.

Educational segment: Long-term U.S. interest rates & the yield curve: A week ago, JP Morgan predicted 10-year rates would rise to 5%. Larry fell off his chair laughing. Jamie Diamond, CEO at JPM, is wildly bullish; he must believe that the American economy will be wildly robust to handle such high rates. The 10-year is 2.80% now. If it rose 100 points, the American mortgage and housing market would collapse. He doesn't think the economy is strong, because there's double the debt since the Recession. Larry feels we'll be in a low-rate environment for decades. Over the weekend, there was a lot of talking of shorting the 10-year. In fact, the net short 10-year futures contract has never seen a larger position since inception. It's massive now. There's talk of a big short squeeze with rates decreasing, not rising. Secondly, he expects the Fed to raise the flat yield curve in a year's time; the yield curve will invert by mid-2019, based on data from the New York Fed. Today, the chance of recession is 14%, but 25% is a warning level. Equity markets historically peak around 8 months before a recession starts. By the time a markets bottom--and when the Fed declared it a recession--the damage has been done, with a 29% drop in the markets. When the yield curve inverts, the market is within a quarter of the market peaking. So, the yield curve is the best indicator of a recession.

U.S.-China trade talks: As the lender to the world, the U.S. has to run trade deficits (by definition). Trump needs to win on the issue of stealing intellectual property, and this won't get resolved soon. Larry believes China will buy more LNG regardless. Meanwhile, Trump will continue to push with more tarrifs. Markets will continue to respond to news that's remotely positive on trade, as at Friday 2 pm. Larry feels we're very late in the investment cycle with flattening yield curves and rising interest rates, which is more important than the market noise. He sees signs of the market faltering with fewer stocks leading to the upside. Again, we're in the late cycle. When it comes to emerging markets and currencies (i.e. Venezuela and Argentina): there'll be a credit shock at some point, but he doesn't know when. But it'll play out over many months.

Canadian gold: It could dip below $1,100 again. At this point, there's a lot of production that doesn't make any money, and gold production declines. $1,350 is the high-end of the range, and he sees gold in a range. Ultimately, he sees a breakout to $1,500, but he can't say when. Buy into weakness.

FANG stocks: Long at some point, short right now. For years, there's been a strong momentum trade where FANG has led higher, but now we're seeing a rotation starting. We're now the end of this phase where the growth money starts to pull out and move into value stocks. This make sense in this current late-stage cycle. FANG won't get cheap until the next recession; now they're expensive.

Why would anyone invest in the Canadian market? There are some great Canadian companies that pay quality dividends and our financial system is robust. However, Canada is 3-4% of the world, so you shouldn't hold more than this in Canada in your portfolio. He's been underweight Canada for years and instead has been global. ETFs allow you to do this. If oil picks up, Canadian stocks take off, but he foresees oil as range-bound for a while.

Market optimism driven by maybe a resolution in the China-US trade spat: Can China really do anything to please the U.S? The problem is Trump points to the trade deficit and wants that to decrease. China can do whatever it wants to
close the deficit, but 30% of trade goes to Europe, so what'll happen to Europe? Does China stop buying Europe's Airbuses and luxury goods to buy America's instead? As for Turkey, it's nothing new. Emerging markets have defaulted on their debt before. The Turkish lira has been slipping since 1970. This is no surprise. Elsewhere in the EU, without currency devaluation, Greece can't grow.

Market. He thinks we could be in for the longest price retracement since 2015 for oil. The headwinds are commodity price weakness globally and misalignment between OPEC and Russia increasing production. Both issues he suggests are being caused by sanctions and tariffs concerns caused by the Trump Administration. He thinks the surge of 1 million barrels per day has taken away the surplus productive capacity, so remains very bullish on oil longer term. Canadian heavy oil investors may be overlooking a great buying opportunity. Despite the heavy oil discount being at $29 to WTI, the short-term takeaway constraints out of Canada are likely to be mitigated to a degree allowing the differential to tighten towards a $20 discount. This can mean a 100% improvement in cash flow for some companies.

TSX outlook. Has been in a holding pattern with trade tensions lingering. Canadian economy doing pretty well, with GDP strong and inflation hot. Corporate earnings doing well. Market is a gauge on people’s sentiment. He focuses on specific companies with high quality earnings and cash flow. Have cash on the sidelines in case of volatility. Parts of the market he likes, but broader market is all over the place. Need a defensive posture right now, clipping yields where they can.

China. Big issue for US is China. Meeting scheduled for end of month. Hopefully, sabre rattling is over, and both sides can get to a deal they’re happy with. Toxic US political environment makes things challenging. Looks like US is locking up things with Mexico, but Canada is still in a holding pattern. Hopefully, the US and Mexico won’t turn on Canada.

Trump’s wanting companies to report only every 6 months. Companies waste a lot of time having to deal with investors. A longer term horizon, not having to worry about beating earnings, is a positive thing. More companies should do it the Warren Buffet way, and not worry so much about short-term earnings.

Positioning heading into the fall? Defensive posture. Focus on high quality, cash flow companies and on the yield. Chance for market to go higher if trade gets resolved positively. But with the stress in emerging markets, there’s risk of volatility in the spring, so have some cash on hand.

What makes a good real estate stock? Over time, most stocks that trade at a discount to NAV are due to mismanagement. It's not good enough to increase occupancy and rent, but it's what managerment does with that
capital, like overpaying management or issuing equity improperly. So, this discount to NAV will persist. Can I invest directly in a property instead of a real estate stock? He doesn't like REITs that pay high dividends, actually. In fact, those that pay low dividends generate outsized NAV. Real estate demands a lot of capital to operate. Buying a property itself--are you comfortable manintaing/fixing that property all the time? Also, how much yield/profit are you really earning by renting out? 1.5% vs. a 5% yield from a REIT?

Canadian REITs have outperformed US ones for two years, 14% vs. flat in the same interest rate environment. Why? The U.S. had a strong run-up in fundamentals coming out of the recession. Demand was strong and supply was in cheque, so owners could demand higher rents. Investors latched onto this trend until 2016, when the growth names in FANG stocks stole investors from U.S. REITs. In contrast, Canadians love REITs and supply has remained in check.