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

Market. The recessionary signs are still pretty low so stocks have room to move but with trade wars it will be a slow grind to get there. He prefers equities to fixed income. He takes advantage of more aggressive opportunities but then uses defensive plays to reduce risk.

[Caller afraid of international equities this late in the game]. In general you want some diversity – US, Europe, Emerging markets. The TSX is close to all time highs so the valuation is not that different than the US, although the European market is relatively cheaper. You need to be cognoscente of currency. The Canadian dollar is low right now.

What are markets reacting to? Tug of war. US economy very strong plus some amount of coordinated global growth. So, intact growth and employment story. On other hand, Trump-inspired jitters. Market can’t decide if real trade war or just noisy public bargaining. Most people see deals being reached. Also reacting to rising interest rates.

NAFTA being shrugged off by markets? Yes, because markets get conditioned to the headlines. NAFTA looks clearly like it will get a deal with Mexico on car parts, and then maybe Canada will follow. US plays the supply management card 75% because they want “something else.” One thing US really wants is to lower tariffs on packages going across the border, such as those coming from Amazon.

State of the current market? Prem Watsa’s bear thesis will bear fruit, but that’s 12-18 months out. US economy is on such a roll, it will bowl through a lot of obstacles. Betting on the wall of worry will eventually work out. Serious market correction maybe 18 months out or a little longer.

Aeroplan. Don’t panic about your points, they still have value. Aeroplan’s credible because Air Canada’s credible, not because Aimia’s credible. Don’t want the recent kind of publicity if you want people to see you as steady-eddy.

Marijuana stocks. Has been investing. Trading them. Bit worried about valuation. Combined market cap of Canadian public companies is $20B vs. a $5B market size. Sense that in October, lack of supply will help price shoot up, but he’s not so sure. Blueprint will be different in each province. Not quite as crazy as the dot.com era, but there will be consolidation. He’d stay with the bigger players like Canopy Growth. Look to the US for much lower multiples.

Market. The market is focusing on the volatile results of a small number of tech basked companies and overlooking the great returns of many strong companies in the broader market. However, the US market looks like it is forming a double top, which is a bit worrisome as traders could see this as a time to take profit. A natural drop of 80 points on the S&P500 would not surprise him and a failure to continue to make a new high would only confirm a potential larger sell off.

Navigating the trade noise. A lot of geopolitical situations. S&P 500 is up 0.5% since end of January. It is range bound. Global economies are growing led by the US. Earnings growth are coming in very well. Canada not quite as well as the US. The trade issues with China and USA are manageable. May see more inflationary pressures going forward because of trade tariffs. This may have an effect on interest rates. Certain sectors will be more impacted than others because of tariff such as auto sector. Everyone is facing higher input costs. Market has little patience if there is a miss or guide lower.

Market. Mid-summer is silly season, with the signal being drowned out in a lot of noise. In Europe, people pay close attention to who is speaking because so often in the summer, the speaker is the assistant to the assistant and their statements are not credible. There are lots of things to worry about but the earnings revisions tell a different story. They started the year with a big rise, stayed flat for months and are rising again as good economic numbers have been published. Despite growth in the economy, inflation is still benign. So the fundamentals give a lot of reason to be optimistic. Over the short-term, the 25% growth in earnings estimates and 10% revenue growth this year give a lot of reason to relax. These numbers are, to a large degree, the result of the tax reduction and so this level of growth will not continue every year. However, the businesses will continue to operate at this new level and so they are worth more. Over the medium and longer term, however, there are some indications of a recession to come. Canada relies on cyclical industries. Signals from asset management, transports and semiconductors are turning or flattening out. The strength of the market has been shifting, with more contribution from utilities and health care--health care strength usually shows up late in the cycle. And the 2 year to 5 year Treasury yield curve spread is very low--only 19 basis points. So, it is a wonderful party, but it won’t last all night.

Comment on the UK. In response to a question on Brexit, he doesn’t think the way Brexit plays out will have much of an effect on US equities or trade policy. It is likely to not have a big impact on many of the companies that trade in the UK either, because they are international, but it might be wise to hedge out the Sterling-related (currency-related risk). At this time, he likes to invest in Ireland and France.

Comment on Canadian Banks. The Canadian yield curve is even flatter than the US yield curve. In addition, there’s a lot of stuff to be worked out on the Canadian mortgage front. He is neutral on the banks and would go to real estate and REITs before going to Canadian banks.

Tesla, down 11% today. Going private at $420? Can Elon Musk pull it off? Yes, wouldn’t have made the statement without having funding lined up. Timing makes sense. In Musk’s best interests, since production is where they want, the 3 is ready to go. Doesn’t need the street any more to raise cash. Musk won’t have to deal with mundane matters, and defending himself against short-sellers, and can focus on getting the company commercially viable.

Big picture advice for investors. All-time highs, yet an underpinning of fear? That’s why stock-picking is secondary, and portfolio construction is much more imperative. Especially 10 years into a bull market. Cash is important, because you can take advantage of opportunities, and because you don’t want to sell into a falling market. Know the proportions of what you own, and the beta. Especially for retirees, who can’t afford to take a 40% hit to their portfolios when they need to withdraw cash.

Analysts reports. Doesn’t read them. Doesn’t believe there is a “Chinese wall” between research and investment banking. Analysts are not independent. Companies “beat,” because “adjusted earnings” are becoming in vogue. Remember, earnings are artificial, cash is real. There’s manipulation going on.