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

Market. It is a stock pickers market. In Canada, seeing a style rotation. The leaders have been the momentum and growth stocks but are starting to see a few chinks in the armour of these darlings over the last few quarters. The laggards are showing signs of improvements and catching the eye of value buyers. The laggards have been clustered in the resource space. The style shift seems to be from the momentum stocks to the value stocks, but a few weeks does not make a trend. Value does outperform growth over a very long period of time. The catalyst may be rising interest rates. This may not be the definitive reason why we are seeing a shift.

Market. Regarding the sell-off in the FAANG stocks, he said that it is normal to see a really big selloff when a rapid-growing, high-multiple company shows any kind of weakness, such as earnings or growth not quite up to expectations. The companies that continue to produce will inevitably have slower growth at some point and will gradually look more like utilities. With specific regard to the selloff in Facebook and Twitter, he noted that the problem is not just a one-off reduction in users as the companies shut down bots. It is also a user shift. Younger people are shifting away from Facebook. He also thinks that the metrics involving the value of advertising done through Facebook are soft. This creates a high level of risk going forward. Generally, he thinks that there is still an upward trend in US stocks. The US economy is strong, interest rates are rising, the value of the currency is rising and this is leading toward better opportunities elsewhere in the world. Emerging markets, Europe, Canada and Australia are all cheap if you are buying with US dollars. The short-term trading gains are in the US, but the longer-term investments are outside of the US.

On economic status. He does not expect a recession in the near future. He thinks a recession will be telegraphed well in advance. He does expect a correction and notes that the S&P, excluding the FAANG stocks, has already been trading sideways to down. If the FAANG stocks were to give back 20%, the US would already be in a bear market. Outside of the US, many companies have sold off. He expects to see a little more downside in Asian companies, Europe will trade sideways, and the US will give up value in the FAANG stocks. Rather than rotating into cash, he thinks there are companies that are cheap, such as commodities and oil.

US vs. Canada. Wind at your back in US. Canada trails, but still gets pushed along by the US. Canadian economy doing well, but trouble is environment not as hot as US and valuations are getting out of alignment. Canada is now cheap. Headlines, like trade, are affecting Canadian market. Mexico wants a tri-lateral agreement, but Trump is trying to break up Canada and Mexico to create a weaker position. Unwanted volatility, but opportunity in next 6-12 months for Canada to catch up. A commodity bid will help even more. Sees Canada outperforming in next 12 months.

Increased volatility. VIX is still historically low. Haven’t seen markets down 3-5%, only 1-2%. Have seen sector rotation from tech into consumer staples, utilities. Would be more concerned about volatility if interest rates weren’t in this tight range.

Apple earnings. Positive impact. He owns it. Stellar numbers today, which changed the tone. Now we’re seeing the tech companies diverge.

Keep at least 10% in bonds? Bond markets aren’t a great earning environment, but you need to preserve capital. The day the market’s down by 10%, you can reallocate to equities. It’s a holding place, and better than cash. With GICs, you have to lock in for 3-5 years. You have to allocate something to bonds.

An ETF or bond recommendation? Cheapest is XCB, which tracks corporate bonds. About a 3% rate of return. Investment grade bonds, with a mix of government and provincial. People buy bonds grudgingly, but there’s a reason for bonds when the market gets volatile or drops.

The Amazon Effect. There’s always an overreaction in the media. But Amazon is not going away. We’re all getting more comfortable with online purchasing. Bricks and mortar is struggling, except perhaps for Walmart. Drag on earnings. If you have hard assets in the retail space, you can’t turn tomatoes into bananas.

Market. US earnings are even better than expected. It may be that they were shooting for higher numbers than they advised of so they would beat estimates. He is quite happy with how things are going right now. We are starting to see the risk in the FANGs talked about last week playing out. The Bank of England is looking to raise rates for the first time. He is watching Japan as they have said the yield curve is too flat. The unconventional monetory policies around the world are starting to be unwound, starting with the US. It will cause a slowing of economic growth. He would be shocked if there was a NAFTA deal done before the US mid-terms.

ETF in Canada with heavy weighting in Chinese high techs. He tracks EMQQ-N in the US. There is not a similar one in Canada. You can trade EMQQ-N short term but it will come out lower in then recession.

GOLD. Seasonality supports it. It is one of his largest positions. He has 25% between gold and gold equities. We are probably range bound. Over the next couple of years we might break out to the upside. He prefers ETFs than to be exposed to company specific risks.

Educational Segment. The Future of Economic Growth is Fake News. Larry does not believe what the US government is saying to the media about maintaining growth rates of 3+-4%. 1950-1973 were the golden years with massive growth in productivity. Today when the government spends money, you don’t get the same bang for the buck. Getting 1.9% growth in the US would come from a deficit.

Market. The fair market value for the S&P is now about 3000. In 20 years he has never seen the index exceed his calculation of fair market value. This would be a peak. Right now the market is stuck in a trend channel with the fair market value on the top and a structural break point on the bottom. If we hit 2500, he thinks we will see a bounce. This will be the case until something happens. He wonders if the market could die of old age. In 1987 we saw the end of the bull market without any warning. The FB-Q and TWTR-Q drops recently could be warning signs.

Market. The trend in Tech is still up. There has been a change in the character of the volatility since February. Of particular interest in the sector is the concentration. The top 5 stocks in terms of market cap on the S&P are the same market cap as the bottom 282 stocks by market cap. Tech indexes are concentrated in the largest 5. That leads to unintended consequences when managing risk. You are not getting the expected diversification. You want several sources of return that are unique and different. The indices that had a big piece of FB-Q had a big drop on the day FB-Q dropped. You should look at ETFs that don't let this concentration happen.