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

Overview. Interest rates are going up gradually in the States. He thinks low rates have supported the bull market in equities and he feels cautious in response to their rise. He expects two more rate hikes from the Fed this year. The Canadian 5-year rate has been dragged up by the US rate increases, and this leads to a strengthening of the dollar, which also has a tightening impact. It can take a year for the effect of an interest-rate rise to play out. For a Canadian family with a variable-rate mortgage, the increased interest rates will cost about $40 per week. Longer-term fixed rates will follow. This will have an effect on the rest of the economy. With so much consumer debt in the Canadian economy, the effect could be significant. He would avoid Canadian consumer stocks at this time.

Market-neutral investing. This involves paired trades: going long one stock that he believes will gain, while going short another that should be hurt by the same trends in the market. He believes that the market has entered a stagflationary trend rather than a disinflationary trend. This is not good for equities or for fixed income.

He expected three things to happen in 2018: Interest rates would normalize and that's happening; Canada to underperform again, despite a lift in oil prices; and a shift to international markets (Europe and Asia). He's minimum bonds and maxmimum stocks. The market is getting used to Trump (and reacting less), because he's contradicting himself--sometimes on the same day. Truth is, the U.S. needs to trade with China. Trump makes more out of it than there really is. A lot this is empty sabre-rattling. We've never seen a person in such an important position act so crudely and cavalier.

Comment on Cannabis. Cultivators are overvalued, but he sees potential in additional products and services that support the production or sale of cannabis. His is long Hydropothecary Corp. (THCX-V), which makes a spray delivery system. He is interested in the idea of companies that test cannabis products on their way to the market. He is also interested in the U.S. cannabis market because President Trump only recently came out in favour of medical marijuana and of leaving recreational use up to the states. He thinks institutional money in the US will now start to finance cannabis growers. He is long iAnthus Capital Holdings (IAN-CD) and in others just going public.

People are looking to Shell to spearhead liquid natural gas sales from Canada. However, there are structural problems with pricing of natural gas due to the lack of infrastructure (such as pipelines). He expects Canadian natural gas to continue to be very difficult. The differential between the Alberta price (AECO) and the global price continues to increase, which will make LNG more and more attractive because it can be shipped globally. He think it is too late to short natural gas stocks. He is now looking to go long, but he things that those trades will be on the new generation of companies that rise next year.

What is a fair MER on an ETF, passive or managed? No more than 0.5-0.75% for an actively managed one, like HPR-T's (for preferred shares) is 0.55%.

How much of a role does shorting play in the ETF space? We're seeing more shorting on ETFs as institutions pay more attention to ETFs. They're hedging their portfolios. If an ETF has a high correlation to, say, a US index, they will short part or all of that ETF. It's not a nefarious thing. For covered calls, you're writing overlays, so technically you're shorting.

What's a good balanced ETF with moderate risk with 70% stocks and 50% US, 25% Canada and 25% world? There are multi-asset ETFs. But if you have the discipline, you can put 30% in Canadian bonds like XBB-T, then buy ETFs to serve those three geographic areas. Now, you have four ETFs without paying an outside manager. The hard part is on your birthday is to re-balance your portfolio according to that asset mix--then don't touch it.

A Canadian ETF that invests in the US. Is there an exhange tariff? There is a withholding tax and/or s minor SEC charge when you sell the stock/ETF. Don't be scared off--Canadian companies offer many ETFs that hold U.S. stocks.

Marijuana Space. There could be a flood of oversupply. The top ten players are going to be about 2000 tons. Demand will be about 800. And the black market is not included in that supply. The space is very interesting and it will be a commodity once the bubble washes out. Marijuana is perishable so oversupply will have to be converted to oil quickly.

Illegal growing of Marijuana. Every house has the ability to grow 4 plants. That is .25 to 1 lb per plant. It is the informal economy. It will be hard to police. It is an unpolicable grey market that adds to the supply.

The bulk of the Marijuana is produced indoor and requires electricity. You have to look at a company's mix of greenhouses and outdoor growing. You have to own the lowest cost producers.

Market. It looks like the extreme populous Italian movement and the national front party in Italy are coming together to form a government. This was thought to be the worst case scenario. It looks like it will be negative and the bond market pressure could ignite again. Spreads out of Italy are starting to widen. It will play out over the next couple of weeks. We could see an important technical level breached – see Educational Segment today. This could be as disruptive as Greece several years ago. Germany and France are not big enough to write a cheque for Italy. If this Italian government forms they will want a lot of freedoms that they don’t have in terms of austerity. NAFTA looks like it is in the final innings. Best case is that they agree on something new but it looks like we will not get anything, which adds uncertainty to the markets.

Educational Segment. The Bull Market in Bonds. The double bottom has one of the most efficacies of all. In the last couple of years we have gone down to the low single digit yields and experienced a double bottom in 2011/12 and then again in the last couple of years. 4.72% is the price target for 10 year bonds to go to. He thinks the world would fall apart of it ever got there. The world cannot handle higher interest rates in his opinion. He thinks 3.5% is the top. Late 2019 or 2020 the yield curve inversion is signaling a recession. As an alternative, he can see the bull market in bonds continuing as interest rates continue the previous down trend.

A pick up in Natural Gas over time is likely as the world moves to getting as clean a carbon footprint as possible. There is a natural floor on gas prices. We are very over supplied in North America and LNG distribution is slow to get going.