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

Market. Consumer staples had been the recommended safety trade after the 2008 financial crisis and performed very well since that time. Now those same stocks are being sold off. Capital is going into stocks perceived to be more growth orientated, such as bit-coin and cannabis. Investors should not chase the latest and greatest at whatever valuation; be less emotional and think about holding it for 5-10 years.

Market. Earnings have come up very strong in the last couple of weeks. Also, oil and other commodities started to rally. 15 times earnings for the TSX is god value. Banks earnings are expected to come pretty strong. They are staring to trim some positions in US and finding value in Canada. The differential between US crude oil and what Canadian firms get has come down to 18 dollars from 30 dollars in the summer. Hopefully there is a positive regulatory approval with Enbridge (ENB-T) on Line 3 and the political debacle that has come from Trans Mountain. That should alleviate some of the differential. It feels like there is some inflation in the system. The Fed has signaled that they are looking to raise once a quarter. The Bank of Canada has been more cautious. Clearly the yield curve is flattening and that is signaling that we are in the 8^th or 9^th inning of this expansion. Commodities start to heat up in the last part of the cycle.

With interest rates rising should P/E multiples fall? - Exactly what is happening so far this year. For yields to really compete with stocks they should be upwards of 4 - 5 %. There is still room for the stock market to come down. There is geopolitical risk. But they are still constructive on the stock market particularly in Canada.

Market. Small caps are generally more volatile because their earnings are not as diversified as a bigger company, and there is a lot less volume and institutional coverage. He is launching a Cannabis open-ended fund. Some of the technical signals he looks at are showing the sector has bottomed and will start to move up. There is a scarcity of Marijuana stocks globally, even if not in Canada. The next catalyst could be global investors.

Market. Got to love volatility. We need volatility. We haven’t had the really big sell off that we need. We didn’t have any consolidation. The Dow needs to go to the 22,000 level. The more time the better, not just a blip. Everybody talks about 24-hours trading, but most of the volume now is in the last 30 minutes of trading each trading day. That is when all the ETF rebalancing happens. Canada has been very boring on the TSX.

Market. He thinks it has been a tough season with companies that have not been rewarded for good earnings. Even though companies are reporting 18% revenue bumps before the tax reform benefits, companies are only getting about 1% stock price increases. However, if you miss earnings, stock prices fall by 5% on average. He thinks forward guidance has been very conservative, leaving investors wondering if recent earnings are peak. He thinks there is a range on the S&P500 of about 2600-2800 right now. This is a healthy consolidation of the market. He would put positions on in “leadership areas” at the lower range.

Strong earnings from the SYP 500 and a strong economy bode well, but on the flipside are rising rates and expectations of inflation. This bull market is still going, but when does it end? Oil is holding above $70 a barrel and helps the Canadian market, but NAFTA uncertainty, mortgate rules and household debt are concerns. Add to this the Vancouver and Toronto housing bubbles. Higher volatility is actually good for stockpickers--opportunities. Watch the yield curve. There's no consensus about when a recession will happen.

Market. He thinks commodities are cheap relative to financial assets. Historically, commodities do well when they are low relative to financial assets. He showed a graph of commodities versus the S&P that shows the relationship is at a 40-year low, and also appears to show that commodity prices bounce back (relative to S&P prices) strikingly from lows that look like the current one.

Comment on Cannabis. He thinks that the new cannabis companies are richly valued, and they have been soaking up investment money that would otherwise have headed to junior commodities companies. He thinks the cannabis companies know they are overvalued, which is why they are using their stock to make big acquisitions. He calculates that in 4 years, Canadian cannabis producers will be able to produce 100 joints per person in Canada, which far exceeds demand. Unless Canadian producers can export a lot of cannabis, this oversupply will cause problems. American wholesale cannabis prices are already coming down, so exporting to the U.S. might be challenging. He thinks it is critical to pick the companies that are the best farmers, because those will be the ones who can survive tougher competition.

Blockchain sector The price of BitCoin seems to dictate the level of interest in blockchain. However, they are very different things. He does not own cryptocurrencies and will not in the future. He thinks they are a waste of money. He thinks the technology behind it is very interesting and he has small positions in some of the technology companies. The big players like Amazon and IBM will create big blockchain-based systems for big companies, but some of the small companies might pay off well in a few years.

The strong Q1 reports (S&P 500 companies) have been overlooked. Fears include potential trade wars, rising rates and that the cycle has peaked. But she still sees earnings growing for the rest of 2018 in the high-teens and 20% for the years. Solid growth, not negative. She thinks rates will slowly rise. American and Canadian banks are
attractive; the Canadian ones have had a solid Q1. She's keeping an eye on geopolitical news, mindful that Trump talks big but doesn't execute (i.e. steel and aluminum tarriff threats).

Looking for a safe haven in the US during volatility? JNJ given their mix in pharmaceuticals, medical products and consumer products, with a strong balance sheet and a 3.5% dividend. Also, Abbot Labs (ABT-N): their medical devices doing well as are their nutritional products given strong global demand; it's diversified and well-managed; pays over 2% dividend with growth. These are products we all need, and with an aging population, there will always be demand.

Market. This week regarding Iran we are going hear if Trump is going to walk away from a multi country agreement. The oil market probably priced in $10 of premium in the oil price due to supply interruption. He sees it as a spike and not a revaluation of oil. Best case they agree to a deal just so Trump says he made one. He thinks we will see a recession in 2019/20 and oil will go back into the $40's.

High Yield ETFs as fixed income. It is a basket of junk bonds and the worst companies. The outlook for these companies is more linked to equity markets than bonds. In 2008/9 HYG-N dropped tremendously. Now is not the time to add high yield ETF's to your portfolio. He is shorting these.

VIX vs. Option Premiums. Last year was an anomaly. With VIX in the current range, we expect option premiums to go up at least 50%.