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

US dividends are treated as interest income, is there anyway around it? The tax policy encourages Canadians to invest in Canadian companies. He thinks it makes sense. The Canadian market is 2% of the world but it’s a large world and there are many opportunities here. From a cash flow perspective, the extra advantage given by the dividend tax credit is very powerful.

Market. He sees companies beginning to spend more this year and we have not seen this for many years. Combined with revenue growth and margins expanding, it points to things being not so bad. Investors are still skeptical, but things are where they should be. The TSX is being held back by the skew against certain sectors, particularly financials. An earnings recovery along with economic expansion and interest rates increasing are all healthy indicators. It is not all rah-rah, but there a few positive factors.

Manager fees. Fees are the big problem with fund managers – especially when they charge 2.5%. He does not like the way the industry is structured. That is why he runs an independent firm and they do not charge the same fees. He does not own Canadian stocks.

US Fed Rate: there was talk if would they be more hawkish. But inflation data has gone into the 2% range while there's wage pressure. Inflation never stops at 2%, but keeps rising. So, the Fed hammers it down with rates to end this cycle. This cycle came out of the Recession 10 years ago, which needed extreme monetary measures to turn around the economy. So, this cycle has gone on longer. Instead of lower rates encouraging. What were great tailwinds are turning into headwinds for the economy and markets. He can see the bull case, but he's inclined to take the bear case. They raise rates so they have some dry powder in case they need it. Lately, he's been defensive, holding more cash and more short positions than long. It's been a fantastic earnings season, but we're seeing slowing growth and squeezed profit margins. This may have been the best quarter of the year. We're late in the game. If you're playing, be warned. He's cautious. Now reminds him of 2007 and the late-90s.

How much cash to hold? He lived through crashes in 1987 and late-90s. He holds at 30-40% cash.

Are U.S. interest rate hikes not good for U.S. banks, because banks like JP Morgan are recently down? Generally, rate hikes are good. But the yield curve is now flattening. Short-term rates are rising, but long-term less so, so this works against the banks. Instead long rates need to rise higher than the short ones. Also, expectations over bank reports have been too night, and loan growth has been dismal.

Historic freak show: last year we had record-low volaitilty vs. today's which is way over 1% a day. Now we pay the price for high volatility which will continue into the summer. Comparing 2018 with 2011: in February of both years we
had a pullback, then a rally, then a second pullback. In June 2011-October 2011 we saw a 22% pullback. Expect a summer correction, but not a crash. In the next week or two, he will slightly reduce equities. Now, the market is slightly
above the 200-day moving S&P average. When we break beneath that 200-day, then sell. Opportunities: maybe Canadian, but he'll go into cash.

Can bonds fluctuate in price from market fears? Interest rates, definitely influence bonds. Inflation: the market will perceive what inflation will be in the future, which will effect the premium on a bond upwards. Bonds are more complicated than stocks, and bonds move quickly. It's hard to answer this questions, since bonds are not simple like stocks. Currencies and world events also effect bonds.

When do you sell and how much, using 200-day moving averages and technical analysis? He uses a combination of a lower-low and a break in the 200-day and wait three days (in case it's a one-day spike). This time of year, he raises a bit of cash to 15% maximum. If a stock breaks down, he uses a ladder approach, the Bearometer, consisting of a series of indicators, triggering selling until he hits 50% cash. (He uses the S&P 500 as his guide.)

Strategy using weekly and daily charts? Different time frames, so each chart tracks the momentum of a stock over different spans. It boils down to: if you're a short-term trader, use a daily chart; if you're an intermediate trader (a few months) use the weekly.

Overview. The DOW is taking another hit today, we are near the year’s low. As the market is moving up and down, it is hitting lower highs and lower lows. 23,300 will be an important point for the Dow. We might hit that very soon, yielding our first major correction since 2009. We are down about 10% for the year but we could hit 20% or 25%. We are having the correction now because: (1) The Federal Reserve is increasing the cost of money, which reduces the value of earnings; (2) The money supply is tightening. The US money supply was growing at a rate of over 7% per year but is now down at 4% under the MZM terminology (see https://en.wikipedia.org/wiki/Money_supply). If you want 3% economic growth and 2% to 3% inflation, you need 5% or 6% money growth or more. The money supply is not growing fast enough and so money is getting tighter and that in turn drives the US dollar higher. (3) The amount of debt that has to be raised is enormous, but the Fed is not buying more and Europe is not buying more, so interest rates are rising. So money is more expensive and tighter. He thinks this is why the market is correcting. He thinks the DOW could go down 3000 over the next three months and he thinks people should be cautious about buying today, and hold onto cash, because there will be great buying opportunities late in Q3 or in Q4. He thinks energy stocks could be caught up in this.

Energy Prices. When he was on the show previously, he was bearish on natural gas (December) and then bullish. Since then, natural gas plays like Birchcliff and Painted Pony have gone up a lot. Birchcliff is up 50% from its lows. He thinks natural gas will come down a little, but oil will come down further, perhaps 20%. He sees a $10 risk premium in the current price of oil. Also, if the US dollar rises 10%, the price of oil (in Canadian dollars) will drop. He thinks oil will drop to the $50’s in the next 2-3 months, which will bring the TSX energy index down by 15 to 20%. He thinks that the risk premium is partially based on anticipation of a possible loss of supply of oil from Iran, but he doesn’t think that Europe will go along with those sanctions. In addition, after the upcoming elections in Iraq are held, it is possible that the pro-American faction will win and Iraq will rapidly increase its sales of oil to address the war damage to its economy or that the pro-Iranian faction will win and limit oil production to keep prices high. There will be more news in mid-May and at that time, the price of oil might come down hard. The market is currently bullish on oil because crude oil inventories in the United States are down by over 100 million barrels and wordwide they are down by over 200 million. He showed a chart on World Oil Supply and Demand from the Federal Reserve Bank of Dallas (chart is at https://www.dallasfed.org/-/media/Documents/research/econdata/energycharts.pdf) . This shows that the demand for oil will be outpaced by supply growth. The implied oil change is for an increase in inventory in 2018 that looks similar to 2014 and 2015, which will be bad for the price of oil. This year, the United States production has gone up from 9.8 million barrels at the start of the year to 10.58 million. The US production has increased over 750,000 barrels in just 4 months. This rate is more than the increase in demand.

On Light Oil in Saskatchewan. He is optimistic about the light oil in Saskatchewan. On his list, there are three companies (large cap, intermediate cap and junior) that have exposure to Saskatchewan: Crescent Point, Spartan (now Vermillion), and Surge Energy. This is a desirable area because (1) takeaway capacity is not as difficult from Saskatchewan and (2) this doesn’t have the differential issue.

Cash. He thinks many of these stocks have gotten ahead of themselves. We are not quite yet at the start of the growth cycle for energy. If there is a pullback on energy, he expects to see the energy index at 150 or less and from that level he expects to see explosive growth.

Market. Lower taxes are a huge part of the boost to earnings. For the entire quarter analysts were increasing numbers and they are still being beaten. Earnings are good enough to carry the market. We tested a recent 200 day moving average low in the markets and bounced up. There has been top line growth but not as much as he would have liked to see. Today we are just beating the 2009 revenue numbers. Increases above that are almost entirely due to share buybacks. The city group economic surprise indexes for the US and for Europe are showing that Europe is expected to miss dramatically, but not the US. He expects the Euro to get weaker over the next couple of months. As of October this is going to be the longest economic expansion since the second world war. We are late in the game.