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

Is Gold the Answer to his opening remarks? Yes. Unfortunately it probably is. There is not very much else out there if the US economy goes into that situation and the Fed has no option but to print money. Long rates are not going to go up, but short rates are administered by The Fed.

General Market Comment. He says last year was the lowest level of volatility on the VIX, now it has returned to a more normal level. The big change is that the medium and timeliness of “fake news” is now instant. Investors should not react to all the noise. Now if you want to spread a lie, it can be dispersed quickly. He prefers his information in print form.

Marijuana Industry. He sees this and cryptocurrency as being fascinating. The key is to correctly choose the future winners. Second Cup (SCU-T) is hoping to be able to distribute cannabis – he is not sure they will be. There are too many questions about legislation. If you see mining companies announce they are moving into this space, beware.

What sectors to buy if there's a recession in 2019? He doesn't see any sign of a recession in 2019. He doesn't invest that way anyway. In a recession, though, he'd buy the things that act like bonds: telocs, utlities and REITS. Crashes in, say, 1987, were not recessions, but resets.

What's a safe, stable dividend stock, like TD or BCE, for five years? He's cautious on telecoms, including BCE. They still have wireline exposure and would stay away. The only Canadian bank he owns is TD, which he's reduced a little. He prefers a U.S. bank with much higher dividend growth, albeit a lower dividend. BAC, for instance.

Credit card stocks to buy? He likes companies with long runways, and digital transactions are growing by leaps. Buy Visa and Mastercard (the latter he owns).

2016-2017 enjoyed high performing low volatility followed by 2018's volatility, just like post-1984 and the early-1950s. In both cases, the third year was a big up year. It's rare that the first correction (Feb. 2018) breaks the back of a bull market. After the correction, the markets run higher. 6 of the 10 best days in the last 20 years came within 2 weeks of the 10 worst days. So, we had a shake-out rally and held onto the moving averages. The strongest sectors since he pullback are all economically sensitive, not the ones you see heading into a slowdown or recession. The pullback gave buyers an opportunity. We have 4-6 months ahead that'll be constructive. But he's avoided Canada the past two years. In the last few weeks, though, he's seen strength in oil, so there could be a catch-up trade here in energy and Canada. American will outperform Canada.

He's looking for opportune sell-offs. U.S. tax reform and more restrained American household debt are encouraging, but the Fed is raising rates under a new chairman. Other factors: the U.S. yield curve is flattening and global trade tensions. He's optimistic long-term, cautious short-term. American has become an under-the-radar oil superpower through innovative fracking to the point of exporting oil and natural gas. Hold dry powder (cash) for opportunities.

Car industry: An extremely interesting time now, given the transition to self-driving cars, electric ones and ride-sharing. Google's Waymo is offering a self-driving, ride-sharing test program in Arizona. Later, they plan to offer a for-pay service. As the cost of these new forms of transportation decline, more people will use it. Also, self-driving cars will reduce auto deaths which are rising in the age of texting drivers. Adapation will be gradual and likely be introduced from city to city. Factors, including the high cost of the technology inside these cars, will likely increase fleet sales vs. individual car sales.

Overview His focus is on oil companies that have had a 50-to-70% dislocation between what oil has done and what the stock has done. He is also focused on service companies that are able to push through price increases, have net cash on the balance sheet, are trading at 2 to 3x EBITDA, with over 20% free cash flow yield. He thinks the risk vs reward in the energy sector is noteworthy: Oil is in the midst of a multi-year bull market; oil prices are at or near a 4.5 year high; because of cost reductions over the past few years, profitability today is higher than it was at materially higher oil prices in the past; and yet energy names are trading at one-third of their historical multiples and he can buy service companies at one-quarter of their historical multiples. He can buy companies generating positive free cash flow, with net cash on the balance sheet, trading at 2.5 times EBITDA and 35% free cash yields. He can buy producers in Canada trading at 3x their enterprise value relative to their cash flow with 9 to 10 years of proved producing reserves. So investors are getting an element of the cash flow or of their production for free. Analysts and investors are beginning to show interest in the sector, which will drive stock prices higher. The energy index has started to outperform the broader market, something that hasn’t been seen for a long time. Momentum will beget more momentum. He expects a $70 price of oil next year, which while result in 100% upside in multiple names. From Jan 2017 until now, the price of Canadian oil in Canadian dollars is up about 18%. In WTI terms, it is up 23%, yet many oil names have fallen by 50%. Just getting back to where they were will take them up by 100%.

Comment on US pressure pumper theme. He is still positive on this theme. There is uncertainty about possible oversupply. However, when you account for a 20 to 25% attrition of equipment due to wear and tear, the US market is still undersupplied. Q1 will be terrible across the board, partially because of poor weather. However, he expects pricing expansion and margin expansion soon. US pressure pumping stocks are trading at levels that are the cheapest he has ever seen. Many have net cash.

Market. Retail sales increased more than expected and is the first gain in 4 months. There was a big build up in the US late last year as well as a huge draw down in savings. Tax cuts in Q1 seem to be going to paying down some debt and boosting the savings rate, rather than stimulating the economy, so we are looking at a weak Q1. XLY-N is more and more dominated by AMSZ-Q, who are going through challenges from the President. The real metric with banks is the net interest rate margin. The yield curve has continued to flatten dramatically in the last couple of months and this is not good for banks. We will see what other sectors say this earnings season.

TFSA. This is where you should speculate. You have after tax money going in and the compounding rate of growth is never going to be taxed. He would focus on growth rather than dividends and more conservative investments.

Educational Segment. The yield curve. The bond market is probably our best predictor of economic conditions to come. Short term rates are coming up because the Fed controls the short term part of the yield curve. They expect to raise rates more. They are unwinding the size of their balance sheet and should increase longer term rates, but in recent weeks we have seen more pressure on the front end of the curve but the economic data is coming in weaker and the yield curve is flattening. The yield curve inverts about 6 months before a recession. As the Fed raises interest rates even more then we can expect the economy to slow. We can buy into the dips at present, however.

Market. Value is going to take over in the market from momentum. We have seen an uptick in volatility. People are going to be much more price conscious in what they pay. This is a good time to look for opportunities to reposition your portfolio. If tech stocks become regulated utilities that would compromise future growth. He is not wisely exposed to tech stocks for this reason.