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

S&P 500 technical analysis: Support at 2,538. High is 2,876. The midpoint is 2,707 and we're close to it. It's holding within this range firmly and consolidating between 2,650 and 2,580. It looks like we're breaking out of that.
At 2,560 we would go towards cash which would mark a downtrend. Don't know if that's the case or if there'll be an uptrend. Can't tell right now.

Market. He thinks there are signs that China is backing down. China has already placed tariffs on so many things that it has little room left. He thinks the Chinese IP policies have been a poor deal for America and that it was necessary for Mr. Trump to stand up to China. Responding to a question about Trudeau, he commented that his focus is international rather than Canada.

Comment on Gold. He has little sympathy for paper gold and less for cyber-gold. He was an adherent to using physical gold as a hedge, but he thinks it is not a good choice right now. He has a bullish medium-to-long-term view of the U.S. dollar and he thinks that real interest rates will get positive, making gold less attractive. The scholarly work done on using gold to reduce portfolio volatility has been done on bullion, not on gold equities or gold paper. The impact of gold price on gold miners was much greater when gold was $500 or $700. He does not think that rising gold prices has as great an impact on company value now that gold is over $1000.

Market. The trade war or negotiations: China says they can weaken their currency to offset tariffs. We are not seeing this in the markets. It could cause some anxiety. The BOC issued an upbeat report. It had a very positive spin. The economic data, however, is softening. It is good to see business being more confident but it could be false. Trudeau has to put the strength of the federal government behind the pipeline in order to get it done It is a question of what he is doing rather than what he is saying. It could put his election in jeopardy next year.

US Investments. For the next year or so, all risks and factors considered, the Canadian dollar is between 75 and 80 cents US$. The spread for FX conversion is about 5%. ETFs with US equities don’t suffer this. 75 cents and below you should be hedged.

Hedged or unhedged ETFs? If the CAD$ is getting weaker then you want exposure to the US$ unhedged.

Educational Segment. Earnings Season. The US is 52% f the world. For the first time in memory, we have seen earnings expectations NOT come down much during the quarter. It means that what is going on in the markets is not what is not what is happening in earnings expectations. It’s going to take a couple of quarters to see what effect current events will have on earnings. We are probably going to see disappointments in the net interest margins of US banks.

Market. He is more interested in individual stocks. Clients are feeling pretty good by looking back a year or two and this is harmful. If we have come off the best decade in 100 years then clients need to think about it when investing. There are 11,500 small caps he could own. He is interested in the businesses as well as the people who manage them. He eliminates about 90% without even meeting them. They are simple financial screens. Returns above cost of capital is a big one.

With volatility these days, investors need to get away from the daily noisy, look at their stocks and ask if this is what you want to own in five years. No question that interest rates are rising. The Fed could raise rates faster if inflation creeps up faster than they ancitipate--and that's a big big danger. It's all about inflation. We have full employment. In Canada, we could see a surprise increase in order to keep inflation in check--which is their prime job. He's not a big fan of Canada and sees better value elsewhere.

Holding cash is critical as rates rise. Have cash to spend. He has 35% in his equity fund. We're in a time of massive volatility and there are few stocks of good value. He's looking for global stocks that are temporarily down (and will recover quickly), while he's avoiding those with too much debt, like Enbridge.

European recovery: Interest rates are still negative in some European countries. Spain's unemployment has dropped from 25% to 17%. There's still a long way to go, but that's massive. This picture is all over Europe. There's a natural cyclical recovery benefitting from North America's recovery and China. All Euro countries are decreasing their deficits (austerity has worked) and many are now in a position to spend money again.

Where to find a bond that pays 3%? There's no value in regular bonds which do poorly during rising rates. High-yields are one of the few fixed-income assets do, because they're short-duration. Don't buy a Canadian-only high-yield bond fund, because you'll get mining, oil and gas bonds with a high default risk if the commodity price falls. So, own U.S. high-yield bonds (bond fund)--which hedges the currency in case the U.S. dollar drops and you get crushed. Such a fund will generate 5% yield over the next five years in terms of income. Stick to a five-year horizon.

Should I buy high-yield bonds as interest rates rise? Don't expect them to necessarily increase in value. Instead, look for your distributions to increase over time, because you always want to get your principle back. As your old bonds mature and you buy new ones at higher yields, you'll get higher interest returns.

Market Comment. The divergence between small cap returns in Canada and the US will eventually return to the mean. Over 20 twenty years the correlation has been very strong. Oil stocks and material stocks may have found a bottom in Canada. Some of the US tech names are starting to be hit hard. He sees the oil service sector as a potential winner in Canada, where the multiples have come down so much.

Market. There were record flows into US Equities. Some bubble sectors in January went parabolic. Crypto and Cannabis have come off since January. We moved to a new environment for volatility. REITs are good if you are looking for yield. Utilities are strained to deliver. Growth cycles peter out as people retaliate. They should not pay as much for the growth to come. Industrial materials have much & more attractive valuations. The correction could be about the market discounting slowing economic growth.