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

How are you dealing with higher market volatility? He tries to understand the companies they invest in and try to determine fair market value. So when the market volatility negatively impacts good companies, they will step in and buy. They currently have between 5-7% cash available at any time, which is higher than the 1-2% level when market volatility is lower. They play defensively by favouring dividend paying stocks that show growth in their dividends.

How will REIT distributions be impacted by higher interest rates? It depends on the health of the sector. A hotel REIT in a growing economy can see earnings continue to grow and not be impacted as much by higher interest rates. It also depends on the health of the balance sheet. How much debt is on a floating rate? Generally speaking, rising short term interest rates are an indicator of an improving economy. He does not think the rise in interest rates will be much higher and companies with good balance sheets and good cash flows will be able to fund distributions.

When he looks at today's valuations, he sees that earnings have to rise for two years to return to equilibrium. The market will correct or goes sidewaks for a while. With more volatility all around, step back and look at your stock price targets; and if a stock doesn't reach that target, then move on and buy something else. This is the perfect opportunity to take advantage of cheap prices. Important: Have cash to deploy during those 10-20% dips. He holds 20% cash. Investing is about how much you avoid on the downside more than how much you make on the upside. Don't chase yield. Few stock markets are up for 2018. He likes companies that generate free cash flow that's growing.

How do you calculate free cash flow? Simply, CFO (cash flow from operations) minus cash dividends paid minus capital expenditures. If it grows over time, you have an unusual company that merits a closer look.

His outlook hasn't changed since he was last on the show recently. Volatility will continue for the next little while. There will be violent shifts. The technical quality of the recent rebound was suspect. We've seen our peak in economic and profit growth. Profit margins are peaking as material costs and wages rise. We've had a great 9 years, but it can't continue forever. Headwinds, like rising interest rates, are emerging. 2018 reminds him of 1987. He's staying defensive. There will be buying opportunities, but investors will be wary. He's staying on the sidelines with a lot of cash. If he buys stuff, he'll move in and out of it quickly, even tech. For example, he sold some Facebook recently based on valuation, not the headlines.

Are we 6 months from a world collapse? It's possible, but unlikely. Financial crises always arise from a debt crisis. There's high consumer debt in Canada and corporate debt in China, for example. He doesn't think a collapse will happen. However, he feels we're closer to a recession than anyone thinks. Stocks peak 6-9 months before a recession. He's read some worrying financial reports from the U.S. and abroad. He sees warning signs, particuarly debt, and he's staying cautious.

Floating rates preferred shares as a fixed income strategy during rising interest rates? He's overweight, at 15%, preferreds in his portfolios. The problem with them is they're not equity or debt, so in a down market they get the worst of both worlds. There's a sustainability issue, so they will act worse than bonds. They're attractive now--and he's been managing them recently--because the gross yield is so high.

What to do during high U.S. volatility? He's hanging onto what he has. He isn't adding to holdings and reducing a bit. Maybe he's chicken. US tax cuts may help the economy. Rising interest rates, yes, but they're not long-term rises which truly matter. He's cautious about the American economy beyond 2018. There are warning flags, like a possible trade war.

Market. He focuses on small and midcap companies that are likely to rise based on their own fundamentals. He often invests heavily in a company, and several of the companies he invests in are bought out because small healthy companies are good targets for buyouts. He’s sitting on a lot of cash. The markets have been very expensive, especially since Trump became president. There is risk in trade wars and from multiples that are too high given rising interest rates. The US economy is growing, 2-3% growth, while good, is not good enough to keep up with the multiples. He found good value in small caps and mid caps, but the companies were taken over after he bought them. The heavy investment in ETFs focused on large caps is creating opportunity in the neglected small/mid cap space. He is particularly interested in Canadian companies expanding in the United States. Several of these are primarily American companies that have a Canadian head office or Canadian companies with strong American subsidiaries. They offer a lot of growth opportunities within the US. His investment approach is to look at growth opportunities of individual companies rather than focusing on the macro.

Compared to the last few years, the recent market swings are shocking, but we are actually getting back to
normal, with this increased volatility in early 2018. The bark is often louder than the bite when it
comes to politics (i.e.Washington). For long-term traders, pick your spots and stand by your
convictions. Day to day, this will be a rough ride--It's unproductive to watch the markets so closely
every day like this. The key thing is to be comfortable with what you own, prepared to
absorb say a 6% drop, and keep looking long-term.

Market. He thinks the recent volatility is the new normal. The VIX averaged less than 10% implied volatility last year, while this year we are averaging over 15%. Trade tariffs are not good for the market and maybe the recent Trump Administration warnings about China are simply a way to bring them to the negotiation table. These concerns are clearly adding volatility to the market. He does not think we will see a quick resolution as trade deals take years to complete. NAFTA will likely hinge on a May 1 deadline with the upcoming Mexican elections. The leader in the polls there is very anti-American.

Why diversify when correlations are increasing? An excellent question, he says. As information flow has improved over the past 50 years, correlation among markets has increased. Over a 10 year period, correlations among regions and sectors have approached 1. You still have to look at valuation and you want to put money in areas that are relatively better value, not the expensive ones.

Educational Segment. Should market similarities with 1987 have us worried? Last week he saw a lot of technical comparisons being made to 1987, prior to the crash. The recent corrections do look like the pre-crash period. There were similar trade tensions and trends toward Central Bank tightening. Despite this, he is predicting a pending crash. Wrong policy decisions on trade by the Trump Administration could cause problems, however. The crash in October 1987 caused a 40% retracement back to where the market started the year. It took about three years for the market to recover back to the previous high – an annual return of about 14%. There was a lot or market noise in between, but good returns in between. He is concerned about the next recession, where he thinks there could be a market drop of 35-40%, when earnings fall and market multiples fall to below normal. He is getting concerned about 2019, when he sees many fundamentals pointing to headwinds and greater risk of the next major recession.

Preferred Shares versus Bonds. By and large the newest preferreds are rate-reset shares, compared to perpetual preferreds where the dividend is fixed. With rate-reset shares, an increase in interest rates will see dividend yield increases, which gives better protection than bonds and perpetual preferreds. He likes the Horizon Actively Managed Preferred ETF (HPR-T) over buying individual preferred stocks. He does not mind paying a higher MER in this class of ETF for the management. He thinks a general rule for preferreds could be to hold 10-20% in your portfolio.

High Dividend Stocks. Just because a company has a high dividend does not make it a good company, he says. He prefers to buy a diversified basket of dividend payers in an ETF, especially if it uses covered calls.