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

Covered calls doesn’t offer too much downside protection, is there a point in a downturn where you get out and take losses? Interesting question. He would trim positions. The risk is that there is more risk on the downside than you have growth on the upside. In terms of exiting entirely, he wouldn’t do it.

Is there a favorite bank you do covered calls on? He hasn’t done a lot of covered calls on individual names. He would look at TD Bank (TD-T) and Royal Bank of Canada (RY-T) if he was going to do some. He would rather do it with an ETF with a basket of banks. It is simpler for clients to understand.

Cannabis stocks, should sell them? Why did you buy them? Marijuana stocks don’t have any earnings, you don’t know what the regulatory environment is going to be. He wouldn’t buy them for now.

Are Canadian income ETFs going to be vulnerable to interest rates going up? He doesn’t think that the Canadian Market is going to be terribly affected. Because many companies are increasing dividends regularly. You have to be careful which ETF you are choosing.

Would you use an ETF to invest in Emerging Markets? Particularly looking at India, what ETF should I use? In terms of buying an India ETF, he wouldn’t have any problem buying one (BMO has one and iShares, etc.). India is much more transparent that China. In terms of Emerging Markets’ ETF, he will talk about one of them on the Top Picks section.

Market. This pull back started Monday. Hopefully the real low was Monday. Things don’t go up in a straight line. Marijuana and Bitcoin stocks have had increased volatility. The central driving force of this is in the volatility index. There are ETFs that allow you to benefit when volatility goes up. Some strategies required small profits in low volatility. When one part of the bet goes the wrong way they have to sell equities to offset the losses. A lot of this correction was done on machines. 3:10 Monday is when it really kicked in. Currencies and credit and global equities did not sell off much. This is just a ‘corrective process’.

Market Outlook. Lots of adjectives for the market right now. One is exhausting. When you go through fluctuations like this week you want to make a step back and look at the fundamentals. Pick stocks based on that. The market is still pretty sound. Canada is the market that the rally forgot. There are some structural reasons for that particularly in the regulatory environment and taxes. From the valuation perspective though the Canadian market looks good. What is going to change that? Maybe something on the tax front or the regulatory front. The values are here. Maybe it is too early to run full hog into the markets. Less risk from the valuation perspective compared to other markets.

Bonds will face a challenging year. We see higher interest rates of 25-35 bps. The good thing is for the first time in many years where we have the global economy growing at 3% or more, which is great for earnings and the stock market as a whole. The Central Banks, however, are pulling back on their bond purchases. This is healthy from our perspective as we see great fundamentals.

Our thesis is we are seeing “re-flation”, but not inflation. Wage gains are not that pronounced and unemployment rates are very low. At the end of the year we will see positive returns on the bond and equity markets. It won’t be huge.

Canada vs US market. Canada will struggle to compete with US markets. We have high crude oil differentials and the US has tax reform.

Can you suggest a REIT stress test? Firstly, he looks at leverage because if interest rate increase risk. Secondly, if the payout ratio is higher than 85% it is riskier. Residential REITs are safer because they get funded by CMHC. In a credit event, yields move out and they have to fund at a higher rate.

Senior Housing. The senior housing market is difficult to determine, because of vacancy rates. There will be headwinds with minimum wage hikes as it has limited ability to pass rising costs through. Although demographics are improving, people are resisting going into these facilities, which is resulting in high vacancy rates.

Tax treatment on REITs vs dividend. Generally, REITs will offer some return on capital, so it is more tax efficient than dividend income.

Volatility. This week has been a reminder of market volaility. It's normal thought not fun to see 5-10% corrections. It will take time to work out this volatility. Some stocks are still overvalued, while some are bargains. The worst thing is getting upset and selling, then missing on the upside. Take this opportunity to take stock and get back to your appropriate allocation. We've seen a lot of program trading and many traders shorting the VIX which had an effect on the markets.

Robo advisors. Active management is the way to go for most investors, particularly in these times. Robos rely on passove ETFs, so it's hard to pick bottoms and buy individual stocks. For some small investors, robos are not a bad way to start and start saving, because those people don't have the time to study stocks and investments. But in your 40s and 50s you need an advisor to consider taxes and financial planning.