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

Stock Bubble. We won’t know until it’s over that we were in it. The marijuana stocks are an excellent example of it. More and more people are becoming traders rather than investors. When fear replaces greed it is all about safety. There is a lot of liquidity out there. What happens when money exits the bond market after governments bought so much.

Market Outlook The issues that the Stock Market is facing is the question of where interest rates are going. On the positive side you have good global growth. See analyst upgrading earnings estimates for companies. Good global growth and, if inflation is reasonable, it is a good outlook for stocks. People are concern that if interest rates go up a little from here then the equity market would fall apart. He doesn’t see inflation going to 4% or higher but he thinks it is probably to see inflation and rates ticking up a little from here. We will probably see a pullback this year, that we didn’t see last year, and that would be a good buying opportunity. For Canada he sees better commodity prices driven by global growth, helping the market. He sees pockets of value in financials in the US and pharma side and some utilities with good yields. The S&P500 is trading at higher multiples but analysts are not adjusting their forward earning estimates soon enough.

How can we minimize the impact on a portfolio of rising interest rate? Inflation is bad if it goes to 5 – 6% not at 2.5% Same for interest rates. Rates going to 3.25% doesn’t mean that the stock market collapses. Look for great companies that you would like to invest in and if there is a pull back then you could enter at lower prices. If you have a long-term approach high interest rates and inflation represent an opportunity.

What do you think about emerging markets relative to US to diversify from Canadian Market? Two different markets. With US companies you don’t have to worry about accounting and other issues that you might have in EM. The US is showing great growth in front of it. Tax cuts are making companies more competitive. Emerging markets are more volatile, and you need to have a different view. You probably need to look at an ETF if want to get n emerging markets. He prefers the US because you get the diversification globally with some companies that you recognize the name.

Where the general market is going in the next 12 months If there is a pullback he would be a buyer because fundamentals are strong. In 2008 there was a credit crisis that he doesn’t see as probable now. Stocks can fall but he thinks the economy is going to continue to growth and would be a healthy pullback in a bull market.

Recommend a non-financial dividend paying company BCE (BCE-T) is a great non-financial that pays a good dividend. Or other Telcos and Utilities.

Market. The start of the year tends to be strong for markets everywhere, but in Canada people are putting money into registered funds at this time of year, which tends to lift the market. Usually selling in the 1st or 4th quarter tends to make sense, and buying in the summer tends to be good, because everyone is out of the market and not thinking about putting more money in. Seasonality can be a very big factor. Post April 1 tends to be when you see better prices, and you might want to think about timing your entry.

Market. This market is not playing that well into Canada's strength. Sectors like industrials and technology are really on a rip in the US. The Canadian market has been left a little behind. He’s been bullish since Feb 2016, and continues to be long term bullish. We’ve just finished 2 of what is likely to be 3 good years before we get the next big correction. In a very short run, we’ve become a little extended. He is not making major changes in his portfolios, but it would be very easy to see the S&P pull back 5%, which would just take us back to the 50-day moving average. Some of his short term work shows the market needs to consolidate a little. However, there are some very clear themes in this market, and thinks the year is going to finish considerably higher than where we are now. If we were to get a pullback, that would be an opportunity to be a buyer for those who are under-invested. Since the early part of 2016, the themes that have led this market are sectors that benefit structurally from reflation in the world's economies. We’ve lived with very low inflation for a very long time, so people over-owned things that act like bonds. However, in April-May 2016 financials, industrials, technology, and in the last year basic materials, really joined in this rally. We have almost historic low correlations between haves sectors and have-not sectors. It’s the best market you could have as an active investor who really targets the long-term structural themes.

US$? This has been weakening versus world currencies. Believes we are in the 3rd year of a three-year strong cyclical rally in stocks, and probably have 12 months of strength in front of us. It’s being driven by an improving global economy. Given where we are in that cycle, you tend to expect cyclical stocks to outperform at this point. Economic data continues to look good, material prices continue to look strong, global growth is resurgent, so he thinks the Cdn$ can continue to firm up.

Regional US banks? The big multinational banks have been doing very, very well. Regional banks are really coming on. In a lot of cases, you are getting exposure to small and midsize commercial ventures. Depending on the geography, you might get a pretty good lift. Regional banks tend to do well with rising interest rates. You could buy the SPDR S&P Regional Bank ETF (KRE-N). He likes the regional bank Comerica (CMA-N).

T.I.P.S.? Inflation protected bonds will see the rate go higher as rates go higher. It has a floating rate that is tied to the inflation rate. It is going to do better than a fixed rate bond in the event that rates and inflation go higher, which he believes is likely to continue. If he had to own something in the bond market, he would either own a high-quality corporate bond with a short duration of 2-3 years, or something like T.I.P.S. that would benefit in rising rates.

Canadian lumber? NAFTA and trade issues are risks. You’ve got 9 million millennials in the US starting to move out of their parents' basements. The home building industry is performing really well, and when there is strong demand, they will pay the higher price for Canadian lumber, whether there is a tariff or not. He wouldn't shy away from the sector. You might consider investing through the ETF Guggenheim Timber (CUT-N), which gives you a basket of US lumber companies. A great way to make not too big a bet, as there are some packaging materials in there as well.

Junk bonds? High-yield bonds. A lot of people are in them because the yields are higher. There is higher risk. Within the last 3 years, the extra return investor is getting for taking that additional credit risk has become narrower and narrower as we become more and more confident. He doesn't have any high-yield exposure at this point. He is bearish bonds, and is Short the bond market.

Market. US bond yields are hitting a 4 year high, which is somewhat bearish for stocks. If everything did well when rates were going down and rates were low, what happens when rates rise and yields go up? It makes borrowing more expensive, buying back shares more expensive and consumers have to pay more. Also, when the risk-free rate rises, it means you need to earn more money on other more riskier assets in order to justify holding them. For the first time since 2006, the dividend yield on the S&P 500 is now lower than the yield on 2-year treasuries. The federal reserve is forecasting 3 rate increases in 2018, 2 more in 2019. If that happens, that brings the short-term rate back to 3%, implying that 10-year bonds yield at least 4%, which is more in line with long-term averages.

Low risk, high-yield dividend fund? Buying stocks just for yield doesn’t make sense. In a rising rate environment, a lot of high dividend mutual funds own a lot of low growth businesses that are interest rate sensitive, that will do poorly if interest rates keep going up. He would not buy one. If someone wants income, they should own fixed income and buy a high yield Bond fund, where you are getting interest income, but those bonds will have maturity dates, and you will be less susceptible to rising interest rates.