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

Educational Segment. Financial Literacy – Robotic Advisors. Currently, the human advisor has to talk to the client and get to know them. They propose solutions, implement them and then constantly monitor and adjust strategy. Robotic advising services bring costs down. The first step is best done with a human. You need a trusted goto person. It is hard to trust something you can’t look in the eyes. The constant monitoring is best for the computers but explaining complex concepts or guiding the investor through difficult times still requires an advisor. The advisor industry will be disrupted over the next decade by robot advisors.

Market. Small, mid and large caps are currently bullish according to fund flows. The S&P was up 7 consecutive months to the end of October. The market typically does better than average over 3, 6 and 9 months beyond when this happens. The fundamentals don’t support the valuations so much and valuations are stretched. Most Canadians should be more North American based, but most have too much in Canada. He only has 5% of portfolios overseas. We need to be cognizant that there will be a pull back at some point. Investors should be building more defensive portfolios as interest rates rise. You may want to own pipelines and utilities.

S&P-500 Price Target for a correction to follow and to what magnitude will a correction be. He can’t predict where the market is going. 5% corrections happen typically every 7 months, 10% every two years and more every 4 years. We have not had a 5% correction since January of last year. We are overdue, yet when you have 7 months in a row of increases, it tends to continue up for 3 to 9 months. Instead of the market calling off, it could go sideways for 3-5 years as earnings catch up.

Canadian Banks. Because of the 2016 run-up, he thought they would take a breather but they did not. They are near the high end of their valuations. He thinks they will fluctuate up and down 5% for the next few years. They have distinguished themselves in terms of exposure. If he could only buy one, it would be RY-T.

Market. The market is expensive, but the most important thing when you are a long-term investor is interest rates. You have to think about what you can invest in with your long-term capital. Should it be real estate, GICs, Bitcoin, etc.? You look at the cash flows to determine what your best option is to deliver the best returns over the long run. He tends to be conservative, so for his clients he sticks to stocks and bonds. Bonds are guaranteeing 2.5% at most over the next 5 years, so it is not the best alternative. If rates stay low for the next 10 years, you’ll kick yourself for not owning stocks. He expects to see record corporate profits in 2017, and in 2018 the market is expecting good corporate profits. If so that would help justify the market valuations. The PE ratios on the S&P 500 are higher than they’ve been in a long time, but are nowhere near as high as they were in the late 90s and early 2000. To see what is going to happen in the future, you have to use comparative analysis. Central banks want an improving economy, but their mandates are to fight inflation. We have no inflation, and thinks that part of the blame has to do with Amazon (AMZN-Q). When Amazon says it is going to cut prices, everybody has to follow suit. Amazon doesn’t care about profits, they care about benefiting the consumer, which means lower prices.

Market. Going into the year, he underestimated the potential for equities to advance. Was too bearish, so too cautious. The US economy continues to surprise him to the upside. Europe appears to be improving. Financials conditions are still at record easy levels. The Chinese appear to be orchestrating a soft landing. It’s sort of a Goldilocks scenario that he hadn’t thought was going to play out. We are in a weird space, where it feels like you are going to need an endogenous event to knock the stocks off their perch.

Market. It is fascinating what has gone on. If someone had said at the beginning of the year that the market was going to do what it has done, most people would have said that it was unrealistic. The American market in particular, but now the Canadian market too has caught fire. It’s fascinating to watch, but it makes it much harder for him as a contrarian, to find value stocks he can buy during this tax loss season. Hopefully he can find some that he can cherry pick towards the end of the year.

Screening Criteria? He likes stocks that have been in business more than 10 years, that should be trading at $10 or less, with little or no debt on the balance sheet. Also, the stock has to be down 33% in the past year. He likes trading towards the low end of a 10-year range. Wants at least a 100% upside, often 200%, 300%, 400%, based on what the stock price has been in the past. Likes to know that management can do what they say they are going to do. Insider buying is something else he likes. If the sector is out of play, that is worth one of his points.

Oil and gas? He doesn’t think this is very contrarian now. A lot of companies haven’t come back, and some have come back a fair distance. You can look at a number of companies that have been so-called survivors. Because they’ve survived this long, that increases the potential of them surviving into the future. There are still some that will go under, but thinks they have seen the worst of it. Definitely a sector worth looking at.

Market. Every year he wonders if we will plateau in ETF inflows or will we break records and it looks like we are headed to break records again this year. There are about 640 ETFs in Canada now. There are more to come including actively managed ones. We have a friendlier regulatory environment for actively managed ETFs in Canada. It is more like mutual funds. The Canadian ETF market has more headroom to grow than the US. The whole world comes to the US ETF market to invest. Many Canadian investors have a home bias. Equal weighting is a good way to get a sector weight exposure.

US$ Investments in Telecoms. Today’s telecom is not like your granddaddies telecom. They could then deliver stable dividends and returns. There will be a lot of shifts to that classification. Over the next year there will be a shakeup in how telecom stocks are classified. A lot of social networking companies will come into the space. It is an interesting investment theme but he wants to take a wait and see approach. You will get currency risk in US investment accounts.

Canadian listed ETF to US counterpart. Taxes, fees and so on all play a part. US ETFs are often cheaper. Currency is a major factor and in a Canadian ETF you may have the option of a hedged ETF.

Market. The US economic data has been pretty good until recently when there was another downturn in capital spending. Canada is a completely different story with the 2 surprise back to back rate hikes. We are just beginning to see the full impact of those 2 rate hikes. On the July 11 rate hike, there was an expected 1% increase in retail sales for September, but it came in only at 0.1%. The 2^nd hike was on Sept 6, which will start to bear the brunt of the 2 rate hikes. We lost more than 10% in exports for 4 months in a row. He can’t wait to see the rest of the September numbers, and October could be even worse. We might have a little reprieve, because the Cdn$ had turned weaker by October. The Federal Reserve wants to raise rates, and are switching back to rule-based monetary policy. Because inflation is so low, there is still an argument that there is no need to raise rates quickly. The bull market is still very much intact.

Gold? Chart shows a saucer formation with lower highs and lower lows in 2015, but it has now turned around. More interestingly, during 2016 and 2017, the federal reserve has been raising interest rates, and the US$ has been relatively strong. During periods of stronger US$s, gold mathematically should go down, but it is going up indicating that there is organic inherent strength in gold. He thinks it is going higher, but don’t chase it. Be patient and try to buy the dips. When you are buying gold, you are also buying the US$.

Market. The TSX 10-year chart shows it breaking into highs which were reached before the financial crisis, which is pretty sad. The TSX index is the worst major Index in the world. It is dominated by resource and financials. Normally, a country’s stock index should reflect the economy of a country. Because so many of our large companies are foreign owned or privately owned, ours does not reflect that at all. In the US and in most countries, their main index better reflects their economies. He would never own a Canadian Index product. Most indexes are market cap weighted, so that as a stock goes up in value its percentage in that index keeps going up. There is an index you can buy called an equal weight index, where all stocks are weighted equally. It better reflects what is really going on in markets.