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

Markets. Earnings have been decent, but it needs to go on being strong to propel stocks higher. Third-quarter US earnings have been reported and are almost complete now. They came in better than the expected 5%. Coming in around 8%-9%. Indices are trading above historical averages, so she is not expecting any more multiple expansion to keep markets going higher. They really need that profit growth to keep going up.

Market. For now, earnings are justifying what you are paying for stocks. We are trading at about 20% premium to normalized valuations, but you have to look at the backdrop, and that is fairly friendly to equities. We are in a continuing low interest rate environment, and corporate earnings are very, very strong. As long as that backdrop continues, there is a relative equilibrium from a valuation standpoint. If the Fed follows through with tightening, that is a signal to him that the economy is healthy.

Market. Some energy names may fall victim to tax loss selling. This year the big caps were up on the year but the average is down about 9%. CPG-T, for example went down greatly in 2014 due to tax loss selling. This year the WTI is over $57 and the index is down about 9%. The companies that are down are more into gas. Service stocks are down 47%. These stocks are all going to face tax loss selling. He suggests for tax loss selling, roll over into a different company.

Natural Resources. What is working in natural resource markets isn’t demand creation, but rather supply destruction. The price has been so low for so long that in many industries, producers have deferred sustaining capital investments, so are losing their ability to produce, a very messy process. But what is interesting is that you match up supply and demand with supply destruction, the industry can’t respond to price signals again, because it takes a long time and a lot of money to bring that stuff back online.

Markets.It is very difficult to predict the top of the market. Markets have steadily climbed. There is so much investor fear driven by headlines of "Is this the market top", "Should we be taking money off the table", etc., and the markets continue to grind higher. Since Trump's election, the Dow had gained 28.5%, the biggest one-year rally since FDR was re-elected in 1945. We still have relatively low growth, versus historical expansionary periods, and valuations are at highs. It is important to have a portfolio focused to high conviction, reducing the number of stocks, and able to target different parts of the market actively, as opposed to the broader market. Markets are now focused on the tax plan and what comes out of that.

Market. Has a top-down process where he is always trying to figure out whether he is offense or defence. Came into the year on offense, and moved into defence late spring/early summer. Recently a lot of his technical indicators have improved again, so has moved the portfolios back to offense around the beginning of September, and went from having a fairly high cash position to being fully invested. One indicator is "sentiment" which is hitting highs. Sentiment is a contrarian indicator, so he is always watching this. When it gets pushed to extremes, either to the downside or the upside, it tends to be a signal. You can't really time off of it, so you can't time a portfolio and decide now is the time to go to cash. However, it can be an alarm or a warning that there could be a bit of a pullback in the future.

Market.She is more constructive on the US market as there will be benefits to be had out of tax reform. That affects Canadian companies doing business in the US. When you talk to strategists and people who spend all their time deciding on where we are in the cycle and what is going to happen next, they say it has been such a different cycle that you can't anticipate what is going to happen next. In both Canada and the US, minimum wage increases will affect companies that are already struggling. That is going to exasperate how poorly it should continue to be doing next year.

Shorting stocks, and relative weighting of Short versus Long?It depends on the market. She uses Pair Trades in a market such as the current one, where it is very difficult to get a good Short because the market is obviously very buoyant. In a pairs trade, she has $2 Long for each $1 Short, so that she is net Long. If in a Bear market, she has naked shorts, meaning they are not paired with anything. In a Bull market, such as now, she tries to find stocks that not only have poor fundamentals, but also an ugly balance sheet. It is very difficult to do in a Bull market if you are not religious about looking for companies that are bad and have a really ugly balance sheet. Right now, she has hardly any Shorts, but individual Pair Trades are about 2 to 1.

Market. If you look at the big names in The Paradise Papers, it is like a year ago when a similar list of offshore account holders was released. It should not be surprising to anyone that people with lots of money look to minimize tax burden. When the government starts taking more than 50% in total tax, it is not ‘fair’ anymore and it tells you governments are not efficient and take more than they should. This does not mean much to the markets but the governments are going to have to dodge this one. The issues in Saudi Arabia will have implications for those doing business in that part of the world. If you look at the ETF KSA-N it trades into Saudi Arabia, it is unchanged although there was volatility over the weekend. In 3 to 5 years he feels oil will still be anchored to $50 so he would sell oil.

ETFs started in the early ‘90s. It is rare where the ETF provider is creating an index. Big name indexes bring you a way to do long term holdings. Actively managed ETFs bring you lower costs. Larry is biased toward ETFs for good reasons.

WTI vs. Brent. The quality of oil has changed. Alaska oil is at $63 and WTI is $55. You have delivery costs higher with some sources of oil than others. Since about 2010 since the US started fracking, supply went up and so domestic supply increase in the US force prices down in Europe.

Educational Segment. Volume on ETFs. Consider ZEB-T which is high volume. The underlying stocks each trade way more volume and especially the value. ZJN-T is low volume, about 3k shares a day. The top volume stocks in its holdings trade at quite large volumes in comparison. If an ETF provider creates a unit, it is priced according to what it costs them to go out and buy all the stocks within it. This concept is not well understood by the investing public.

Market. The US market is the best alternative for investment until interest rates rise. Investors are concerned about a bear market or a crash. Although we are seeing some of the highest valuations in a long time, where are investors going to put their money? US fundamentals are still very good. She sees 10.5 earnings growth for this year and 11% next year. There may be some consolidation in some stocks through flattening of valuations to make her feel better about entry points. It’s been a pretty strong earnings season. This was expected to be the worst quarter of the year but we are expecting 7% growth. Tech and Internet have had blow-out earnings. But growth stocks have been the worst this earnings season.

Market.There has been a recovery in the global economy. The European economy has been better than expected. China's growth has been relatively strong. Japan came in much better than expected. Some of the emerging economies are doing much better. The US economy is not that much different than it was prior to the US election. The market has continued to anticipate all the good news and have paid for it in advance. People are more bullish than they have been in 30 years. We are clearly late in the cycle, and he doesn't know how much is left. The market is still rocking and rolling to the upside, and it's hard to get in the way of it.

Investing.We are not too far off from the tax loss selling season, and he is looking for bargains. It is crazy what is going on now, making the number of stocks he can buy severely diminished. There are still some he can cherry pick, and hopefully by some good ones before the end of the year. If the US lowers the tax rate from 35% to 20% for the major corporations, as they say, it makes them more competitive. However, the US debt is about $20 trillion. You can go to the US Debt Clock, throw it on your computer, it is absolutely crazy. The average US taxpayer owes $170,000, and estimates are that the deficit is going to go up over another trillion dollars. What they are doing is great for Donald Trump, his family and his colleagues.