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

Consumer Staples or Discretionary? He prefers staples, we’re seeing some sign of distress in the discretionary sector, particularly, retail is struggling right now not knowing what impacts the technological changes happening in the sector are going to have. You’re less vulnerable with consumer staples, although they have their own problems, notably, wage increases coming in in Ontario and other provinces.

Market. From a PE multiple the stock market is at its highest since we have seen since from the last 5, 10, 15, and even 20-year periods. Relative to where interest rates are, where inflation is, where bond yields are, where else are you going to go? We are definitely in a healthier situation than in 2006 from the banks standpoint, and we don’t have a housing bubble, so the underlying macro environment looks pretty good. Historically, relative to interest rates and inflation, stock still look to be attractive.

How to be positioned if US tax reform goes through or not? The chatter is getting louder. Maybe they don’t pass the entire reform they want, but there are some easy things they can do. It is no secret that between technology and health care, there are trillions of dollars in cash sitting offshore, that if repatriated to the US would get hit with a 35% corporate tax rate. If there is some reform, that is low hanging fruit where cash can be returned to shareholders in the US in a very easy way. That would help tech and healthcare. The other big issue is, what is going to be the corporate tax rate. Coming into the year, stocks rallied hard on the prospects of a lower corporate tax rate. Some investors and analysts are baking in a 15% corporate tax rate, while others said 20%-25%. Doesn’t think there is going to be a massive market selloff if it doesn’t happen. Either way, you should have a diversified portfolio with some bonds in your portfolio. If there is some unforeseen event, you need that to protect your downside.

Bitcoin?A very interesting speculation, that he won’t touch with a barge pole. Thinks a lot of speculative interest that was in gold, has caused the interest to pour into Bitcoin. Gold is the only currency that is no one else’s obligation. If looking for insurance against disaster, holding some gold bullion makes sense. He is not doing it presently because so much of it is priced in.

Market. He expects a big week in earnings. FNG-N has all the FANG stocks that are reporting this week. You had a pretty big run up and then some weakness. His gut feel is that we should get a bit of a sell-the-news action. He likes the idea of diversification and this is a very niche ETF. He feels the FED will continue to step on the breaks and try to raise interest rates. The ECB is doing the same thing. It will be a challenge over the next year. It is the beginning of the unwind for them. He does not have a strong feeling to sell Europe at present, though.

The long term implication of an inverted yield curve. Prior to every recession we ever had we saw an inverted yield curve. It forecasts a recession well out from the present. We should get a bounce short term in the curve but longer term we should get an inversion.

Sleep at night portfolios (mutual finds Larry manages for BMO). Some combination of the three will fit most people’s portfolios. The global dividend fund is suitable for most people. The global balanced fund is currently yielding about 4%. All three manage risk when it comes up.

Educational Segment. Seasonality. The seasonal pattern has not worked this year (Sell in May and Go Away). There was no market correction in Sept./Oct. Since we did not get a correction you might say we will not get much of a seasonal impact for the rest of the year. He looked into history and over 30 years in years where we did not get that seasonal correction, the market just continued up and the seasonality in November December is even stronger, although sometimes the correction is just later in the year. Seasonality is just one factor to incorporate into your investing decisions.

Market. It is interesting times we are in. Investors may be missing the big news out of Asia. The media is focused on Washington. There have been important things longer term out of Asia. The PM in Japan was reelected and is now the longest serving PM in decades. He will get their economy back on its feet. The Chinese communist parties had their semi decade get together and laid out their next 50 years’ plans. It affects people worldwide. They are growing at 6.8% when everyone said they were done two years ago. It is important to look at what is going on in the number 2 economy in the world. China needs to cut commodity production due to pollution generation.

Economy.Government, corporate, nonfinancial and consumer debt has been rising as a percentage of global GDP. Even after years of austerity programs, we are in a situation where the global debt level has been rising, and suddenly we are at an inflection point where interest rates are starting to pick up. This is going to have an impact globally. Bond yields are starting to rise around the world. Central Banks are not raising rates in Europe or Japan anytime soon, but we are starting to see a bit of an uptick in bond yields, which is going to impact over time on mortgage borrowers and government bond issuers. Everyone is going to be following the Fed and the Bank of Canada, and there is the usual lag, so he figures that in the next 24 months we are going to start seeing rates coming up in other parts of the world. In a rising rate environment, you want to avoid some of the overvalued sectors, specifically pipelines and utilities. Investors have been buying those and driving up valuations on companies that have minimal growth. They are buying them for the dividend yield. You want to be in really strong undervalued companies, and not just riding yesterday’s winners.

A high dividend paying stock? Buying the stock just because it pays a high dividend is not a good reason. In a rising rate environment, those dividends become less attractive. When you buy a stock, buy a company because you think the stock is undervalued. He likes the Cdn insurance companies because you are going to have a rising dividend over time. (See Top Picks.)

Buy US$ now or wait a month or 2?Has never met anyone in the investment business who has predicted correctly the direction of the Cdn$ versus the US$. If you have to buy US$, either buy it all now because the Cdn$ has rallied, or buy half a position, but don’t try to think you will be able to guess the direction. That always comes back to bite people.

Market. Usually, from about Nov 15 to the end of the year the market does well. From here to Nov 15, it is usually flat and then up into the year end, so maybe there won’t be any correction until early next year. Surprised energy is not doing better with oil prices of $51-$52. Stocks had a nice run when oil initially pushed through $50, but it hasn’t really followed through, even though it has tried a couple of times. Fears of a bubble in Canadian real property has kind of dissipated. In the banks, the quarter was up about 9%, dividend increases were still there, and we now have reasonable returns, so it’s a nice place to hide.

Black Swan? By definition, an upcoming recession is probably not a Black Swan. Usually there is so much debt that you get out on a limb. Other than real estate, we don’t seem to have any thing else that feels like a bubble. We have an expensive market, but we don’t have an inverted yield curve or anything coming, except the pace of higher rates. If there is some danger of the Fed tightening too quickly and tip us over into a recession, that would be 2 years from now, so the earliest risk would be 2019.

Market.We are now starting to get economic data that suggests the consumer is not quite as robust as they once were. Today the August retail sales report came out, which is consumer spending. It fell .3% after a .4% gain in July, and excludes cars and auto parts, which are more volatile, so we are looking at core consumer spending, which actually fell .7%. In July it was up .2%. The economy is taking a sharp turn for the worst. The economy has been carried by the consumer and the housing market for a long time. You would want to have a moderate housing correction, and hopefully energy exports can pick up. Maybe crude oil prices are stabilizing which would help. Our exports have been falling for 3 months in a row, and in those 3 months, we lost 10% of our exports. That is due to a very strong Cdn$ due to the 2 rapid rate hikes. Taking back the emergency rate cuts is totally justifiable, but doing that in a hurry will have a larger than expected impact. Element of surprise has always been the strongest tool in the Central Banks toolbox. He can’t see any reason for them to raise rates further.