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

Market. The average investor has a 30 year time frame. We have not had a correction in a very long time but if you are worried about it and you have a long timeframe, you don’t have to worry about it.

Central Banks.They are forward-looking, so monetary policy to some extent is forward-looking, considering that a lot of Central Banks in the US have hiked rates 3 times since Trump won the presidency. In Canada, the Bank of Canada has hiked rates twice, so we are forward-looking, because inflation isn’t quite at the target a lot of these Central Banks are targeting, which is 2% or below. They think the slack is eventually going to get absorbed and eventually move back up to 2%. Having fixed income in a portfolio is important, because it will act as a ballast and give you an opportunity to redeploy capital when an opportunity presents itself. As long as we have decent credit growth and decent economic growth, it bodes well for owning equities, corporate profits and earnings.

American Mortgage REITs?Typically very highly leveraged, which is one of the reasons he doesn’t own them. The perverse part about what is happening to rates is that the short end has gone up and the long end actually hasn’t. Where you want to start to get worried is when rates move up too quickly, which puts more of a dent in home ownership in the US.

Market. The 10-year chart for the S&P 500 is a thing of beauty. Trading at record levels. If looking at PEs vs estimates, there are people who will point out that the PE multiples have been moving higher, so prices are higher. Last quarter, 55% of companies beat the estimates, so estimates are too low. That has been rising. PE multiples that people are looking at are probably making stocks look more expensive than they are. Secondly, we are in an extremely low interest rate environment, and PEs can be higher. We are in a secular bull market for equities. It didn’t start until 2013. When you took out the highs from the last bull market in 2000, that was the 1^st year of multiple expansion, and multiples have been expanding since. There will be corrections, but expects equities between 2013 and 2023 are probably in the teens from a return standpoint. The volatility we have been seeing, that everyone is saying is so low, is virtually identical to the early 90s and identical to the early 50s. Both were in secular bull markets. We will see a good-sized correction out there somewhere, but none of his work points to any of the things that would be happening if it were coming up soon. As long as the percentage of stocks performing well are expanding, there is no bear market or correction that has ever taken place while that is happening. The most important thing in the way a market is behaving, is how it reacts to news. For example, there have been lots of big news items last year and the market hasn’t cared.

Stop losses? He uses point and figure price charts, which mark out the orderly progress of either higher highs and higher lows, or lower lows and lower highs. He would encourage you to get a book on this. A very good one would be Tom Dorsey on point and figure charting. In the absence of that, for a longer-term investor, you could use a 150-day moving average. It is amazing how often a stock pulls back and then reverses higher at their 150-day moving average. If a stock dipped below this on heavy volume, that would be a good reason to become a seller.

Good stock or ETF for medical devices? He likes the area as a sector. If you check out iShares DJ Medical Devices ETF (IHI-N), it had a wonderful rally through 2016 into July 2017. Since then it has consolidated sideways, and is within a whisper of breaking out to a new high. The group is a little more economically sensitive than big Pharma, because more of these things are paid for by people who have more confidence to buy. You could also look at Stryker (SYK-N), which he owns, which manufactures hips and knees.

Market. The TSX has come roaring to life post labour day. Patience and diversification paid off. Stocks don’t go up in a straight line. Last year Canada was the star and this year, US stocks were the top of the leader board. He has mainly balanced portfolios. The round number fixation on 23k will get fixated on and this is nothing unexpected. It is probably not a reason to be nervous right now. Don’t try to pinpoint the top or bottom of a market but maintain a balanced portfolio. Fixed income has been sobering. The main benchmark index has been negative two quarters in a row. It is important for investors to realize that rising interest rates may dampen capital value of bonds, but it means when they renew, there are higher interest rates. The do have a place in a portfolio.

Utilities. He is not particularly favourable on utilities right now because we are in a rising interest rate environment. Utilities tend to suffer multiple compression in that kind of environment as they are a bond proxy.

Canadian Dollar vs. US Dollar. He won’t forecast the near term trend on the exchange rate. To protect a portfolio against a rising dollar is to run a balanced portfolio of Canadian and US equities as well as fixed income. If you are only considering Canadian companies than buy those that generate the majority of their revenue in the US. If you think the US dollar is going higher you want to underweight Gold and gold equities.

Market. The current fair value for the S&P 500 is north of $3045, which is 19% higher than it is right now. The US market is substantially undervalued. He does his calculation every year by taking the estimated earnings, adding them to the balance sheet and grow it out a year. Next year is $3500. It’s no wonder the market is making new highs because, Fair Value is substantially higher than where the market is trading. Fair Value is his own algorithm. Since the financial crisis of 2007/2008, the market fell a lot more than people thought, in terms of fundamentals. It’s been 10 years and we are finally emerging out of financial repression. Interest rates are now starting to go up, which is a positive for equities.

A junior lithium producer?There are lots of them and it is very difficult to single out just one. The juniors don’t seem to be getting going. There are no problems with the ones that started early. Lithium is very difficult. It is high cost if it’s from hard rock, but easier to run, which takes you to the Australians, so Galaxy (?) which you may be able to buy there, but is not sure, is an interesting one. There is a lithium ETF, Global X Lithium & Battery Technology (LIT-N).

Blockchain?The problem is, you can’t buy it in stock. Believes you can buy the coins, but doesn’t totally understand the process. This has certain merits, which appears to exceed Bitcoin, but it is still tiny compared with Bitcoin.

Market. US earnings are starting on a so-so footing. The banks started off and given the low volatility of the market, trading volumes were lower than expected. Revenue growth year over year was not as great as expected so markets were soft. Banks’ profitability is based on the yield curve and so he does not get excited about the rising interest rate environment because the yield curve is getting flattened. If you add three more rate hikes, by Q3, we get an inverted yield curve and that predicts recession in 2019. He does not want to chase markets higher. Defense is called for. We are in the worse seasonal period of the year and yet markets have gone higher. Mid to end of October is historically the worst part of this. He is waiting for today’s unveiling of the new income tax changes in Canada.

Currency. If people sell the dollar, where is the other side of that trade? The Canadian dollar is not big enough for the sale of US dollars. The Euro can’t be because the Euro will break up soon. The Japanese Yen is a possibility and he does not think we will see a flight to Chinese Yuan. Don’t worry about the dollar. It is not going anywhere any time soon.

Educational Segment. Richard Thaler won a Nobel price. He is the best behavioral economist. He spends a lot of time trying to get through to viewers and teach them how to make a better investment decision. Richard is best known for the endowment effect where you value something overly when you already own. You are reluctant to sell it below what you bought it at. Even utility bills are giving you little nudges to help you make better decisions in the use of your energy.