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

Educational Segment. (weekly series) What Investor Personality Are You?: 2. The Preserver / Conservative. They have typically done well in their business or career and have always been conservative. As they get older they get TOO conservative. They tend to have more fixed income. Over the last 30 years they would get 6-7% returns. Over the next 10 years you are looking at a return of 2.5% before fees with higher risk. He does not think you can re-think what kind of investor you are.

Move mutual funds to a Canadian Bank ETFs? It is not a good idea to concentrate your portfolio into one sector. You should be globally diversified also. ZWU-T gives you utilities and telcos. It is 20% global.

Oil a year from now. It will bottom late in the year and then the question is what the weather will be like. If we had a cold winter the price of oil can react quite quickly to the upside, as well as Nat Gas. He thinks tax loss this year will be severe. Then we get $60 oil by Q3 and $80 in 2020 (WTI). You would need a major disruption of supply for oil to go higher. He thinks he will make November buy recommendations.

Big Oil Companies and Electric Cars. We need electric cars because we cannot find enough oil otherwise. Oil will still be used in trucking, rail and so on. We need a third of the vehicles on the road to be electric. They are not a competitive threat.

Markets. The case for the bulls: (1) The EIA said in the second quarter demand was stronger than expected; (2) OPEC wants to extend the 1.2 Million barrel a day cut past the end of Q1; (3) The Hurricane has impacted US supply; (4) US production has been flat for 5 months. But then if you go into the data, he is bearish because of OPEC numbers. They put in their quota in Q1 2017 as 32.1 Million barrels. Lybia had a disruption earlier but now have 300,000 more coming on by year end. Nigeria raised production by 138,000 and are talking about going much higher by year end. The OPEC numbers are just talk. We are looking at less demand for oil in North America going into the fall. Numbers should go up seasonally. Stocks usually bottom in mid November into December. He is looking at what happened in ’06 and ’08 to oil and/or oil services stocks. He suggests that you let the first 10% go to make sure oil stocks are really going up. He sees a $42 oil price in October and perhaps going down to the $30s later in the year due to inventory builds.

Market. This is the 3^rd largest bull market in history. We would be silly not to have a little cause for concern, given how long this bull market has been going on. He keeps a close eye on the yield curve, and an inverted yield curve has been a very good indicator of an impending recession. The inversion of the yield curve generally leads the recession by about 12 months. Based on his math, we are probably about 3-4 rate rises away from that happening, which in itself would probably take about one year. With that, we are probably 18-24 months away from the next recession, and he is cautiously optimistic as the equity markets seem to be quite strong lately. He is seeing short term rates rising more quickly than the 10 or 30-year, an indication of a much larger macro environment where growth is really slow. We are not seeing that in Canada in the short term, but there is a whole slew of reasons why world macro growth is likely to keep trending lower. In that environment, 10-year and 30-year rates will drop. Warren Buffett has suggested that if we are in a lower for longer interest rate environment, he believes markets are cheap, and has been putting cash to work in the market, which is really at odds with him being a value kind of guy.

Energy. It feels like we are pretty close to a time of maximum despair in energy stocks. They’re under owned and people just don’t want to touch them. There have been many false starts this year, but this week is the first time in a very long time where things are starting to feel better. Not only do we have the combination of a few different agencies asserting their bullish thesis on oil that the market is tightening, but OECD surplus inventories have fallen by about 44%. We’ve had cuts in US growth rates and evidence of plateauing in US production in the past 5 months. This is an area that is massively undervalued, stocks are trading at half of their historical multiples and good fundamentals that are now improving, and there are now people starting to recognize that.

Market. The Canadian economy has had a good first half, certainly leading the G8 in terms of GDP growth. That ultimately translates into earnings for companies. In the US, Q2 was very strong, but he expects a little softening in Q3 because of hurricanes, but balancing in Q4 and Q1 of next year. Canada will benefit from those tailwinds as well as organic growth. Thinks we can expect better things from base metals and oil. We have seen the bottoming out for something like base metals, which has been the best return in the resource space, led by things like copper, zinc, iron ore and met coal. We can build on that. Sees better things for oil into 2018. Conditions have stabilized for things like oil, which is a big driver for Canada. We can build from that base as global GDP continues to improve.

Gold has already passed over $1350, but resource stocks haven’t shown good performance. Why? Last year there was a good break out where gold stocks outperformed the price of gold. This year gold is up about 15% year to date, versus the global gold index which is up about 7%. Some of that he would attribute to just the nature of the move in gold. A little more concern in the world has created some move into the price of gold. Believes part of this has to do with if the market believes in the sustainability of the gold prices north of $1300. He is more focused on what companies are doing, and not worried about the price of gold. Eventually, if the market sees discipline continue, equities will outperform the underlying commodity on a more sustainable basis.

Market. He is not so much into single drug companies that are into single home runs. He likes diversified healthcare companies. Companies have not traded at a discount to the markets since ’08. Companies are chugging forward and improving. We are seeing a pinnacle coming of the $billions in spending of R&D and we will see the benefit for the next couple of years. 3 to 5 years out we are past the patent cliffs of the past. He follows some of the healthcare REIT large caps in the US and few of the smaller in Canada.

Economy. Economic indicators have been streaming fairly strong through the last 18 months or so, and he can see them strengthening here. He likes to watch the City Economic Surprise Index. It tends to move in waves which are probably 6 to 9 months long. We are about 3 months into the up wave, so we have about another 6 months to go to see what happens on the down wave. Has moved to a defence positioning back in March, based on a lot of the market technical indicators. Lately, he started seeing some of the shorter and leading indicators starting to improve. This is probably around sector rotation as well as relative valuation between Canada and the US. He was about 40% cash 6 weeks ago, and is now about 25% cash.

Market. There are some risks in the market right now, but they have been building for some time. We’ve had a long run of good markets without any significant pullback. No one ever knows where or when or why it is going to happen. You watch valuations and things begin to look a little more expensive, and it is harder to find things you are comfortable buying. Over the last 6-8 months, he has been a net seller as opposed to a buyer. Cash positions are building a little. It is probably prudent at this time in the cycle to have some cash on the sidelines in case you do see some sort of significant pullback, whether it is set off by a geopolitical event, an economic event.

An ETF of Canadian large caps with a proven track record and growing dividends for an RESP? With a managed ETF, you are going to get a little more diversification. You could also do this by selecting a couple of sector ETF’s, and putting them together as sort of a complement. He would tend to do this with 2 or 3 different ETF’s, such as some that are exposed to Canadian financials, and then buying one that is partially exposed to some energy, and partially to some industrial.

Market. The Canadian economy roared ahead of 4.5% growth in the 2^nd quarter, the TSX is not participating in the global rally. By the end of the year, Canada should probably flip, and outperform a little against the US and its global peers. Global demand has reached an all-time high for energy demand for oil. We are getting close to 100 million barrels a day which is somewhat positive. The numbers for most banks were stellar despite the low interest rate environment. There is a big sale going on in the utility spaces and energy-like yield spaces, and that has to be revalued. A lot of those types of businesses, which are actually incredibly stable, are sitting at 6%-7% yields, but you have 10-year bond yields at 2%. All boats will probably lift as long as we have synchronization of global growth.

Split $300,000 into 3 diversified dividend holdings with at least 4%+? Utilities are on sale, so you would have to take one third and buy a utility or an energy name such as Inter-pipeline (IPL-T) which gives you a 6%-7% yield. If you literally gave no valuation to the natural gas and liquids business, the payout is very conservative and you get 6%-7% guaranteed. His 2^nd choice would be banks which is giving you a 4% yield. There is a case to be made on REITs because of the ultimate yields, but you are probably not going to get any more capital gains out of it.