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

Today's sell-off. In late-December, the last time he was on Market Call, he said he was a reluctant bull. Now, he's waiting for even more than a pullback. Many reasons for a strong economy, including great monetary stimulus, but enough is enough. It's priced in. We had a great January and the market's been up the past 23 months. But now it's harder and harder to find good ideas. When he can't find a great idea, he goes, Wait a second... No one can predict a top, but he looks for things like Texas Instruments where they had a good quarter, but the stock still goes down. We're close to a top. Wants to see a pullback.

Crypto and cannabis selling off in tandem this week No real reason for correlated sell-off. Coincidence? Not areas he invests in. Prefers companies with cash flow and return on invested capital.

Market Outlook. Today’s market remembers him to 1987. But hopes not. A lot of non-sense is going on the market, like bitcoin or marihuana stocks Some of that needs to be flushed out of the market. It is good for markets to be shaken up a little every so often. The US market particularly seemed expensive. Interest rates being low can justify higher P/Es. But seem expensive considering this year earnings. There is nothing economically wrong with the system. The US is doing fine, Europe is doing fine. But remember 1987 happened when anything bad happened to the economy.

What is the marijuana stocks bottom? The problem in the space is that there is not a lot of information. Nobody indicated what taxes are going to be and how the distribution is going to operate. Investors like him needs that information. He thinks we haven’t seen the bottom yet. Another thing is that legislation he understands says that each individual can grow up to 3 plants in their backyard, so consumers can supply their needs themselves.

Revenues from Marijuana helping the GDP. The numbers are staggering but he would be cautious. Still the Canadian economy is not doing badly. Exporting lots of lumber to the States. Oil exports are significant. Farming is doing OK. The manufacturing sector is OK. The Canadian Market is lagging the Canadian economy probably due to uncertainties regarding NAFTA and lower prices for oil.

What is the impact of raising interest rates on the price of gold in the short term and intermediate term? Gold is a hedge against inflation. From that standpoint gold is a factor. He doesn’t hold gold. Not convinced that inflation is round around the corner.

Market. The 10 year bond yield is probably the one factor that will drive markets in 2018. As it gets closer and closer to 3%, things start to change with respect to relative valuation of stocks vs. bonds. The two year bond is now higher than the stock yield. Inflation is starting to creep up. 2% inflation and 2.7% bonds (10 year) is not a lot of income. Canada is losing momentum against the US. The US dollar is weak right now. The Canadian / Aussie spread is a much better indication of the relative strength of the CAD$ and it is really just holding in there. Look at energy and at the slowdown in housing in Canada, and the US looks better than Canada. He is looking at the consumer and industrial sectors as well as financials, in the US.

Block Chain. We are at a point in the cycle where psychology is getting more and more important. There comes a point where it becomes psychology and people have a fear of missing out. That is the wrong time to look at names. Fear replaces greed and out they go.

Stock Bubble. We won’t know until it’s over that we were in it. The marijuana stocks are an excellent example of it. More and more people are becoming traders rather than investors. When fear replaces greed it is all about safety. There is a lot of liquidity out there. What happens when money exits the bond market after governments bought so much.

Market Outlook The issues that the Stock Market is facing is the question of where interest rates are going. On the positive side you have good global growth. See analyst upgrading earnings estimates for companies. Good global growth and, if inflation is reasonable, it is a good outlook for stocks. People are concern that if interest rates go up a little from here then the equity market would fall apart. He doesn’t see inflation going to 4% or higher but he thinks it is probably to see inflation and rates ticking up a little from here. We will probably see a pullback this year, that we didn’t see last year, and that would be a good buying opportunity. For Canada he sees better commodity prices driven by global growth, helping the market. He sees pockets of value in financials in the US and pharma side and some utilities with good yields. The S&P500 is trading at higher multiples but analysts are not adjusting their forward earning estimates soon enough.

How can we minimize the impact on a portfolio of rising interest rate? Inflation is bad if it goes to 5 – 6% not at 2.5% Same for interest rates. Rates going to 3.25% doesn’t mean that the stock market collapses. Look for great companies that you would like to invest in and if there is a pull back then you could enter at lower prices. If you have a long-term approach high interest rates and inflation represent an opportunity.

What do you think about emerging markets relative to US to diversify from Canadian Market? Two different markets. With US companies you don’t have to worry about accounting and other issues that you might have in EM. The US is showing great growth in front of it. Tax cuts are making companies more competitive. Emerging markets are more volatile, and you need to have a different view. You probably need to look at an ETF if want to get n emerging markets. He prefers the US because you get the diversification globally with some companies that you recognize the name.

Where the general market is going in the next 12 months If there is a pullback he would be a buyer because fundamentals are strong. In 2008 there was a credit crisis that he doesn’t see as probable now. Stocks can fall but he thinks the economy is going to continue to growth and would be a healthy pullback in a bull market.

Recommend a non-financial dividend paying company BCE (BCE-T) is a great non-financial that pays a good dividend. Or other Telcos and Utilities.

Market. The start of the year tends to be strong for markets everywhere, but in Canada people are putting money into registered funds at this time of year, which tends to lift the market. Usually selling in the 1st or 4th quarter tends to make sense, and buying in the summer tends to be good, because everyone is out of the market and not thinking about putting more money in. Seasonality can be a very big factor. Post April 1 tends to be when you see better prices, and you might want to think about timing your entry.