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

Markets. The broader market is expecting another increase in interest rates from the BOC. There could be more in 2018. Rates going up will hurt dividend paying stocks short term, but long term they will adjust. In certain sectors there is overvaluation and the US market is fully valued at present. In Canada two of the biggest sectors have not done well. The banks should do fairly well because they should get their margins up. Insurance companies should do well in a higher rate environment. Pressure will be put on utilities and pipelines, but only short term as long term they get it back through inflation adjustment as that is the way they are paid.

Markets. Trump still has a twitter account and the economic agenda is not moving forward still. If there is a time you are not worried, then you should sell everything. What will scare people, are surprise interest rate rises and that is probably not going to happen. Corporate earnings are doing okay. Canada is doing okay. You never know when inflation is going to show up. Metal prices are doing quite well. There are some bets being made for future inflation. We are just not quite there yet. The TSX really needs to pick up speed. It has been a loser this year. He says to forget the TSX and just have a lot of sector representation. Don’t ignore the sectors that are doing poorly.

Markets. It is impossible to say if you are at a peak in the markets. We are at a low in unemployment in the US. There are still a lot of people who CAN come back to the labour force and that is keeping a lid on inflation. There is less inflation than the Fed could wish for. Wage inflation is not driving inflation. Maybe the Fed is not going to raise rates so far and so fast as people thought earlier. Bonds are not a great place to hide out. The PE ratio is just the inverse of an interest rate. He can’t get 4.5% on any bond. As long as interest rates stay low then he is not scared of stocks. It has been a tough year for Canadians – either the CAD$ going up or the TSX dropping.

US Banks. (Market Call Minute) JPM & GS are ones he likes. WFC-N is fine if you don’t think there are any more skeletons in the closet.

Canadian Dollar. (Market Call Minute) It is probably fully valued. It went up 10% in a short period of time and he thinks it will go back to $0.76 by year end.

Markets. We are not expecting to get a statement on central banks unwinding quantitative easing, but rather tightening. We are expecting to hear, however, how they are planning to unwind their balance sheets in the future. The markets are starting to respond to some of these negatives. Japan has a deeply struggling economy. They are buying equities and bonds. He thinks we are heading down the path of what Japan has had to do. This is playing out over decades. It has to do with the aging demographic. Bannon out of the Whitehouse: he was the worst part of the election process. It bought all the worst to the surface including hate. He is not sure it will fix anything, but it is a step in the right direction.

Smart ETFs. In the BMO world they have two niche areas. (1) Low volatility, low beta. (2) A couple of years they got into the quality factor space. When you pay a fee you expect them to pick the best quality companies.

Markets. He is still waiting for the inevitable correction. At some point stocks have to fall. He cannot tell you when, but eventually it has to happen. He is still heavy in cash. The mini corrections simply bring in more buying people. He may be early, but it is going to happen. With the politics in Washington it would be surprising if they got anything done. Not much is going to happen. He observed that recessions don’t normally happen when commodity prices are low.

Cash. You need to hold cash because we are in for some choppy trading. The commodity space is unloved and overlooked.

A Correction. Volatility is at an all time high in the US. We get corrections all the time. He has never said we are going to have a 30-40% bear market, however last year from 2015 highs to lows in 2016, small caps were down 20% in the US so that is a pretty material correction. We have not had a broad correction in a long time. Calling a top is hard and he never does that. He says he is concerned and it is time to shift the portfolio to more defensive stocks, and ETFs that use covered call strategies. It is about asset allocation and sector diversification. Nobody knows when the top is in. He does not like what he sees over the next couple of years and so is defensive in the way he runs his portfolios.

Pipeline ETFs. His favourite way to play utilities is ZWU-T, 80% Canada and 20% US. It has generators, telecoms and pipelines. It has a covered call overlay, enhancing the yield. It is very diversified over the couple of sectors. He prefers this to picking individual pipelines.

Educational Segment. Financial Astrology. A study that went back to look for correlation between solar eclipses and stock market performance said that there is none. There are all kinds of financial astrologers. One newsletter makes market calls off astrology and he does not give it weight. There are all kinds of academic studies. The more sun there is the better markets do. There is correlation, but not causation. That is the ultimate question. There is a guy who correlates full moons to markets with the idea of disproving any and correlation he could not disprove it. Gold tends to either change or accelerate in a full moon. He recommends you don’t pay attention to it. Markets like wheat and corn are influenced by weather which is influenced by tides and those by the moon, so you have to be careful of that.

Markets. We are in the summer doldrums and the market is trending little lower. He does not do any shorting. He is in 20% cash for all portfolios. September/October tends to be when you get a hiccup and if it falls far enough he may pull the trigger and spend some of that cash. PE multiples are using adjusted rather than GAAP earnings. You are getting the aging demographic that aren’t spending as much money, companies doing a good job of cost cutting, which is deflationary, so you can’t expect the old rate of GDP growth. The market has rallied for 8 years because interest rates have never been this low for this long. The market could go sideways for 10 to 20 years. We don’t have to have a correction.

Markets. The chaos in Washington does nothing for him in terms of investing. Both Obama and Trump had legislative gridlock. A lot of what Trump has talked about has done nothing financially because congress has not wanted to play along. He keeps waiting for ‘this great correction’ to happen in the US. Valuations have gotten out of hand. While the DOW has been hitting new highs, it has been because of AAPL-Q and BA-N. If you look at an equal weight index, it has been going down. The Canadian economy is probably one of the best in the world, but because our market is mostly financials and resource/materials, it has been one of the worst in the world. The rising dollar has taken away any foreign gains you had and the rise in interest rates has taken from your fixed income investments. Canadian investors have the worst of all worlds.

Markets. We are in the most volatile time of year for the equity markets. It is a slower time of year and economic activity is diminished. The headlines are affecting it as we are past the earnings season. The new season is turning out to be very volatile. North Korea is nothing new either, but investors are grasping onto that because there is nothing else. From a technical perspective we are seeing cracks in the longer term S&P. We broke a rising trend line yesterday. From a low in July we tend to see the VIX rise and it causes erratic trading activity in the market. Opportunities to buy are created if you want to add to your portfolio. We dipped below the rising trend line that was supporting markets in the S&P. Investors are becoming risk adverse. Breadth and momentum are decreasing. Gold is the classic volatility play. You tend to see a rise through to October. This year we are bumping to resistance about $1300. We cracked it today. It just takes a number of cracks to make it break all together.