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

Pot Stocks in Canada. Caller was a client who wanted to buy weed last year and the guest ‘wisely’ talked him out of it but the caller put it into his portfolio a couple of weeks ago. The legislative hurtles wall be kicked off over the next years but he will not recommend it to his clients as a whole. There will be money made but a lot of money lost in the sector. He does not believe Constellation (STZ-N) will take over a pot stock.

Canadian banks. You should have a minimum of 20 stocks for diversification’s sake. Put at most 2% into any one bank. You would not go wrong buying the top five. The tops are TD-T and CM-T.

Market. Round numbers attract a lot of attention (DOW) but the market in the US is moving higher because the economy is growing beyond a 3% clip as it is here in Canada. Employment data is strong. TSX profits are growing at an 18% clip compared to a year ago. In the medium term, he expects stock prices to move higher. There is a tug of war over seasonality with December being one of the most positive months and the fact that markets are running pretty hot and are overbought. How that resolves in the short term is anyone’s call. In the long term, we are in the late stages of an economic cycle (9^th year). He is looking at any number of indicators to know when to take a defensive position. NAFTA is going to work out. He thinks it will survive with a lot of noise along the way. We are getting close to the finish line on the US tax cuts. He thinks there is some good news coming.

Gold Mining recommendation. He does not own gold miners. They perennially find ways to shoot themselves in the foot. Mining is very difficult. It is almost impossible to put a discounted cash flow on it. If you want to own it, try GLD-N or a royalty or streaming company.

Canadian Banks? It’s all about a compelling valuation. Banks generally do an ROE at about 14%-16%, and are only valued at 12X earnings. In this environment, where we are seeing a little bit of rate increases, NIM is creeping up which is good for them. Also, a lot of are in the US. He is positive on the banks. Next year should be a breakout year for them.

Economy. Things are good, and we should be grateful. However, it’s really important to be diversified. Usually when things are this good, they’re not this good for long. The best way to mitigate risk is by being diversified by asset class, geography, and making sure you own the right securities. That is probably going to be the key theme going into 2018 and beyond as we approach the end of the business cycle and start to see more credit build up, not just in the Canadian economy, but economies all over the world. Inflation interest rates are going remain anchored by several structural factors. First and foremost, there is a ton of debt floating around. When you have that much debt in the global economy, rates can only go up so much before it starts causing economic conditions to start deteriorating.

Market. Geographically Japan remains the cheapest of developed markets, and we are finally hearing other investors talking about Japan. Europe also offers good value. There are pockets of value in the US, but it is not a cheap market in general. Heading into a higher rate environment, investors need to be a little cautious. The historical PE of the S&P 500 is 16X earnings, and low interest rates have driven it to about 25X earnings. That’s not to say it can’t go higher, but the Fed is in a rising rate cycle, which implies stocks are going to be less attractive, especially the higher valued shares. In this business, you are either early or you are late. Successful investors are early, so you had better start building up a bit of a cash position or you are going to get caught off side at some point. The whole world is swimming in debt. Consumer government non-bank corporate debt has been going up every year as a percentage of GDP for the last decade. It’s been held together by extremely low interest rates. The fear is that rising interest rates are going to have some impact on government, corporations and consumers. Even if rates move up slowly, we are already seeing slow increases having an impact on Canadian consumers. High-yield bonds are about the only fixed income classes not sensitive to changes in interest rates. In the last 6 rising rate cycles, they actually did well. This is a very short duration asset class. The biggest sensitivity is to default.

Market. The great thing about NA equity markets is that between mid-October through until the 1^st week in January, the markets go higher. People are in a good mood and are in a buying mood. We are getting close to the end of the year when people are buying all kinds of things, which causes equity markets to move higher. Traditional sectors that move highest during this time are economically sensitive sectors like materials, industrials, technology and consumer discretionary, and have led the market once again, particularly on the technology side. FAANG stocks are what have really driven the market higher. The market is overbought, so what do you do now? You have another 6 weeks until the end of the period of strength is up. Hang in there, but realize we are getting close to the end. There is a whole group of stocks which have not done well this year. Tax loss selling is having a big impact, because things like metals, oils and oil service stocks are way down, relative to where they where at the beginning of the year. A classic year for tax loss selling pressures. That will probably continue for another 2 weeks and then the tax loss selling pressures come off. These are the ones that traditionally move higher between the middle of December through until spring. Be patient now when markets are going higher, but also be patient on buying because tax loss selling pressures are still there, and will be for the next 2-3 weeks.

Banking ETF? We’ve reached the end of the period of seasonal strength for Canada’s bank stocks. That is normally the end of November, and that’s the time when you want to look elsewhere. The US side is very different. Their period of seasonal strength is from about the beginning of December through until about April.

Market. Thursday they expect to have a go on the tax bill, the senate version of it. They hope to have it completed by Christmas. Markets are going to be looking at this closely. Then there should be a sell on news when the president signs it. Larry does not believe there will not be any new money added to the debt. There is a shortage of skilled labour in the US. He does not believe there will be a 5% increase in GDP because of the tax bill, as predicted. Bitcoin could be reaching a bubble. There is no intrinsic value. He believes in electronic currency in the future but he thinks Bitcoin will turn out to be some kind of payment system.

Dividend paying global ETF recommendation. CYH-T is a currency hedged. ZWE-T, ZWH-T ZWC are good for covered calls. HAZ-T is actively managed.

Service Companies vs. large Cap Oil and Gas. In the US there is OIHS-N. They are companies involved in drilling, rigs and infrastructure. E&P companies are the ones at risk to the product price. He likes the pipeline space. The commodity is going to hang around $50 +/- $10 for some time. He prefers diversified oil companies like SU-T.

Educational Segment. Financial Literacy – Robotic Advisors. Currently, the human advisor has to talk to the client and get to know them. They propose solutions, implement them and then constantly monitor and adjust strategy. Robotic advising services bring costs down. The first step is best done with a human. You need a trusted goto person. It is hard to trust something you can’t look in the eyes. The constant monitoring is best for the computers but explaining complex concepts or guiding the investor through difficult times still requires an advisor. The advisor industry will be disrupted over the next decade by robot advisors.

Market. Small, mid and large caps are currently bullish according to fund flows. The S&P was up 7 consecutive months to the end of October. The market typically does better than average over 3, 6 and 9 months beyond when this happens. The fundamentals don’t support the valuations so much and valuations are stretched. Most Canadians should be more North American based, but most have too much in Canada. He only has 5% of portfolios overseas. We need to be cognizant that there will be a pull back at some point. Investors should be building more defensive portfolios as interest rates rise. You may want to own pipelines and utilities.

S&P-500 Price Target for a correction to follow and to what magnitude will a correction be. He can’t predict where the market is going. 5% corrections happen typically every 7 months, 10% every two years and more every 4 years. We have not had a 5% correction since January of last year. We are overdue, yet when you have 7 months in a row of increases, it tends to continue up for 3 to 9 months. Instead of the market calling off, it could go sideways for 3-5 years as earnings catch up.