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

Economy. The Bank of Canada did a 180 back in June. It was a long time coming. The Canadian market is robust. GDP grew 3.7% in the 1^st quarter, which is more than double their normal pace of growth. 186,000 jobs created of the first 6 months this year. Corporate profits are up 12.5%.

Market. Believes equities have ignored interest rates going below something like 2.75%. If equities actually priced in interest rates where they are now, they’d be a lot higher than what they are today. The equity world is disconnected from the bond world. Interest rates moving up is actually a bullish thing. There are a lot of dynamic things happening in the US and that is where the opportunity is. Stocks are actually getting a lot cheaper in the US than they are in Canada, especially when you look at retail, consumer discretionary and financials.

How do interest rate increases helps resource companies? Interest rates are going up all over the world. We are seeing the US lead. This creates economic growth, and materials are part of that, and with the input of goods being produced, it is therefore positive for resource stocks.

Canadian Economy. He is constructive on the Canadian economy for about the 1^st time in 5 years. Has always been very overweight the US. Normally he is running around 35% of the whole portfolio as US equities, and the Canadian component is about 15%-20%. Feels Canada has been lagging the rest of the global market, and our performance this year has been abysmal. He can see where there is going to be room for growth in the Canadian economy and the Canadian markets. A criticism he has of the Canadian ETF industry is that they are all pretty much cut from the same loaf, they’ll have 30%-35% financials, 20% energy, 10% material and 10% telecom. What they should be doing is to come up with something that leaves the side of the banks and energy that we are all familiar with, and come up with an ETF that has some large caps, but mid-cap’s as well, that can take a look at the broader sectors of the Canadian economy.

High yield Bond funds? Normally he doesn’t recommend these because you are dealing with junk bonds, and his clients tend to be older. If interested, he would take a look at iShares US High-Yield Bond Index (XHY-T) and BMO HighYield Corp Bond US Hedge to US (ZHY-T). The performance on both is virtually identical. You could also look at First Trust Senior Loan (FSL-T), short-term commercial paper in the US. He would much rather have a Covered Call on a Canadian bank paying the same thing and get the tax advantage.

Covered Calls - Do you ever buy these back to resell them? Yes. Sometimes you get a situation, such as the financial crisis, where Canadian banks were holding up quite well until the end, and then collapsed. Royal (RY-T) went from $52 down to about $26. In that case he bought back the Calls he sold, rolling down and selling a fresh batch of Calls and trying to conservatively save 50% of the money, and then stops selling the calls and lets them rise back up. If the Calls get down to around $.25-$.50, he buys them back and Sells the next series.

Markets. With uncertain economic data and what Trump will do, there is a lot of uncertainty. He is becoming more defensive. He has reduced some long positions and increased some short positions. There are long opportunities, but you have to be a stock picker. It is not about sectors, but stocks. Canada is very cyclical. There are more opportunities in the US, but you will find a greater rate of return in Canada. He has about 20% in cash. He has a lot more put protection in the market now. It is very hard to use hard stops on core positions. 10-20% of his portfolio is normally shorts. He also does pairs trades.

The expectation for increases in interest rates has caused a pull back in interest sensitive stocks. He thinks rates won’t go up much and it will be low for longer.

Markets. The expectation is for less than double digit earnings in the quarter, He is going to be looking for whether they will be making the year or not. The markets are very much about rotation and they are stable as a whole. He is a bit nervous, but things seem to be holding in. Everywhere except Japan wants to ease on stimulus. He is expecting economic growth to slow and interest rates to rise slightly.

Education segment. The Role of Gold in your Portfolio. Gold has been selling off quite a bit. The best opportunities are when gold is going down. It is a great diversifier, but it yields nothing so it is hard to hold it in your portfolio. If you look at the correlation between gold and other asset classes, some have no relation and some are very correlated. Gold has high correlation with currencies. The total world index has very low correlation to gold. VT-N compared to GLD-N have various correlations through time. TLT-N is more correlated to GLD-N so it represents less diversification. He is looking at buying gold here. If gold breaks below $1200 we will see some panic selling and that is the time to look at accumulating.

Market. He is scaling back risks ahead of the central banks hiking interest rates. 9 out of the last 11 recessions have come off the backs of Central banks raising rates. He has some concerns regarding the yield curve. It would only take about 3 US raises for them to get an inverted yield curve. An inverted yield curve is a pretty strong signal that a recession is fairly imminent. Given that we are fairly long in the tooth in this expansion out of the 2008 recession, it is probably prudent to take some risk off the table at this time. Some of the leading indicators are rolling over a little. Feels the central banks are a little behind the curve. US GDP figures, and to a lesser extent in Canada, as well as inflation figures in both countries, are now flashing warning signs that they should be raising rates.

A US defence stock? You might prefer looking at a Canadian company CAE (CAE-T) which makes simulators for training of pilots. You could also look at General Dynamics (GD-N) or Northrop Grumman (NOC-N). Most governments are really strapped in terms of cash, so it might be an area you would take money away from. There is political risk in buying defence stocks.

US Economy. Earnings started off on an extremely good footing and GDP came in a little bit weak. There was a big 15% EPS growth, and the job numbers are cruising along, 200 plus or minus. Going back 5 years, it has actually average out to 207. Putting up 220-230 is right in the ballpark. The Fed is just looking for a clear path forward. They know they need to normalize rates, they know they need to normalize the balance sheet, they just need the path to be clear for that, and are not going to be aggressive in an interest rate hike. They have a great path for an interest rate hike in that corporate earnings are strong; triple B credit spreads have been fantastic at 3 year lows. That means that in the last 3 years, investors and bond market participants feels that there is the least risk in buying a triple B bond at this point in the last 3 years. You want to see that being low and trending lower. When it reverses and shoots up, that is when the red flag goes up. Typically, you see this in the bond market before equities peak. The fact that we are seeing bond spreads being quite low is a good sign.

Market. We’ve had a good strong bull market run for a number of years with great returns. Everyone is looking at valuations, now feeling it is toppy. However, you have to take it in context. If you go back to 1982, and look at the average mid-cycle PE, it is 18.6. Right now, on a full year 2017 estimate, we are at 18.5. He doesn’t think the market is overdone. You just have to pick your spots and allocate properly.

A US defence stock? He likes aerospace and defence. General Dynamics (GD-N) has been fantastic. It has had a little bit of a pullback in terms of its earnings estimates, but ultimately the stock has produced some great numbers. They also have a “buy back” in place. He also likes Raytheon (RTN-N). It is not particularly over exposed to any one of the US defence programs, and is the one that he would probably tilt towards.