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

Guest: Danielle DiMartino Booth, author of Fed Up. She is very critical of the Fed. Credit markets were frozen solid and liquidity was the issue, not interest rates. 9 years later we are not at normalized interest rates. She thinks eventually we will have social unrest. Dividend paying stocks are among the most over valued stocks in the index. Auto and Energy are the two biggest drivers of growth. Auto sales volumes have rolled over.

Markets. It comes down to valuation. With the market multiple at 20 times, it is rather rich. He likes 15 to 20 times if there is 15-20 percent earnings growth. Finding stocks is getting more challenging. There is risk for Canadian stocks with changes to NAFTA. It’s an overhang. US investors are going to want to see some kind of resolution to NAFTA. Stock picking is important as things are likely to go sideways over the summer.

Market. Two areas he likes are defence and construction. Defence has a very long-term cycle and is very easy to identify. Global defence spending fell for 6-7 years in a row, and 2015 was the 1^st year defence spending increased. The cycles tend to last 7-10 years. Construction has to do with the age of the structures. Government statisticians in the developed world, have tracked the age of infrastructure, and it has never been this old. We are already starting to see the cycle. If governments come in with stimulus packages, that can be a catalyst, but the cycle is there, simply because things are wearing out. Regarding automobiles, we have gotten up to a SAAR (Seasonally Adjusted Rate of Production of Automobiles) of 16-17 million in the US, so we have literally seen the top of cycle amounts.

US Treasury Bonds? One of the biggest problems globally is low interest rates, which has been largely caused by several factors, not the least of which is foreign governments hoarding them. The People’s Bank of China has the largest central bank balance sheet globally, and they’ve hoarded a massive amount of treasuries suppressing interest rates, and denying American households income. The US government is also to blame. The Pensions Benefit Guarantee Corp. raises the penalty payments for underfunded conditions within pensions, every year sequentially, which leads pension plans to buy duration products, such as long-term government bonds, or corporate’s that are swapped back into the government market. There are somewhere around $1 trillion treasuries that are being held by banks, instead of banks investing their money to provide mortgages.

Oil & Gas? He is more positive on gas, and sees more possible downside on oil. The supply/demand on oil is out of whack right now.

Market. Everybody seems to be calling for a correction, but as probable as the reasons are for this, stocks are real cheap relative to bonds. Europe is starting to get better. America has been good for a while. China has found its footing. The only reason you want to get defensive in stocks is 1) because a recession is coming or 2) valuations are crazy. We had some really good top line growth last quarter, and hopefully that continues this quarter. As that continues to happen, markets actually get cheaper.

Markets. Economies are looking pretty good around the world. Things are improving and it is not just contained to the US. Everything is in expansion mode in the US. Emerging markets are stabilizing. We are seeing instability in oil. Canada is saying the economic recovery is broadening to other sectors. She is encouraged that corporate profits in those areas are improving. Low energy prices are keeping inflation low. Multiples are high, but corporate profits are coming through. Second quarter profits should continue. She forecasts 10-11% profit growth in S&P going forward.

Gold. She is very low in terms of gold exposure because inflation is very benign right now. The US$ is quite strong right now. Volatility is quite low and near historic lows.

Marijuana IPOs. It is not a sector she is looking at because it is news and momentum driven. If companies can go public, they are probably taking advantage of the environment. There is not a lot of fundamental data to work on. Momentum is based on the assumption that recreational use gets legalized. It is hard to model out who is going to be winning going forward. The ETF in the sector creates momentum in stocks and it does not differentiate which ones are attractive.

Market. You can’t look at the market in a vacuum, you have to look at it relative to interest rates. Interest rates are low and are probably going to stay low for another couple of years. GIC rates are probably 2.5%-2.75%. When you buy a GIC from the bank, ultimately you are just borrowing money from them. Instead, why don’t you own the bank? You are going to get a dividend rate of 3.5% to 4.5%. You get a much better yield on equities than you can on fixed income investments. Banks are not cheap, but also not wildly overvalued. Thinks there will be some pickup and growth in the US economy, and the Canadian economy will benefit from that, and we won’t be hurt by NAFTA.

Canadian $? A lot of this is oil. The Canadian dollar has been punished enough. It could stay between $.73 and $.77. He doesn’t see a lot of movement, either upside or downside. Longer-term, rates will be going up.

Marijuana? Remember this is going to be regulated, so think of it like you would think of beer and alcohol sales. Secondly, there is probably going to be a level of profit margin, with limits on how much money they can make. From that perspective, there is going to be a lot of competition and a lot of regulations around it. It is not the investment people think it is going to be, and the returns will be quite mellow.

How to determine if an option bid/ask is overpriced? The idea that the option’s price has a certain value as a percentage of the stock price, has to do with the volatility assumption on the option. If a Call Option is 10% of the value of the stock price, and there is another Call Option on another stock that is 5% of the value, that simply tells him that the 1^st stock is more volatile and higher risk than the 2^nd one.

Resources. After the Asian flu/Russian debt crisis in 1998, you also had the original Internet boom, and no one cared about resources. We are now at a point where we finally have legitimate good valuations. 5 years ago, we were playing defence because valuations were not there. We have now recovered from that and are now in an environment that we can get really excited about. Businesses are getting incrementally better and are throwing cash flow, and you don’t have to pay a lot for them. Resource stocks are “crazy” out of favour, which is great. 12-18 months from now, the supply stabilizes and demand keeps growing.

Diversification for RESP’s for children? There are a number of different ways you can be diversified. This is a whole new millennium of technologically driven and aware people. Technology is changing the world, and we are in the early stages of a whole new evolution, so that when children are older, they won’t be typing into keyboards or computer screens, they will be talking to things and will be learning in different ways. For diversification, technology would be a good place to look. The most innovative companies in technology are the ones that have the biggest balance sheets and they are the strongest ones. Instagram is owned by Facebook (FB-Q), and is just in its early stages of its monetization strategies. Trading at a pretty reasonable valuation, but has a pretty strong balance sheet, and has a lot of room to grow. Its biggest competitor is Google (GOOGL-Q), which is sitting on tons of cash, very innovative, working on artificial intelligence, healthcare. These are big, big areas that are going to need a lot of improvement.