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

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.

Market. We are starting to see a bit of roll out. Tech stocks particularly, have had some really strict valuations, and some of the money is being taken out of that sector. There is also a global rate cycle that is going to be moving forward and capital being put to work in that market. There is a sector rotation, and techs are just going to take a pause to see if the earnings are going to come through. For cost conscious investors, this is probably the time to buy. Summer is the better time to buy.

Effect of Trump lowering taxes on US companies situated overseas? A good example of a company in that context would be Waters Corp (WAT-N). A biotech company that has a ton of cash offshore. They didn’t want to bring capital back to the US because of higher taxes, so instead they have been buying back tons and tons of shares. A very inefficient way to run a company. If Trump can get capital back into the US, the companies will spend the capital and in many cases give US healthcare/US tech a buying advantage relative to European competition. It will also allow them to do acquisitions. On the other hand, he is not entirely sure that Trump can manage to do it.

Markets. He was bearish last time about Cannabis. These stocks have been going down 11 weeks in a row. Cannabis will continue to be a business unto itself. He is looking for a bottom on the stocks. See his Top Picks. He likes the infrastructure associated with the business. Some jurisdictions may not allow you to walk down the street smoking up. It Is up to the local municipality as to what they will allow in terms of smoking. 5 or 10 years from now distribution will be key. We have a free market approach to the supply but when we go to sell the stuff, we are going to say where, how much and what the price is. He does not know how this will kick back on us. He does not think mail order will work.

Pharma is facing one of the biggest homeopathic medicines in the world. But they will not buy out a Cannabis company unless they can patent something that is much better. You should wait and see if this business is profitable.

Market. The market has done very, very well. In most cases, it has doubled since the bottom of 2009. There is a sense that a short-term pause or correction at this time might be healthy. It would give you a chance to reload on some value stocks. The global economic growth is picking up speed, so the backdrop is good for the economy, and therefore good for earnings growth. The US Federal Reserve has started to raise interest rates, and so far it hasn’t had any negative impact, but at some point it might cause a bit of tightening. At this stage, your cash allocation should be closer to your maximum because of the uncertainty with high interest rates and delays in some of the reforms that might be coming. Hold onto your core holdings, but maybe take profits selectively and get ready to buy on a downturn.

Market. Global conditions are very favourable for stocks for the next 18 months. Conditions are good because corporate profits are strong. Earnings, especially out of the US, have been good and we should start getting more performance out of Europe and emerging market countries. The emphasis in the US may shift to the Fed selling off their bond portfolio a little faster than had been expected, which would be a good thing for banks, as it would get away from the flat yield curve with the 10 year rates moving up a little faster. He would be underweight Canada as it is just flat and is less interesting than the US or the international markets.

Canadian Bank ETF with a good dividend? All the banks pay good dividends. In Canada there are 2 specialty ETF’s for banks iUnits S&P Financial (XFN-T) and BMO has an equal weighted banks for Canada ETF. He is not really expecting much more out of the Canadian banks. He sees earnings growth slowing in Canada, which means dividend growth will slow. not sure a Canadian bank ETF is going to be worthwhile.

US ETF’s bought in Cdn$. How do you hedge the loss with a rising Cdn$? You can actively manage the currency position of your portfolio by either buying hedged or unhedged ETF’s. In his case, active decisions on currency is a big part of what he does. At the moment, he is not hedged, deciding not to react to what was happening in a rising Cdn$, simply because he thinks the Cdn$ for the balance of the year will stay in a range of $.75 plus or minus $.02. Currently you are at the top end of the range and down at $0.73 at the bottom end of the range. You can either play that spread by trading in and out, choose to ignore it, or if you are more conservative, you can buy currency hedged ETF’s.

Market. We are a week away from the Bank of Canada’s decision. They will probably hike interest rates, but he is not sure there is a particularly good reason for this. To slow down housing markets, it would seem that the housing specific rules are accomplishing that anyway. He would worry about the strengthening of the Cdn$ and the impact of that on exports. He is in a strange spot at the moment in that he is bullish on energy, but bearish on almost everything else. It’ll be interesting to see, if he is right on energy, what happens to the rest of the market. The issue on energy is that a lot of money was raised, a lot of money has been spent and no money has actually been made. You can grow production all you want, but at some point economics has to kick in, which he believes is happening now.

Market. His portfolios have been 2/3 US and 1/3 Canada since 2012. The US provides more diversity and you don’t live and die by what happens to commodities. How do you partition a portfolio for a continued upside we have seen, but at the same time, position portfolios to be able to weather a correction? He starts with a conservative mandate, so all his positions are dividend paying names, and never has more than 5% in any one name. He has about 5% cash, and since February has had about a 5% weighting in gold bullion. Bought that unhedged, which has given him an external layer of return. The 5% cash and 5% gold is his defence, because in this type of market, you have to be very careful. With 5% cash, you can still beat the market with good stock picking. He stays away from China and India, and really focuses on developed markets. When you go into emerging market countries, you take on a few layers of extra risks, such as validity of their accounting standards or regulations.