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

Market.Investor sentiment has turned very positive, driven by the fact of increasing breadth in the global economic expansion, and expectations of sustained corporate earnings growth. We have a Goldilocks backdrop of improving global economic growth and modest inflation, which should allow all central banks to increase interest rates on a more gradual pace, rather than too quickly. Technically, we are overbought at this level, when you look at the RSI. A pause may be in order or some sort of consolidation. Volatility can flare up a little, whether it be from further fighting between the US and North Korea, or geopolitical strife in Washington. Given that we are moving into a very, very strong part of the season and seeing optimism surrounding potential tax reform, buying on dips and taking advantage of any consolidation makes a lot of sense. You want to be in the cyclicals. Financials are close to 30%, technology around 20%, and 22% for consumer discretionary. Those are the plays that will tend to move better in an economically sensitive environment. Has no exposure to utilities, real estate or telecom, although does have a little in consumer staples. He favours the high-quality companies. With interest rates moving higher, you want companies that are a little bit less leveraged. You don’t want to be at 30% cash in this environment. He likes both the international and EM markets, whether it be Europe, Asia or EM.

Market. We have synchronized global growth and low interest rates. The MIS increased its outlook for global economic growth. It was 3.2% in 2016, and has been upgraded to 3.6% for this year and 3.8% for 2018. The US and Canadian Central Banks have started to raise rates, and it looks like the UK may be the third. There is little inflationary pressure, so she doesn’t expect interest rate increases will be very rapid and will be well telegraphed. She likes financials generally, because a rising interest rate environment will help their margins, and improving economies will help their business.

Canadian Banks? She likes Canadian banks as a group. They’ve picked up in performance in the last few months, because they were flat, up until a few months ago. In this environment of an improving Canadian economy, it looks like energy problems are largely behind us and a rising interest rate environment is good for the banks. Forward P/E ratios are slightly above the 10-year historical averages, as is P/BV, another important valuation metric, where they are slightly below. They can kind of grow that mid-single digit 5%-7% earnings growth. All the banks have committed to a target payout ratio of 40%-50%. She owns Toronto Dominion (TD-T), Royal (RY-T) and Bank of Montréal (BMO-T), which all have US exposure which will be beneficial in a growing US economy. She also owns Bank of Nova Scotia (BNS-T) which is in a higher growth area.

Market.We have a lot of things to be worried about geopolitically, a lot of interesting tensions such as NAFTA trade talks. Investors are propelling this market higher. Fresh money is coming in. Credit Suisse upgraded all the FAANG stocks just when you thought they couldn’t go any higher. A report came out talking about a melt up, and he couldn’t agree more. He is positioning on a strength-basis, but does have a “best before” date, and it is somewhere that leads into January, where we have to get very cautious. Between now and Christmas he is pretty positive. You have to stick with really good quality companies. Still thinks most people are under invested. He is pretty comfortable with where he is. It really feels like this wants to go higher, for at least the next 2 months.

Market. Started the year thinking we were going to see a 3% 10-year yield in the US, but has come back from that. Inflation hasn’t reversed course badly, so is not looking at deflation. No indicators are pretending a higher 3%-4%. Very positive on the US and European side, which are taking a very slow and steady approach. Making great strides towards not pushing rates up too aggressively. If they can just gradually move along, there are no inflation pressures and it doesn’t have to be rushed, so he is quite sanguine going into the remainder of the year.

Market.It seems American business is ignoring all things political and the White House. The US economy is growing, unemployment is in pretty good shape and manufacturing is doing well. They seem to be ignoring all the tantrums that are coming out of Washington. He is hoping for some deregulation that would make things a lot easier for banks and get them back active in the market again. The Dodd Franks act is much too restrictive. If we don’t see that, midterm elections are coming up with more Democrats running than Republicans, which could change the dynamics.

ETF for Canadian Reset Preferreds 5 year laddered?There are 2 available. ZPR-T from Bank of Montréal where they are all rate resets or HPR-T from Horizons that are two thirds resets and one third fixed. Regarding the laddering, he doesn’t think that comes into play. Both have good yields. The one from BMO is going to be a little more volatile depending upon the rates.

Favourite bank for covered calls?One thing he looks at on covered calls is when the stock goes X dividend date, because you want to try and maximize the dividends you get within the 6-month Call period. You have to factor this into your calls. You want to capture as much as you can. He likes Royal (RY-T) and TD (TD-T), because they have a lot of US exposure.

A long-term tech ETF for a grandchild?There are a couple of routes you can go. You could look at the Power Share QQQQ (QQQ-Q) or the BMO NASDAQ 100 Equity Hedged-Cdn$ (ZQQ-T), or you could do a little of both.

Fixed income or bond ETF?There are a lot of them. A couple of things you should look at. Whenever looking at an ETF, forget about what the yield says. Go onto their website and look at “yield to maturity”. That is far more important than the current yield. Look at what their distribution yield has been over the past year. If the current yield is 3% and the yield to maturity is 2.2% and the distribution is 2.4%, that is somewhere what you are going to be getting, not 3%. You should also look at the duration of the portfolio. An ETF he recommended last year was just taken over and was going to put into a bond portfolio. The bond portfolio has a duration of 8.6 years, which is too long. If the duration is between 3 and 6 years, on any increase in interest rates you are going to get beaten up. You could look at BMO Aggregate Bond Index (ZAG-T) and/or something like iShares DEX Short Term Bond (XSB-T), about two thirds government and some corporates. There is also iShares Conservative Short-Term Fixed Income Fund (XSC-T).

Do you agree with no hedging in your ETF’s?He uses a lot of hedging, simply because of concerns about a decline in the US$.

An AI ETF?There is Robo-Global Robotics and Automation (ROBO-Q) and Global X Robotics & AI (BOTZ-Q). This is an area that is going to be increasing in the future, but you also want to make sure that there are some earnings as otherwise it is just speculation.

Deep-in-the-Money Call Options?Option prices are based upon intrinsic value and time value. If you are buying them “out of the money”, they have no intrinsic value, only time value. If you are buying these things “in the money”, you are squeezing out the time value. The price will not be as high as there is not a lot of time value. You have to watch this more closely than what he would want to.

What bank would you write a covered call on?In terms of writing Calls, he likes Toronto Dominion (TD-T) and Royal (RY-T), but this is something you have to decide for yourself. As to “When”, that is a different story. He tends to like writing them out every 6 months and close to the money. That way he gets a bigger bang for the buck. However, institutions write them a little out of the money and every 1 or 2 months, and over time get a better yield.

Market. The first half of the year was pretty soft and people were wondering if they were going to get a second-half recovery. If you add up the 4 quarters of this year, you’ll probably see about a 2% growth. Global growth has surprised him this year. The European economy has made a nice recovery and the Japanese numbers have been pretty good. In China, moderation has slowed down, even though it has all been debt financed. With the Trump thing, there is a lot of bullishness, which we have seen in the stock market. The soft economic data has been exceptionally strong, but the harder data such as retail sales, industrial production, trade data, is not nearly as supportive, so it will be interesting to see how it washes out for the balance of the year.