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

Where is the Cdn$-US$ relationship headed? He is a little concerned about the Cdn$, particularly in the environment that we are still facing on the negotiations of NAFTA. Thinks there is going to have to be some giving up on the dairy side. Expects that we will continue to see the loonie drift down. A low dollar is not a bad thing. He also hopes that Bank of Canada keeps our current interest rates and doesn’t follow the US with their June increase.

Banks or lifecos? Although they are both in the financial sector they are quite different animals. Right now, there is pressure on the banks, mainly coming out of the US. Sun Life (SLF-T) and Manulife (MFC-T) are both good companies. Yields are about the same. If you are interested in an investment, then he would say half and half.

Market. All the US technical indicators just broke down through the floor today, but sometimes “nothing” is the right thing to do. There are still good investments that can be found. The decision-making process in any political forum is not necessarily economic in nature, but we have to make economic decisions. The #1 factor that people are challenged by right now is uncertainty.

Market. The market had quite a selloff. People are maybe concerned that if Trump has to take gas, by either resigning or getting impeached, that his agenda won’t go through. We have gone a long time in these markets without a major retracement. There is a lot of good out there that kind of gets ignored. The US has essentially full employment. On the other hand, people are not making as much money and there is no upward wage pressure at all. We are seeing terrific corporate earnings, but on the other hand the US is having difficulty boosting its GDP anywhere north of 2%-2.25%.

Marijuana. Right now, clearly some of the medical marijuana companies are making money selling a demand. Once marijuana becomes legal, what is the barrier to entry? What is the moat that keeps everybody from growing their own marijuana in their backyard? He doesn’t know what is possibly going to keep the price of marijuana up. If he owned stocks, he would sell his shares before marijuana became legal.

Market. Now that we are in a rising rate environment, the Fed governors are projecting that the Fed funds rate will be increased from 1% today to 3%, 3 years from now. That takes us back to normalcy. If the short-term rate goes to 3%, it implies that 5 and 10 year bond yields are back to 4%-6%, and that will potentially have a huge impact on valuations. You can expect that stocks like utilities, pipelines, REITs will be the most prone to decline. Also, you should expect the P/E ratio of the market to kind of retreat to a more reversion to the mean.

High-yield bonds as part of a fixed income portfolio for a retiree? He manages both regular and high-yield bonds, but in a rising rate environment, regular bonds go down. High-yield bonds actually tend to go up in a rising rate environment, because they tend to be short duration bonds with a wide spread. He always cautions investors not to try and pick high-yield bonds. Buy a high-quality, high-yield fund, which is widely diversified. Do not buy a high yield fund which only owns Canadian high-yield bonds, because you are going to end up with a bunch of mining and energy bonds.

What makes Government of Canada 5-year bond yield rates, go up or down? When the economy is doing poorly, there is often a sense that the Bank of Canada will not raise rates, and may even drop short term rates. That would have an impact of investors running to buy 5 year bonds for a little bit of yield, which would cause the bond yield to go down. If inflation were picking up, investors would ask why they would buy a 1% bond when inflation is going to be at 2%, so they would demand a higher yield. A stronger economy tends to lead to rising rates.

Market. Thinks earnings are starting to catch up with valuations now. The S&P 500 is up 12% since the US November election. Expectations are that we’re in a more growth friendly environment even though Trump’s policies have not all come through. We need to see the earnings come through. It looks like year-over-year 1^st quarter earnings are going to be up at around 14%-15%, the 1^st double digit pace since 2011. We’ve done better than expected. Also, comments on conference calls have been encouraging. Europe and emerging markets are stabilizing.

Energy. Thinks oil prices will remain quite volatile. She is not committing capital to this sector yet. She was encouraged by what OPEC and Russia said yesterday, and thinks they want to maintain a price level of around $50. However, US shale production is ramping up which is offsetting the benefits of the production cuts. Until they see a sustainable draw down in inventories, that is when she will get more positive.

Gold? She has a very low weighting in gold in her clients’ accounts. The reason to hold gold is usually because of uncertainty, and that really isn’t in the cards right now. Inflation is another reason and the pressures are not that strong.

Oil. There has been a big run up in oil because of the agreement between Russia and OPEC, to prolong a series of oil production cuts. The question always is, can they do it and what do the non-OPEC people do. Libya and Nigeria are exempt from caps and have been pumping like mad. The US has been pumping like crazy, and the higher the prices go, the more they are going to continue to pump. He’s not sure there will be the long-term resolution that they would like to see. $50, plus or minus $10 is likely our trading range for the next few years. A few weeks ago, when oil was summing off, that is when he was buying because the prices were a lot cheaper. If we go 4%-5% higher, he will be selling the oil stocks again. Range trading is what he thinks is going to happen.

Market. Now that earning season is now over, we go back to global macro again. Oil prices are coming back, which is good for the market, so it should go higher off and on over the next 6 weeks, until we get to the next earnings period. Right now, he thinks the OPEC meeting is going to pull the market into focus. As we get into June, what is the Fed going to do with interest rates. If markets are stable, we are going to see another rate hike.

Educational Segment. He gets a lot of questions on hedging, and this is to show you his favourite indicators, and what are quite popular on the street for figuring out where the Cdn$ might go. A upper part of the chart showed the traded value of the Cdn$ over a two-year span. When it was going up, it indicated the dollar was weakening. The bottom part showed the interest rate differential 2-year US and 2-year Canada. As the differential was rising, the spread to US interest rates, the US yields more than Canada. Money tends to flow towards the higher yielding currency on average. With that in mind, the Fed is likely going to keep raising rates, which is a bit of a negative. However, compared to where the spread was when we were back at the extremes, we are now at the same level spread wise. The chart also showed the correlation of oil to the Cdn$, which pretty much followed. The chart also showed the speculative position in the futures market. Currently, we are at the highest level in terms of net speculative Shorts in the last couple of weeks. That tells him that there is an imbalance in the market. The loonie might be close to a bottom for at least the next 6-12 months. Going out to the end of 2020 on the futures curve on a crude oil chart, we are looking at pretty stable oil prices in and around $50 looking out 4 years.

Market. The US market is in record territory and oil is up sharply as well. They are moving together. There is a rebound in all the risk-on trades today, and a marginal increase to new highs, in New York. The dollar related commodities have been laggards in the last couple of months. Pres. Trump’s tax stuff has got to the back burner. We had always heard it was going to be August or September, etc., so maybe it is not too surprising. Earnings were good in the quarter in the S&P, which has also helped. We are going to run out of steam unless Pres. Trump comes up with something, sometime soon. If you are a good fundamental stock picker, you can do well from here.