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

What high yield Bond funds would you recommend? These are paying about a 6% yield right now. Rather than getting 6% on junk bonds, he would much rather do a Covered Call on Royal Bank and get 5%. There are a number of these things, but they are all the same. An interesting one is FT Short Duration High-Yield (Cad-Hedged (FSD-T), which is short term loans, and has had a very large institutional following since it came out. It takes a whole bunch of junk bonds, but they are all short term, 6 months or so, and you get rid of duration risks. The higher yields that you were getting, are not there anymore, so he doesn’t see much point in this.

A high-income ETF? He prefers Covered Calls. Bank of Montréal has a suite of them on utilities and Canadian banks and higher dividend US. Horizon also has the HEX-T, which is a little bit broader on financials than the Bank of Montréal product. He likes them as they are all paying around 5%-6%. There is also the ZWC-T, based on the Canadian Index. This one is capital gains and dividends where you get better tax treatment. IShares has XSC-T, which is an actively managed bond portfolio, but a little more expensive in terms of management fees.

Markets. He is not exactly bullish on weed these days. He believes we are ramping up the licensed marijuana industry at an alarming rate. Supply is short. It is investor sentiment and events that are driving stocks. Domestic demand is going to be far higher than analysts predict. He thinks export demand will take off. Capital is not getting put into greenhouse expansions.

Market. One of the biggest, puzzling factors is inflation. Where is it? Economic data is clearly getting better in the US, and that is because of automation improving productivity, so wage pressures are nowhere to be seen. E-commerce has also improved the economy. Inflation is probably going to stay constrained. She is optimistic on the industrial space, although we are not going back to the 2006-2007 levels of growth. Europe and China are looking better than expected. There is a slight adjustment down for the US, but it is still growing. The most important thing on commodities is that supplies have really been rationalized over the last 2 years. She sees the whole supply/demand balance coming back into a better picture. The emerging-market index is trading at a much lower multiple than the world Index, and certainly the S&P 500. However, you have to look at the region. She continues to prefer Asia. It is a net importer of commodities. Commodity prices where they are, is still slightly better for those that use it as opposed to those who produce it. She is wary of the Middle East because their reliance on oil is extremely high. On Latin America, she is cautiously optimistic. Likes Brazil although there might be some volatility going into the next election.

An emerging markets ETF? Find the one with the lowest costs and the closest tracking error. Whether it is XEM-T, the more general broad emerging markets ETF, or XMM-T, the lower volatility one.

Market. The TSX has lagged pretty much every major developed world market year to date and is down about 1%. The MSCI ACWI (All Country World Index) is up about 15% in US$ (7% in Cdn$), so this is really in stark contrast to what is happening in the economies of Canada and most of the other developed countries. Canada has economic growth and is leading the G8 by about 3.7% annualized. Job creation has been quite robust. The TSX is trading below its 10-year average trading multiples on P/E and P/B. It offers a little more dividend yield than it has on average over the last decade. The rest of the world is trading at a premium to the 10-year average on all those metrics. The relative underperformance is attributed to worries being overblown about NAFTA getting torn up, or domestically a US style meltdown in our housing market. You have opportunity where stock prices are moving in one direction and corporate profits moving in another, which is where we are right now, so he expects the TSX to be moving higher later this year and into 2018.

Gold. It has broken out past $1300. In the last couple of days there has been the sabre rattling with North Korea. It may have made a bottom in early 2016. He is not convinced that a new secular bull market is underway. However, our gold does have a role in a diversified and well-balanced portfolio, as a sort of alternative to cash. Thinks the decisive level for gold is $1375.

Market. This has been lumbering along in the last year and has been somewhat difficult. The US has been a great place to be. Feels investors’ frame of reference is too short. We have been in a bull market, but not as long as people are thinking. There is a whole generation that is not investing because of the great financial crisis we just experienced. Feels it is an interesting time to be invested. Much of what is going on is based on economic finance reform and the new US tax code that we hope comes in.

Market. He is a little cautious. August/September are traditionally not the best times for equity markets. Valuations are relatively high. Complacently levels in investors is quite high. At some point something is going to rattle the markets and there will be a correction. Looking at the S&P 500 with multiples of 18-19 times earnings, a lot of that is being justified by low rates. Rates are going to go up over time. The political gridlock in Washington is also a potential concern. Some of the market staying where it is, really depends upon tax reform, etc. getting pushed through.

Market. It has been tough to make money the past few months. The Canadian market absolutely stinks. It touched 16,000 a year ago and has been dragging its feet at 15,000 this year. The US market is pretty good with NASDAQ up double digits, S&P 500 close to double digits, but in Cdn$, it is not so great. Those looking to diversify outside, are getting hurt by the Cdn$. The fear of rising rates has kind of clobbered bond prices recently. It is hard to find places to make money, but it is the market and these things happen, and you have to be patient. We’ve had double digit earnings growth for the 1^st and 2^nd quarter and we have seen revenue growth. He is quite bullish on the economies, but the stock market hasn’t done as well. He is bullish on stocks, and is finding lots of good value. The auto companies and airlines are very cheap. You still have to own technology because of the growth. Over the next 5 years, we are going to see some pretty good results for equity investors.

Markets. The hurricane has an impact on the gas refining industry. Gas prices are reacting today. We are 6.5% above average inventory levels. He does not think we will get a big shoot up like decades ago with Katrina. XLE-T is showing nothing today. He would have expected a premium, but today we are actually down. Supply and demand are more important from a market perspective. The seasonal pattern for the TSX over 30 years: We are going into the worst season of the year, from now until mid October or so. The challenge he has this year is that the TSX has not played out as it normally does year to date. He thinks the stocks have already reacted so the seasonal pullback should be muted this year. He sees gold as remaining in the trading range, rather than breaking out in a big way.

ETFs and a Securities Price Bubble. Before ETFs the money was in mutual funds. ETFs are not the cause or the issue. ETFs are an efficient vehicle for exposure. His only issue is that if you buy an index ETF you are also buy the bad companies that are in it. An active ETF is picking the good companies. Before ETFs, in a pull back, people redeemed mutual funds. In a selloff now selling ETFs is no different than redeeming mutual funds except that it does not all wait until the end of the day.

Canadian Dollar $. We are back up to the extremes at the beginning of the month. The next technical level is at $0.83, but what is the catalyst to make the CAD$ stronger? There is the price of oil, interest rate differential and sentiment around what the BOC is going to do. We are in a trading range. He is backing up the truck to own US$ in his portfolio. The trading range will continue for at least the next 6 months.

S&P Seasonality. In the US we have not seen the same divergence as Canada. Seasonality, if it comes into play, should have more down draft than in Canada.

Educational Segment. Where Equity Markets Returns have come from. Going back to 1970, real return has been 6.3%. Breaking that down, dividends have been 3.4% points. Margin and multiple expansion have been 0.5% and 0.1% percentage points. But in the last 7 years those last two factors have been the most significant. A 7-year forecast shows a loss of 3.9 on US large caps vs. a gain of 2.9% on emerging markets.