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

BNN presented special cannabis legislation coverage LIVE from Ottawa at 1pm ET. Market Call was pre-empted.

Market. People felt very uncomfortable last year that we were in a slow growth, low inflation environment. They worried about the Fed increasing rates. This year they are more comfortable with the Fed raising rates, feels the economy is going to grow faster, and maybe more inflation. Globally, we are seeing a lot of positive numbers coming out. We are in a better environment from an economic point of view. Deflation seems to be less of a worry in Europe. The economy can handle the Fed increasing rates and the economy can grow a little faster than people expect. However, he doesn’t think that is going to happen until 2018. The world is looking for faster growth and maybe higher inflation, and he doesn’t expect we’ll see that until later on in the year. There may be a pullback, and if so, he could buy some companies he likes that are cheaper.

Market. S&P 500 has rallied about 10% since the November election. There has been a lot of soft data in terms of sentiment/optimism by consumers and businesses. That has gone up a lot since the election in hopes of Trump’s pro-growth policies, tax cuts and regulatory reform coming into place. It hasn’t happened yet, and now we are seeing a lull, and the S&P 500 has been in a trading range for the last few months at the 2300-2400 range. Going forward, the earning season is coming, but with markets trading at about 18X forward earnings, and historical averages around 15X, it is arguably on the high-end. If we do get some tax reforms, that will boost EPS and moderate the multiple. In terms of earnings, she wants to see what the companies are saying and what they are seeing out there. They may be holding back on capital spending until they see some of these reforms being put in place.

Interest Rates. Doesn’t think Canada will see an interest rate hike in the next year. The Bank of Canada is in a difficult position, because they want to have a strong economy, but are worried about the housing market. The economy, generally speaking, is doing well, but there are concerns out there about trade policies with the Americans. There is no inflation, and other than the housing market, government employment and employment related to housing, there is not really a lot of strength. He doesn’t think they want to raise rates, and raising rates to stop the housing market is a pretty heavy duty club to bear on everybody.

Large US construction companies that can take advantage of Trump’s promises? Whether Mr. Trump’s going to be able to deliver on his promises are unknown. There is a lot of expectations in these companies already. If the market sells off on disappointments, this is going to be pushed out to 2018-2019, which he thinks is reasonable. That is when he would make his investments. He would also look at housing. Rates have gone back down again, which will be a bit of an impetus.

Gold .He is not a big believer in golds, and doesn’t really know how you would derive the price of it.

Energy. We are in the beginning of a new multiyear market, that is going to have its ups and downs. Oil needs to be well above $50 on a global basis to sustain the investment that is going to keep up with the demand that is growing by about 1.5 million barrels a day. Over the last 5 years, energy consumption has increased by 7 million barrels. There is a lot of talk about American oil coming out of the ground at $50 and they can make profits. There are going to be a certain number of fields that can produce that amount of oil, but not 9 million barrels a day forever.

Market. It is hard to find a valuation metric that looks low. Pretty much anywhere you look, all the markets are looking overvalued. Saying the market is overvalued/undervalued is an oversimplification of a complex question. The real question is, by how much are markets overvalued/undervalued. If they are overvalued by 10%, and you have a 5-10 year timeframe, that is not so bad. Maybe you are getting a 2%-3% dividend yield on that during a downturn and you are probably going to be alright. If you are 25%-35% overvalued, you may have a problem. The US P/E ratios, 1973-1975 to the present day, gives you an average PE ratio of 16X. However, that doesn’t take into consideration that the world has fundamentally changed with things like the Internet. In 1991, the Internet was essentially opened up to the public. When looking at valuations from 1991 on, you actually see a step up in valuations. If we take the average valuation from 1991 to today, you get about a 19X average P/E ratio. He is in the camp that thinks that 19X is a fair valuation, especially when you consider things like record low interest rates and pretty good growth coming out of the US markets.

Gold. He likes this as insurance in a portfolio. Probably 5%, but no more than 10%. The best hedge an investor can do is being diversified across industries, across markets, and getting some emerging markets, US and Canadian exposure.

Market. The market seems to be a little range bound right now, between the 15,000 and 16,000. On the lower end, he would be buying and then trying to accumulate positions that have come down a little. It seems that it will stay there until there is a catalyst to help us push through that. In Canada, maybe it is energy, and tax reform in the US, but doesn’t see those catalysts coming right now. Expects earnings will continue to be good. Waiting for the next driver to really push us. He would suggest having an overweight position in cyclicals, so a little energy, as well as some financials, maybe more so on the US side. Some of the REITs and utilities are still good core holdings, but you probably wouldn’t want to overweight them with rising interest rates on the horizon. The biggest concerns would be geopolitical ones, with the Canadian housing market little further down the line along with the Canadian banks. He is not seeing rising interest rates in Canada for the next 1-1.5 years.

Investing in bank stocks? There are positives to this in that they are very good companies and they don’t get the respect they deserve. His preference would be Bank of Nova Scotia (BNS-T) because of being outside of Canada in South America and Central America. You could also look at an ETF such as BMO Covered Call Canadian Banks (ZWB-T).

Markets. When you look at forward earnings expectations for 2017 the market is looking for 9% growth. The US analysts are expecting 23% earnings growth there. They are expecting tax cuts to help earnings, but we are not getting any tax cuts this year. If we go to GAAP earnings, we are trading at over 25 times earnings. The last time was in 2000, then 1987 before that. The markets are expensive. It is possible that the US debt will be extended beyond April 28^th without a bill. The problem is that Trump wants it to contain funding for the ‘The Wall’.

ETFs and Tom Caldwell’s Comments last week on BNN. The ETFs have the liquidity of the underlying equities. Larry believes Tom was wrong. Counter party risks are quite small. Other derivatives out there are much more toxic. ETFs will not cause a crisis.

Preferred Shares. They are fine holdings. The risks are significant moves in interest rates. In the last few months there were a lot of financial products being built around preferred shares. This has pushed up the valuations of preferred shares in general. They could come back down.

Educational Segment. Why Long Bonds are the Best Way to Diversify your Portfolio. You have to look at risk and return. Long bonds have the same or less risk as equities. You get a better yield from long bonds than from equities based on risk. Long bonds are the most negatively correlated to equities.