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

Markets. Current events are a reminder to investors that risk never goes away. The market priced everything in for the best of possible worlds. He thinks it is likely that someone may leave the EU before BREXIT negotiations conclude. There are serious problems in Italy. Investors should think about gold. It has come out of its 5-year bear market. The supply has shrunk.

Oil - 1 to 3 Months. Usually this time of year the price goes down, but refineries shut down for maintenance. There have been exciting things happening in the Middle-East. There is the possibility of a supply disruption that could affect prices.

Market. We have already started a corrective period, and now that we may be in it, any downside in prices will probably be capped with possibly 1 or 2 jolt days. It will be volatile next month followed by a crazy, roaring rally through to the end of the year. Right now, there is a big disconnect between sentiment and actual hard data. Longer-term, we have to bookend the 2008 crisis. Everything has not been written about that chapter yet. Because it was a secular sort of thing, the timeframe for that is long.

A good ETF or defence stock? Two names he likes and which have done quite well would be General Dynamics (GD-N) and Boeing (BA-T). On the other hand, you could always buy the ETF iShares Aero & Def (ITA-N).

Energy. There is still a massive glut in the oil market. The summer driving season is coming and demand is going to pick up by 1 million barrels. The problem is now April, May and June. US storage is at record levels, way above the five-year average. OPEC is hoping that with their 1.2 million barrel cut and the continuation of that cut through to the end of the year, that million barrels will allow things to grow in and begin to start to see inventories globally come down. In his opinion, OPEC is able to cut another 2 million barrels a day. In the past, when they made cuts, it hasn’t been one cut that has worked, it has been 3 or 4 cuts between a total of 3 and 5 million barrels. Also, risk premiums are coming back. 10-15 years ago there was a $5-$6 a barrel premium because of worries about the Straits of Vermouth, the Straits of Molokai, Yemen, etc. OPEC is hoping that the non-OPEC supply will give some credence and cut back, which to him it is a nonsensical idea. US is not cutting back. Canada is not cutting back. Mexico won’t cut back. Britain won’t cut back. They are hoping Russia will agree. The government of Russia is saying they are cutting back, but the 2 largest Russian players are selling every barrel they can.

Tonight's program is on taxes, not stocks.

Markets. Research has shown that 2011 through 2016 the traditional model of active management has struggled to add any value. Flows are out of hedge fund strategies and into passive strategy ETFs. He argues that you are taking only one category of active management and painting the whole canvas. You are in the gut wrenching cycle where you want to go passive management. Active management is working right now.

Market. In the last 4-6 weeks, we have seen North American equity market stall a little as investors digest some of the political uncertainties in the US, as well as abroad. When looking at some of the policy setbacks that happened in the US and overseas in the UK, investors are obviously a little concerned and markets have bounced sideways. Another ingredient added to the mix of volatility is how Trump will deal with China. Although markets are at bit extended in terms of valuations, you still want to be constructive given the fact that we still have a pro growth agenda in front of us. The US healthcare policy did not go through, but there is still the prospect of tax reforms, deregulation and infrastructure stimulus, and he is quite certain that some or most of those policies will go through. If we continue to have an environment where there is inflation and economic recovery, the market should do well over time. In companies, he prefers dividend growers over dividend payers given that interest rates are expected to continue to move higher, especially in the US. Also, likes value stocks over growth stocks given that valuations are a bit extended. You also want to look at the US over Canada, given the differential in policies that is happening, as well as the trajectory of growth. International markets are somewhat attractive given the relative valuations to North America. He would avoid defensive equities, including utilities, real estate names, consumer staples, as well as the traditional bond market and would move more towards the credit markets, corporate bonds and high-yield bonds.

Credit bonds or corporate bonds?10 year yields in Canada are sitting at about 1.5%. In July it was under 1%. Clearly bond yields are moving higher. They’ve calmed down in the last few months. In the US yields are 2.34% with a low of 1.36% in July. Feels that July marks the bottom in interest rates for our generation. They are likely to start moving higher, particularly with the pro-growth agenda happening in the US and that we are looking for a global recovery in the economies. Credit bonds or corporate bonds make sense, investment-grade or high-yields. In a lot of those cases, he will use ETF’s. Also, rate reset preferreds look good right now. Another source would be the emerging market bonds which fell off after Trump was elected and are starting to recover now.

Energy. US crude inventories are still more than 500 million barrels. The period from the beginning of April to the end of May is going to be very critical. He is looking for a couple of signs. 1) Expectation of any cuts that have been happening in the Middle East. OPEC predominantly will start to get reflected probably through April and May. Shipments that originate in January or February, take 45 to 60 days to get into the Gulf and get reflected into the overall system. 2) Watching demand for finished products. Everybody gets preoccupied with crude, which is important, but he also wants to see, as refiners start to turn back after turnarounds, what the drawdown is for products, because you might see the crude inventories come down as refiners have that draw, but the products might not be selling. You really have to see the balance between the two. For 7 straight weeks, gasoline and distillates in the US have been falling. What is also important is non-US OECD stocks, which have been declining pretty much since the middle of last year, and are actually equal in overall size to US stocks. AltaCorp has a chart indicating that Cdn oil/gas equities are way down from the end of Nov. when OPEC announced its production cuts and there is some great value. There are a few things that are getting caught up here. The noise around the border adjustment tax which had an impact on Canadian energy companies specifically, versus their US counterparts. We are probably looking at anywhere from 200-300 basis points differential.

Gold. Its big rally has faltered lately. His range has been $1100-$1300. With the new administration, he has raised his floor to $1200, because he feels it introduces some element of unknown. Whenever the market is unsure about timing, magnitude and affect, that adds an extra element of risk as to what it really means over the next couple of years.

Market. He is seeing a bit of a pullback in some of the dominant Trump themes, such as the weakness in the Mexican peso, the rise in government bond yields and leadership in the financial sector. Investors should understand that when a regime takes hold, there are invariably a lot of doubters, so you do get these setbacks in any major or dominant trend in the market, but only because sentiment runs faster and hotter than underlying fundamentals do. This waning of enthusiasm is only a corrective counter-Trump phase, and the leadership should reassert itself going forward. The defeat on the Obama care was a setback for the Trump administration and the pushing forward of their agenda, but it’s too simplistic to just write off. They’ve got a long runway in front of them, and is hopeful they will get some part of the tax cut agenda enacted. He continues to like financials, which are well positioned, particularly in the US, for a rising interest rate and rising net interest margin environment. As well, if the government is successful in rolling back some of the regulatory red tape that has encumbered the sector, notably Dodd Frank, that should be a tailwind for them. He’s also constructive on energy, although recognizing there are some challenges in Western Canada.

Market. The US market will go sideways, despite the headwinds of high valuations and the Trump uncertainty. There are as many positives as there are negatives. With Trump’s aggressive plans to cut taxes, repeal Obama care, the immigration policies and the big spending policies, those are all kind of positive, but he has had very little success so far in implementing a lot of those. Also, as valuations are at a historic high and rates are rising, the best we can hope for is a sideways move in the market. There is going to be a lot of money to be made in the market, but the strategy of just buying an index and waiting, is probably past its prime. Stronger global growth will really be needed to ignite energy prices.

Preferred Shares. Historically, investors would buy preferred shares, something like corporate GICs and put them on the shelf. They got paid a dividend income, a little bit better than GICs, of good strong companies. Over time, different types of preferred shares were invented and have become a little more complicated. What was very popular, and still is, was the fixed reset preferred share, which designed to perform well. Every 5 years it gets a new reset coupon, which is determined based on a spread over Government of Canada 5-year bond yield. In 2015, people were generally anticipating interest rates to go higher, so the resets seemed like a great product. However, 2 years ago, the price of oil dropped significantly. This was a concern. The Bank of Canada was committed to stimulating the economy, and they started cutting rates. The structure and the built-in spreads of these fixed resets didn’t really support that environment. With this, your 4.5% return turned into 2.5%. There was tremendous selling pressure. At the end of the day, it was really oversold, and smart money started stepping in, recognizing value.

Issuers have now introduced new products with attractive yields, but with a floor feature. If, what happened back in 2015, happens again, these products are protected. Even though it is a rate reset, if you get inflation, you get the benefit of the new rate. If it starts going lower in a deflationary environment, they guarantee you the minimum yield. It’s a great feature and something that has been very well received.

Using rate reset preferred shares as a strategy for increasing interest rates. Because resets are also perpetual (with a reset every 5 years) isn’t there a risk if the yield curve steepens? Traditionally, if the yield curve steepens, long bonds get creamed, so if you own a perpetual preferred share, and you get a real inflationary environment, you are at risk. The 5-year reset though, really captures the 5-year bond yield, and does so every 5 years. If your yield curve starts steepening significantly, your reset coupon is actually going to become more attractive. It is going to respond to the steepening of the curve.