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

Cdn$. This has very strong seasonality. Historically, from around the middle of March, it normally reaches a very important low, and moves higher through until the middle of May of each year. It has a lot to do with US activity generating more demand for Canadian commodities.

Energy. Oil had a big jump today because of better than expected inventory data. The other component, of course, is the weaker US$. Historically, crude oil’s seasonality is positive this time of year. It has a lot to do with growing economic activity coming in the spring time. There is good reason to believe that it will be even stronger than average this year. This has a lot to do with the weather. He is expecting greater demand for crude oil and for natural gas.

Gold. Historically, gold and gold stocks have a history of 2 periods of seasonal strength. The most recent has been from the middle of December right through until the 3^rd week of February. It then has a history of moving lower. The other period of seasonal strength is from July through until October. We’ve now passed the period of seasonal strength. If you own gold, you want to use the strength meter that we are probably going to see in the next few days as an opportunity to lighten up.

Banks? These have sold off in the last week or so, and is providing a buying opportunity. On a seasonal basis, the banks normally do very well from about the middle of March through to the end of April or the beginning of May. This is the time when people are buying new cars, fixing up houses, spending a lot of money. The recent weakness in the banks is providing a buying opportunity for a nice seasonal trade, at least until around the end of April or beginning of May.

Market. We are in such a choppy period that a week from now the market could be either up or down and people wouldn’t be that surprised. Given that there isn’t a real clear path of where the markets are going, you have to be nimble. It is important to have a little bit of cash. He recently added gold for the 1^st time since December 2012, and has a 4% weighting in bullion, which provides him with some defence if there is a pullback. At the same time, he is still invested in high quality dividend paying equities. If the market goes up, his clients will be participating. If there is a correction, he is able to step in and do some selective buying. This is not an environment where you want to be sitting in 30%-40% cash. At the same time, it is a mistake to be overly bullish.

Advantage of a US DRIP program? The benefit of a DRIP program is that you don’t have to do much thinking. The dividend comes in and buys you more shares, without having commissions. The negative is that you don’t necessarily want to invest those dividends back into the same company. By not using a DRIP program, it allows you to be more tactical.

Market. Valuations are pretty stretched. Getting policies passed through the US is going to be a lot more difficult than just "tweeting" about them. The political backdrop of Trump compared with the valuation of the market, he struggles to see how the market can go materially higher from here. To him, the market looks very, very expensive.

Oil. There has been a big shift to the downside in crude on the supply side, and there was confirmation that OPEC was pumping more oil than expected. He was stepping in on oil because today’s headlines read a lot worse than it really is. Saudi Arabia is still producing below where they need to be. The OPEC agreement is to be respected, and is very difficult to Short into it. It is the demand side of the equation that is really going to save this market. Demand numbers have been extraordinarily strong.

Banks or Lifecos? These have done incredibly well, particularly since the election and the whole reflation trade that rates are going to be moving higher. If he were forced to commit capital to one or the other, it would be banks. Lifecos are a little too sensitive to the yield curve, and the result could be that at some point we would get an inversion of the yield curve if the Fed continues to raise rates while long rates don’t necessarily go up. US banks are also quite a bit cheaper. He personally would not commit new capital to either at this time.

Interest rates. The Fed will raise interest rates this week. Friday’s payroll was pretty decent, so there is no room for them not to go. Three rate hikes are pretty much priced in to the Fed Fund’s curve out to the end of the year. If we go into Europe and European elections, Netherlands actually starts this week, but we are really looking at the French election as the key one, April 23-May 7. If Marie Le Pen wins the election, that is going to be very destabilizing globally, far more than BREXIT, far more than the US election, and far more than the Italian election. We haven’t seen any impact from British breaking trade agreements with the EU, other than the weakening of the British pound. If France decides to leave the EU, and it goes back to the French franc, the whole European project begins to come apart. BREXIT was a warning shot across the bow, and this would be breaking it apart. If it is not this one, maybe it is the Italian election, sometime within the next year. If one of these goes extreme right wing it is going to start falling apart. That is what he is really worried about. The US economy, for all its ills, is still the strongest economy in the world. The restructuring that Trump is trying to put into place should be very, very good in the long run. There is lots of execution risk. We are now hearing Congress may not go for these trade deals, it has to be revenue neutral for tax cuts, etc., thus execution risk for the next couple of quarters We just have to be cautious on the markets.

Oil. Hedge funds may be a bit too long on oil. Tom McClellan points out that the “net short” position of the commercials, the opposite side of the speculators, are very net short; in fact, the most “net short” since oil was over $100, and they are the smart money. The speculators are on the other side of this trade. There is probably some more downside to go here. It could push oil down to the low $40s, as those positions unwind. $40-$60 is probably the range for the next couple of years.

Why would bank stocks lose value when interest rates are increased? This isn’t necessarily so. The general perception is that if interest rates go up, their revenues are going to rise which would make them more profitable. It really has to do with interest rate differentials. Banks tend to borrow Short and lend Long. It’s the shape of the yield curve that matters. Typically, the bulk of the lending is going to be in the 5-year range, the home equity lines of credit, the corporate mortgages, commercial mortgages. So it’s Short term rates versus Long-term rates, and if that curve is actually flattening, that means margins get compressed by the Banks. It depends on why interest rates are rising. Are they rising because the economy is taking off and inflation expectations are growing, in which case your yield curve steepening; or is it rising because the Fed is tightening and maybe too much, causing a perception that the economy is going to slow down, and therefore your yield curve is flattening, which would affect bank profits negatively.

Gold? He was buying gold mid December, and sold out at the beginning of January and February. Last week, for the 1^st time, he started nibbling again. He’s been buying pullbacks as a general rule. Doesn’t think gold stocks are going to see the major resistance of last summer of $1350-$1400 any more, so he is inclined to range trade it. What is going to force gold up are bits and pieces of inflation, flight to safety, supply and demand. When it dips below $1200 you Buy, and up above $1300-$1350, you Sell.

Canadian dollar in 3-6 months? A big factor is what oil prices are going to do. What is the spread between interest rates between Canada and the US going to do? Those of the 2 biggest factors. If you look at positioning right now, it is very similar to the oil story. Speculators and the futures market, are long the Cdn$ because they believe oil is going to do well, so there is room here for the Cdn$ to sell off.

Educational Segment: Market Drawdowns. What he calls “market noise” is a 5% correction or less. He looked at the peaks and the lowest lows in a 4-year business cycle since 1920. Looking at the drawdowns over the years, you can see the great depression, where 86% was the drawdown in US large caps. We’ve had several in the 50% range. However, the average surprisingly was 13.4%, and the average was only 10 months long. You tend to get a 5%-13% correction at least once a year, so it is pretty normal to get volatility in the markets. Drawing down a little further, he has a one-year version, which shows that we get more frequent declines. The interesting thing is, if we are down 13.4% from the previous peak, and we look out one year knowing that the bear decline is about 10 months, this is the time to start investing, to get aggressive once the markets are down. Your forward returns go up exponentially from a low point, compared to putting money to work at a high point. We are probably due for a downturn that is going to be about 24% at some point in the next year or 2, so he is playing defence because of that. Once we are down 13.4%, he’ll be thinking about buying.