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

How do you tell if a stock is overbought or oversold? He uses 3 indicators; Stochastics, Relative Strength Indicator (RSI) and MACD (Moving Average Convergence Divergence). He is looking for divergences, for selling exhaustion or buying exhaustion. That is more interesting than if something is overbought or oversold. If something is overbought, that just suggests strength. You want to be in things that people are aggressively buying, to the extent that it pushes them to extremes that are at nosebleed levels. (StockCharts.com has an entire learning school.)

US Market. The market is at or near record highs. The Dow is breaking through 19,000 for the 1^st time. Didn’t feel there was any substance or news in Donald Trump’s speech to Congress, so it was surprising to see the market up so much. He doesn’t think interest rates are going to go up a lot. Thinks the rally in banks has a little room to go, but you have to remember that the financials are the most leveraged sector of the economy. When you buy financials, you are getting a lot of risk for that leverage. He is looking at retail, but not the brick-and-mortar retailers, with the possible exception of Wal-Mart (WMT-N) and Home Depot (HD-N) which are expanding into the online ordering of things.

Effect of the budget on the US stock market? The market has priced in that there will be at least 2 things that will be good for stocks. One is that US companies from overseas will be able to repatriate earnings allowing them to buy more shares and reinvest in themselves. The market has also priced in a cut in the US corporate tax rate to make them more competitive globally. If we don’t get those 2 things, the market is going to correct.

Market. The market is at all-time highs, which is concerning from a valuation standpoint, but he is still finding lots of opportunities. Low interest rates, low inflation and pretty darn good profits in an economy that is starting to accelerate, maybe the market deserves to be at these levels, and even deserves to be a lot higher. In the past year, he has been allocating a lot more clients money to the US, where he is finding more opportunities. Believes the Cdn$ is going to get weaker and the US is probably going to raise interest rates 2 or 3 times.

Market. The market is almost flat year to date. We had a big move at the end of the year after the US election. He has seen a lot of good earnings come through that has just reported, so there is good visibility on a lot of companies. You have to be more of a stock picker in this environment. Good correlations have broken down, but that is the type of manager he is and where he has historically been able to perform.

Stocks that will do well in US defence spending? He doesn’t follow the US market closely, but for Canada there is CAE (CAE-T) that will benefit from larger defence spending. Also, Top Picks will include a stock that has a portion of their business in US defence spending. Sometimes these stocks move ahead of the news, so sometimes it is good to sell into the news and wait for a pullback. The spending doesn’t happen for a while, so it will take a while for you to see it in earnings.

Market. Looking at market valuations, PE ratios in both the TSX and the S&P 500, the market has gotten a little overextended. As a value investor, he is looking to buy equities on the cheap. With the market as a whole being expensive, it means he needs to focus on stock picking, individual security selection to derive returns this year as opposed to just blindly buying the market and hoping it goes up. Hopefully we are entering a period of earnings recovery, but it is all relative to what price you are paying for equities. Maybe the S&P 500 is growing by 4%, but you are also paying close to 20X earnings for that growth. Part of the reason the market has been so strong is that bond yields were very low, so people didn’t have any other place to go. Now that bond yields have started to creep up, that argument is going to get weaker. Thinks there is still more upside to energy stocks. Utilities and REITs are overvalued, and in a rising interest rate environment, those are not great sectors to be in.

Markets. We have this divergence because we have the liberal budget coming out. Canada is out of cash. The US is going to cut taxes and make it more competitive, making business less efficient here. He thinks what is doable through congress and what Trump would like to do are two very different things. March 15^th we next hear from the Fed, March 10^th we get another employment number. If we get a good employment number it is 50/50 we get a rate hike. We are due for some volatility soon.

ETFs for an RESP at the start of University. As you go into the years where you start to use the funds, you need to make sure the money you will take out each June is not subject to volatility. Take next June’s withdrawal and put it into a money market ETF. The rest can be a short term corporate bond ETF. At some point before the end of the 4 years of school, we will probably have a recession.

VIX Products. There are a suite of single, inverse and leveraged ETFs with Horizon. You are exposed to US dollars even though you buy them in Canadian dollars. They are not good for long term trades, however. HUV-T may be one to look at.

Educational Segment. Diverging tax policy in the US and Canada and how to take advantage of it. Trump is addressing a joint session of congress tomorrow night. Trump is going to talk about tax, including border tax. They may not have agreement about tax reform until Q4 this year or even early 2018. They want the tax reforms to be revenue neutral. He is far more bullish in his outlook for the US than Canada. The Canadian dollar could get weaker. PSU-T is a high interest savings account, but you would also make money on the drop of the CAD$ relative to the US$. For more aggressive types you could play it with small caps in the US and an inverse position in Canada. There is volatility ahead with ambitious estimates for earnings growth possibly not happening.

Markets. We are into a radically different era, especially when dealing with the US. He refers to a book by William Strauss and Neil Howe, “The Fourth Turning”. Every 80 years structures in the global economy have to be torn down and built back up again. We have to trust Donald Trump and take him at face value. This is going to be a world phenomenon and investors have to get used to it. This is a natural evolutionary cycle and we have come to a crisis where things have to change. People are going to talk about this period in history for a long, long time. He does not know where the Canadian government stands.

Market. If the market holds out in February, it will be the 13^th consecutive month that the TSX has gone up, and it hasn’t happened that many times since 1981-1982 and back in the 1960s. It makes you wonder when the pullback is coming. One of the most frustrating markets for people who are underinvested, or who have a lot of cash and who are trying to find some type of pullback to get in on. There were a lot of positive comments from Warren Buffet over the weekend. Thinks the real tell will be tomorrow late, when we see whether or not Trump does a big meandering speech without any specifics, or if he actually gets into detail. We need to really see some detail in the State of the Union address, otherwise there will be a lot of concern on what is going on. Thinks buying an index fund at these levels is going to be a bit of a riskier play than most people think. Underneath the broad market, there is still some good value.

Canadian Banks? Banks had a good run last until Friday, where they were up about 8%. They were all down today which brings them to about 6%. They’ve had a great 16 month run, but looking at a longer-term chart, they really didn’t do much for about 3 years. The quality of their mortgage Book is good. Thinks they are emerging out of a five-year run, so he is still happy to be in them. He would be buying all 5. (He is more inclined to be in the US banks through the Hamilton Capital Global Bank ETF (HBG-T).)

Market. The markets are not cheap. Forward earnings on the TSX and the S&P are at 24X plus. As a value manager, he likes to buy stocks a lot cheaper than that. It makes it even more crucial to look at securities you are buying today, making sure, if a value investor, that they are indeed cheap. He still sees some growth, maybe at the 1.5X or 2X level. If Mr. Trump gets his policies put in place pretty quickly, we might see a little more tepid pace than the 3%-4% type level.