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

Market. He still likes the look of the US market, but is seeing opportunities elsewhere. If he had to characterize the 1^st half of this year, he would sum it up by saying less is more. There has been less likelihood of fiscal reform in the US, which has been overshadowed by an improvement in corporate profitability that has helped US equities. In Europe, political risks have diminished, and there has been an improvement in fundamentals, which has probably helped European equities. The decline in interest rates and low volatility this just screams for diversification. As the year progresses, there is likelihood that volatility increases, and you’ll start to see the correlation between some asset classes deteriorate, which means you want more broad-based exposure. He is overweight equities relative to fixed income, and is seeing some opportunities in the US, but there is probably more capital appreciation potential in continental Europe, where things are getting a lot better.

Which pipelines should be held, and which should be sold? Not knowing which ones you own, he would suggest keeping the Kinder IPO along with TransCanada (TRP-T) and Enbridge (ENB-T). He wouldn’t hesitate to add to Pembina (PPL-T) and Alta gas (ALA-T).

Market. The average investor tends to concentrate on the P of the P/E. They are really interested in price and believe that if the price goes up it is good, but if it goes down it is bad. That is not the way real life works. People tend to judge the company, but are not equipped to analyse the depths that the professionals do. They spend too much time looking at macro issues, trying to figure out whether politics or policy is going to have a bad effect on their holdings. Politicians come and go. Companies and stock prices are driven by the abilities of companies and management to drive earnings, revenues and cash flow.

Currency? Canada has a slightly lower growth rate than what they are seeing in the US. Also, the Cdn$ gets impacted by energy. The Cdn$ is likely to remain weak, and even weaken further from where it is. He has no problem buying US$ with our Cdn$, because we could be buying less a year from now.

Market. We are in a very strong global economy with very little inflationary pressures. Productivity gains are offsetting wage increases. We are still in a period where we can see valuations on equities continue to rise, just as it did in the nifty-50s period. From the late 60s into the early 70s the great companies just became “one decision” stocks and managers just had to “buy and hold” and they did very, very well. That got hammered in the correction of the 70s and by 1998 you are back to breakeven, if you had bought those stocks at their very peak. The FAANG stocks are going to be the ones that survive. They have profit margins that are rarely seen in history. This is a business model where distribution is just the Internet and everyone knows the brand names.

Tech stocks? Fully believes in the Internet technology stocks. Alphabet (GOOGL-Q), Facebook (FB-Q) and Amazon (AMZN-Q) are in a good position and will continue to grow. There is not going to be any dividend yield on these and the volatility is going to be high. Watch for opportunities to enter, on days when the market is down for no reason.

Markets. They de-stressed the stress test for the banks by taking the qualitative aspects out of it. This week the stress tests will not have much impact. He thinks we will see negative interest rates in the future. He does not think the Fed will be able to unwind the balance sheet of the US much. The equity markets are breaking out to new highs today. There is a recession sometime in the future that will be hard on the markets. He is nibbling away at energy producers, mainly through ETFs such as XEG-T, XLE-N, OIH-N.

ETF similar to ROBO but in Canada. There aren’t any. You will have foreign currency risk with all of these. But even if there was a Canadian one it would have to hold international equities.

Canadian vs. US $ ETF. He believes the US stock markets have never been more expensive. A high quality ETF could fall 25% or more in a bear market. You would still get a yield throughout, however. BMO is the best at covered call strategies so you might go that way.

Buy US$ now? He likes to scale into a position. If you have years to wait, then the CAD$ might get higher. For the foreseeable future you are looking at $0.78 as the maximum, if that.

Guest: Danielle DiMartino Booth, author of Fed Up. She is very critical of the Fed. Credit markets were frozen solid and liquidity was the issue, not interest rates. 9 years later we are not at normalized interest rates. She thinks eventually we will have social unrest. Dividend paying stocks are among the most over valued stocks in the index. Auto and Energy are the two biggest drivers of growth. Auto sales volumes have rolled over.

Markets. It comes down to valuation. With the market multiple at 20 times, it is rather rich. He likes 15 to 20 times if there is 15-20 percent earnings growth. Finding stocks is getting more challenging. There is risk for Canadian stocks with changes to NAFTA. It’s an overhang. US investors are going to want to see some kind of resolution to NAFTA. Stock picking is important as things are likely to go sideways over the summer.

Market. Two areas he likes are defence and construction. Defence has a very long-term cycle and is very easy to identify. Global defence spending fell for 6-7 years in a row, and 2015 was the 1^st year defence spending increased. The cycles tend to last 7-10 years. Construction has to do with the age of the structures. Government statisticians in the developed world, have tracked the age of infrastructure, and it has never been this old. We are already starting to see the cycle. If governments come in with stimulus packages, that can be a catalyst, but the cycle is there, simply because things are wearing out. Regarding automobiles, we have gotten up to a SAAR (Seasonally Adjusted Rate of Production of Automobiles) of 16-17 million in the US, so we have literally seen the top of cycle amounts.

US Treasury Bonds? One of the biggest problems globally is low interest rates, which has been largely caused by several factors, not the least of which is foreign governments hoarding them. The People’s Bank of China has the largest central bank balance sheet globally, and they’ve hoarded a massive amount of treasuries suppressing interest rates, and denying American households income. The US government is also to blame. The Pensions Benefit Guarantee Corp. raises the penalty payments for underfunded conditions within pensions, every year sequentially, which leads pension plans to buy duration products, such as long-term government bonds, or corporate’s that are swapped back into the government market. There are somewhere around $1 trillion treasuries that are being held by banks, instead of banks investing their money to provide mortgages.

Oil & Gas? He is more positive on gas, and sees more possible downside on oil. The supply/demand on oil is out of whack right now.