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

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.

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.