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

Gold. He would not handicap gold to just performing in 2017. It has been in decline for several years, but now you have the opportunity for gold to be in the sweet spot. People might get scared of what markets are going to do, or people may believe there really is inflationary pressure in the system.

Why is oil going up and some oil stocks going down? Sometimes it is the balance sheet of the company that is driving the stock price. The crude market itself may not be enough to drive the company. People may be looking at infrastructure growth and so on. Oil price is only one component for the overall stock price.

Gold – Should it be in the portfolio? Yes. It is an inflation hedge. This was a non-issue for years. Now you are seeing wage inflation and general inflation is getting into the system. Gold can hedge against these pressures. AEM-T has probably one of the best management teams out there. They may have the benefit of the doubt already, but G-T probably has an opportunity to get a return above that from just gold. Gold will peak in about 1.5 year’s time.

If you are not 100% certain that one of two stocks in a sector is better than the other then get half of both positions and think of them as one position. After a couple of months you may realize that the behavior of the two stocks are different. One may have more catalysts or is recognized more and then you may decide to go with the winner from there.

Market. The VIX is still at record lows, so he thinks the current market condition is just a little bit of steam coming off. He’s been getting much more aggressive in his portfolios, and his cash standing is virtually at zero now. Was starting to see positive data on corporate profit, S&P 500 earnings and PMI data before Trump won the election, and it was nice to see that cloud of uncertainty removed. Fully expects some volatility around the inauguration, but is staying Long throughout that.

Market. The P/E ratio for the S&P 500 is at about 17X 2017 estimated earnings, above the long-term historical averages of 14X or 15X. Some strategists have upwardly revised numbers for this year on the premise that Trump is able to get through his corporate tax cuts, from 35% down to 15%. For every 1% cut, it adds about $1.80 to earnings, so if he even does 5% and brings it to 20%, that could potentially add $20 to 2017 earnings. We do need the profit growth to come through. Right now, the expectation for the 4^th quarter earnings is that they are going to grow about 4.5% year-over-year. Usually they surprise to the upside because companies are cautious. We should have less headwinds with energy.

Market.Earnings season starts in earnest very soon, and all indications are that things should be pretty good. We have seen a pretty good rally since the election. The rally is justified, it’s not just a flash in the pan. We are on the cusp of a legitimate regime change in the markets whereby the baton is being handed from the monetary authorities back to the government. With Republicans now firmly in control of the government, they are very likely to run a pro-growth agenda led by tax cuts, both personal and corporate, probably rounded out by some infrastructure spending later on, and perhaps some tax repatriation holidays.

Rate resets?A lot of investors are going to be wrestling with the need for income as people are aging. The preferred share market is an asset class that is taxed favourably. It is not quite the same risk exposure as government bonds, and there is more volatility and can go wrong if rates fall. Rates are not likely to fall. Rate resets are by large trading at 4.5%-5%. He likes this asset class.

Investment for a TFSA account?He wouldn’t be put off by Canadian banks being at all-time highs. They are tremendous shareholder value creators, and earn about 14%-15% ROE. They are steady and consistent businesses that tend to grow earnings most years. Most have medium term earnings growth targets in the 7%-10% range. Pretty good governance businesses and pay out pretty good dividend yields. He likes Royal Bank (RY-T), Bank of Nova Scotia (BNS-T) and Toronto Dominion (TD-T).

Market. Since the Trump election, there has been a lot of optimism about policy change happening, both in a tax and a regulatory front. We are now at a digestion stage. There is a lot of Senate confirmations on his cabinet in the next few days. This is followed by his inauguration, and analysts are waiting for the change to happen. This is a healthy. He tries to always populate his portfolios with a basket of the best reward returns. When cyclicals shift, whether it is materials, energy, etc., it can be years of a changeover. Cycles happen because of over investment and supply. When things get really bad in multiple years, there is under investment and supply. These can be longer cycles.

Of the Big 6 Canadian banks, would it be wise to buy the laggards? Looking across the banks, they have differentiated businesses. He has focused on the ones with the largest US exposure. TD Bank (TD-T) would probably be the key name. The ones with the highest multiples, around 12X this year’s earnings, are the ones with the larger exposure to US wholesale. Those are the ones that are going to have the best earnings growth.

Bonds? These have had a 32 year-run and are trading at yield levels that are unsustainable. Unlike the last 32 years, where you made capital gains and income, you are going to have a very small dividend offset by capital losses. This is the asset class that is going to struggle.

Market. A report just came out from the Canadian Security Administrator, talking about whether or not we should keep embedded compensation i.e. trailing commissions in mutual funds. The investor needs to know that for the 1^st time ever, regulators are serious. Regulators were talking about this 22 years ago. 22 years later, they’ve gone from “this is a good idea” to “tell us how to implement this”.

Is an equity/fixed income portfolio of 50/50 still recommended? A resounding Yes. You might even want to find ways of being more aggressive in cutting back on your income portion. A good way to decide what your income component ought to be is to take your age, multiplied by the decimal of your age. That is your income component. E.G. if you are 50, this would be 50X.5 = 25% in income. If 60, 60X.6 = 36%. When you get up to age 70, it is 49% income, and is basically 50/50, and you don’t need any more income.

Markets. He is calling for a correction after the Trump rally. Statistically, most times from the beginning of the year until some point later, you can buy the market cheaper than when the year first started (80% of the time). US Earnings season gets ticking this Friday. There has been a huge move in some of the banks since the election, looking at higher interest rates and deregulation. The reality may be much different than the market is looking for. Net interest margins will not be meaningfully impacted yet. A year from now we will see the impact of interest rate increases. Hopefully now banks will have freer use of their capital. Are autos looking at trade wars – it has not come out except in the twittisphere. Oil poked above $50 and shale producer rig count rose in the US. Over the next 6 months it will go up to $56 and then will remain constant for 4 or 5 years. It remains questionable whether OPEC can execute on their deal. We have not seen the impact of Brexit and won’t for a year or two. There will be a hard line on both sides as to what that looks like.