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

Benefits to the US from a strong dollar? The US is the largest debtor in the universe. A strong dollar is always good. It keeps investors confident to buy and own US Treasury debt. It also keeps the US in a dominant position in the world. Chart shows that it was breaking out in the latter part of 2016, as well as testing old highs and making a new high, which are all bullish signs.

Dow Jones Industrial Average. Are we on the brink of a market collapse? He doesn’t see that at all. The price action has been very strong. Any market collapse usually needs a topping formation. You need to build up overhead supply before the market can crash. As of now, buyers are very persistent and are willing to pay progressively higher and higher prices, and sellers are kind of shy.

Energy. There is a lot of dynamics happening from the Middle East and we are seeing a little of it. Thinks oil stays around the $60 level. It is going to be volatile because there are many things going on. A lot of the shale companies are in better shape and are willing to produce a lot more oil. You are a buyer at $50 and a seller at $60. In that lucky environment, it may get up to $65-$70, but you have to see a lot of good things happen in the economy to push it up there.

Canadian Uranium mining? Canada is blessed with some of the best uranium projects in the world. Uranium price has suffered, but we are probably coming off a bottom now. According to the World Nuclear Association, they are calling for the supply deficits open up in about 2-3 years’ time, so he is expecting a nice recovery in uranium. (See Top Picks.)

Market. He is very bullish on the market and sees it going higher. Unquestionably Trump has been good for markets, the stage was set for a reflation trade. You have very tight labour markets in the US with increasing wage pressures. There are all these underpinnings that are very strong, however we have had a big move. There has been some mixed data recently, namely the 10-year retracing back to a yield level that we saw in November. Gold has done reasonably well of late. All these are worrying signs for the continued faith in a bull market. A certain element of caution is warranted. Looking out over the next month or so, he doesn’t know if we are going to get a big pull back. There will be periods of softness where there will be a few months where the market is down 1% or 2%. You have to be a little cautious going into the market, seeing that we have had a big move. Caution is probably the order of the day for the next 2-4 weeks, until we see if the Trump agenda can actually be implemented.

Energy. Oil is probably range bound, so he doesn’t see a huge catalyst for many of the names. This is a sector that you don’t need to be overweight in. We have a pro energy administrations south of the border, however we do have an abundance of supply right now. While the OPEC agreement seems to be sticking, it is sticking at 75% of what was originally agreed. We are in an overcapacity world right now.

Markets. The Chinese growth story is over. Chinese debt (gov’t, corporate, personal) from the Lehman moment was about 165% and now is pushing 265% debt to GDP. The Chinese economy that was growing at 6-7% was 100% fueled by debt. The economy is still growing, but just because they are slapping on the debt. The demographics in the world are a big problem. With protectionist policies under Trump, Chinese growth will have trouble keeping going. Canada is only growing this year because of debt.

Treasuries Outlook: The longer the maturity, the more negatively correlated it is, compared to equities. The long bond is the best hedge. The longer bonds are starting to find support whereas short term are starting to back up because of the fed rate hike scenario over this year. We are getting a flattening of the yield curve, forecasting economic slowing. If the market was forecasting inflation then the long bond would be selling off more.

Covered Call Protection against a recession? ZWU-T is the safest one. It yields about 7%. In a recession that will give you the best protection. ZWB-T would sell off more. ZWC-T looks at the best dividend paying companies with covered calls.

Oil bulls think we will rebalance and energy will go back up. He is a realist. He just bought a plug-in hybrid car. The first 30 km of the day it runs on electricity. All the cars are going this way. Demand for oil is going to come down in the developed world. The TSX energy sector is priced at $60 oil. He is very underweight.

Educational Segment. Long Term Investor Psychology. Per unit of gain in a portfolio, the psychological value diminishes as you get more. The more money you start to lose, the more you increase your unhappiness per unit of loss. When we get complacent after a period of gains, this is our biggest point of risk.

Markets. Something really big is underway. We are going back to a 90s style funding culture of exploration and discovery. In the last month the shift has brought it back home to him when companies started reviving projects that did not work in the past. They are now doing brute force drilling and not only hoping to hit something, but gathering a lot of geological data.

Mining. He is pretty positive on the metal sector, gold prices, etc. Generally speaking, gold prices are inversely correlated with the US$, and the world’s confidence in America. We are seeing a slowly improving economy in the US and are probably going to see interest rates bumped up again. Those are both negative for gold. But the flip side of that is Trump and his administration. We are dealing with someone unstable, and the team behind him is certainly inexperienced. He is concerned that they are not going to be able to react and deal with a major global crisis, or black swan of some sort. Feels that is what is holding up gold prices even though other things would suggest that it goes down. On a more positive note, major mining companies are not finding enough gold to replace what they are mining, their reserves are depleting. They’ve cut exploration dramatically and are not finding new deposits. The place to be right now is in the very junior exploration sector with good people and legitimate projects, and that is going to do really well this coming year.

Mining. Most of the big companies are setting their gold reserve prices at $1250. A lot of the financings is happening for a lot of companies, but some of them have very marginal projects. Those kinds of projects don’t work in this environment, because a lot of big companies have been writing down their reserves to $1250. If gold goes up to $1500 for example, they could already add maybe 10 million ounces from their own assets, rather than go out and acquire them. They need to replace assets of quality, that work at the gold price that the reserves are set at, and generate some kind of double digit return. It’s also about the team. There are not very many teams with the relevant experience, not only in the jurisdiction, but also in the deposit type that they are looking for that can marry all that. Lately there have been a lot of private placements by majors in these kinds of companies with those kinds of assets and those kinds of management teams. That is basically what he is looking for.

Market. He is waiting for the US Congress to get moving on some of the proposals. What will impress people the most is how fast or how slow things are going to happen. That will be the main thing that markets are looking at. If Congress comes through with a broad border tax, that will be a problem. He can’t see them doing that on the commodity side. However, it is a risk on the manufacturing side.

(Feels the Federal Reserve is going to increase rates by 25 basis points.)