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

Markets. There was some geopolitical risk priced into the market before today’s events. Once we know more we can see how it unfolds. If these events hit North America people will react more negatively and so will our markets. Geopolitical risks are ongoing and we have to live with them as investors. Pre-Trump there were interesting things happening. Employment and personal income were picking up. What we are about to see is a major change in investor Psyche. The value of homes are now back to where they were pre-crash. It is possible that Trump will succeed beyond our wildest dreams. There is deregulation, repatriation tax cuts and a reduction in corporate income tax that will bump S&P earnings one time. We could be in for a very bullish two or three years. The bull market is over for the fixed income market. If the US$ does get stronger then it will dissuade the Fed from raising rates three times next year. You will see damage to your fixed income portfolio, however.

Gold. He is a long term bull on gold. We are creating more and more debt in the world. You have ongoing liabilities from pensions. Short term, however, gold is not going anywhere. You should have 2 to 3% of your portfolio in gold at all times. Eg. CEF.A-T

Fixed Income Market. Should you sell off bond funds? He would not stick around. Take the money and run. Look at high dividend paying stocks. Rates have been coming down since 1980. Now rates will have to go up.

REITs. Rising interest rates should whack REITs but keep in mind that the key with REITs is how well the rentals are doing and the length of the leases compared to the cost of money. The closer you can match the maturities to the leases, the better off you are. HR.UN-T is one of his favourites. They are shedding less interesting properties and buying in the US. CSH.UN-T is another favourite because of the demographics.

Canadian Lumber. Lumber stocks have been under pressure because of the likelihood of the imposition of duties of 25% from the US. There is a counter view that the market knows about and has discounted this position. He would not buy them, however.

Market. We have had a really good run in the US market since Trump won the election. The international markets haven’t participated nearly as well, and more importantly, the currencies have been very, very weak. There are 2 things working in the US$’s favour. 1) Trump and his pro-growth strategy and 2) the Fed, which has changed the picture a little by saying there are 3 interest rate hikes coming up next year. The market has been fully anticipating 2 hikes, and by saying there was going to be a 3^rd, that added to strength to the US$. Global currencies will be weaker than the US$. Ultimately that helps international and Canadian companies that are exporting into the US as it makes us more competitive. That is a positive momentum that will build for foreign companies selling into the US. The market has been anticipating pro-growth. We are seeing the moves in resources, financials, and in the bond market. He doesn’t think it is in anyone’s interest to have a trade war, so is doubtful if Trump will introduce 45% trade tariffs with China. Expects he will backtrack on more of his promises, and things will quiet down. He is optimistic on what he is seeing out of Europe. There is no flow of funds into Europe, so investors are really ignoring what is going on. However, he sees a lot of positives. Leading indicators have been turning up and lagging indicators look reasonably good. The best thing about Europe is the base affect, with very, very low earnings and growth, which provides a base to grow from. The election outcome in France is going to be benign, and thinks Merkel in Germany will be able to form another coalition government, so he thinks the risk is on the upside for European politics.

Japan? The Japanese market looks fairly positive. It has been one of the poorer performing markets around the world until recently. There is a strong correlation, especially of late, between the Nikkei and the broader market, and a weaker yen. He feels that the yen could fall to 120 or lower, which would be good for the Japanese market in the short run. However, longer-term, we are starting to see wage inflation, which hopefully will translate into good inflation in general, which leads to increased spending and consumption.

Market.The result of the election was obviously a surprise. There were 2 things for optimism. One was the Republican Congress that their tax cuts would likely go through, and 2) Trump re-instilled a confidence level that the average guy had lost over the last few years. When he got elected, there was Short covering, and a lot of portfolios were light in equities, so in they came. The system is so locked up tight, there is not very much of a chance that he would unravel this whole thing. The environment is still very positive for the American banks. In Canada, a lot of this has been front end loaded. Banks have had a fantastic year, and will benefit from a steeper yield curve. The opportunity for loan growth is greater in the US than they are in Canada, because Canadian consumers are in a lot of debt. He is sceptical of the ability of OPEC to orchestrate energy prices to go higher. The Saudis still control energy prices and supply, but it is not the cartel that it was in the past. Also, there are 500 million barrels of inventory that it is sitting waiting.

Inverse ETF’s? Why pay somebody? If you are not comfortable in Shorting a stock yourself, you shouldn’t buy inverse ETF’s. Most of these are very big and liquid, and are easy to Short. You could even buy Puts on them.

Energy ETF? He doesn’t have a recommendation, because he is not tilting to energy. There are 2 big ones. iUnits S&P/TSX Capped Energy (XEG-T) and BMO S&P/TSX Oil and Gas (ZEO-T). If he were going to choose one, it would be ZEO-T, which would give you the broadest diversification.

Gold ETF? This depends on what you want to do with gold. Gold is basically trading at its marginal cost of production. If you want a bit of leverage, just buy iShares S&P/TSX Global Gold (XGD-T) or Mrk Vectors Gold Miners (GDX-N). They are very similar.

Markets. It has been an interesting couple of months. It is difficult to translate a Trump victory into investment strategy. Some of the run in certain stocks have been impacted by policy reform and it is probably over done. Changed policies will not get implemented until third or fourth quarter of 2017. You should own companies that will work regardless of the outcome of policy reform in the US. He has a bias to Canada but has exposure to other parts of the world. The cost of capital in Canada will go up as a result of many rate increases in the US. These rate increases will impact interest sensitive sectors. Not all of a REIT’s debt gets refinanced in any given year. This insulates them from the full impact of rate increases.

Market. Since the election, it has really been a sector move, as opposed to an across-the-board move causing all these new highs. Where we are getting the oil/gas, financials and industrials to move, the healthcare, technology and consumer discretionary stocks are not moving at all. It is important to understand why these moves are being made. Investors should continue to stay diversified in their portfolios. You never know when things are going to take off. For people who don’t want to have 100% exposure to the equity market, there is nothing wrong with being in the bond market, as long as you continue to have a laddered bond portfolio, so as interest rates rise, you will always have something maturing every year for cash that you can roll into something higher. You can still get 5%-6% yields in the bond market with BBB and BB high-yield investments, where the balance sheets are strong and you can still take advantage of it. Don’t discount the fixed income market just because interest rates are going up. On the dividend side, with rising interest rates, you are going to have pressure coming from telecoms, REITs and utilities. In utilities, most of the construction is done so the rate bases aren’t growing, and at the same time because of higher bond yields, there is going to be competition. S&P 500 is trading at roughly 21X earnings, which often signals a peak. If you take out extraordinary items, it is trading at 25X. We are bubbly right now, so it is nice to have some cash on the sidelines.

Suggestions for getting into gold? Has looked at gold ETF’s, and doesn’t like them. When you add it all up, the actual MER is not .6%, but is closer to 1%, which is too much of a take away. He would prefer just buying gold wafers and sticking them in a safety deposit box. It is the safest and cheapest way of doing it. As long as the US$ continues to stay high, the price of gold is not going to move in a huge way.

Market. The US economy was growing even before Donald Trump was elected. We’ve had very steady employment gains, and are starting to see some wage increases. For Canada, there was a bounce back in GDP, and things are improving. She constructive on equities, because the profit growth is there. It turned positive in the 3^rd quarter. If Trump reduces corporate taxes and repatriates funds, it is something that he will do quickly, which will improve after-tax profits for US corporations. Longer-term, she believes the secular growth is in emerging markets, so now might be a good time to look at names that have not moved. Emerging markets have been lumpy, and a stronger US$ puts them in a difficult position.