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

Market. The Fed raised interest rates by 25 basis points, which was expected, but also said that they could raise rates 3 times next year, rather than 2, and the market sold off. Thinks that rising interest rates will be directed by whatever Trump is doing and thrusting the economy forward somehow. It hit the Cdn$ today, but will probably ease off tomorrow. We are in that critical period of being not quite at the end of the tax year, so everything that is being trashed is going down, while people take tax losses. The Trump rally is a totally brainless rally that is picking everything up, but all you can do is sit through to the end of the year, and hopefully have a good result by the last day of the trading year, and then start having a correction.

Buying gold stocks on tax loss selling?Gold has sold off under the Trump market, and has been cycled down. At some point, there is going to be some fundamental event that will drive them. The stocks will rise again. There is a significant lowering of grade and discovery and production nowadays, and it will continue to be needed. One setback at the moment is India, where Modi has killed all the big notes, and in the short term killed the gold festival. Now is the right time for buying more.

When do you Sell or lighten up?He very seldom sells, except for things that have gone down for tax purposes. There is also a tiny bit of trimming on some big stocks. He has no precise methodology, and he often gets it wrong.

Market. He has been bullish all year. In June, he felt that very clear leadership had emerged in financials, industrials, energy and technology. This feeling hasn’t changed, other than accelerating since the election. Sadly, the most over owned parts of the market, bond proxies, utilities, telcos and REITs had the highest risk, given that we were so low in interest rates. Trying to position in the market is way too defensive. Cash is sitting on the sidelines. $180 billion came out of equity mutual funds over the course of the year, and that money is not yet replaced, not even close. For those waiting for some kind of 10% correction, they are going to be disappointed. The economy is inflected and valuations for equities can expand from here. The 5 quarters of negative earnings growth in 2015 was an inventory correction. At precisely the moment the market got most bearish, February 2016, the global purchasing managers index (PMI) turned higher. Economic indicators started beating expectation. What was expected to be a 5^th quarter of earnings decline, turned into earnings gains and revenue gains, which began a cycle of estimate revisions. Post the election, most analysts are gun shy about raising their numbers until they see more concrete evidence. As a market participant, you can’t do that. By the time it is clear, you are too late.

Market. Nobody expected this size of move in the market. When you are at this level with the S&P 500 and in new territory, you can’t really call it a Cap. At some point, there is going to be a little fatigue built in, and probably is going to happen on a catalyst event. He is still bullish on the market. We are still in that favourable 6 months of the year. We might see a rotation since some of the sectors have done so well.

Economy. Everybody is expecting the Fed to raise rates tomorrow, and he is in line with that, but what happens after? Are they going to be dovish or hawkish going forward? The people in the Fed are real doves, so they will only raise interest rates 25 basis points at a time.

Markets. The US$ dollar broke out above resistance. But it will cause problems for emerging market debt. He thinks there is a bottoming in gold. The gold producers are starting to bottom sooner. Commodity producers’ stock price anticipates moves in the commodity. XRE-T has been under pressure with the rise in bond yields. REITs have come back a little bit since the end of November. He thinks the 10 year bond yields in the US will break the trend and pull back. Overall he thinks markets will push higher into December but Mid-Feb. to mid-March there will be some pretty big volatility as with other changes in party after a presidential election. He thinks there will be a rally after that.

Educational Segment. How to Use Stop Losses. It is part of risk management. Look at your position sizing. Do you have too much in one stock because it has done so well. Knowing when to sell is a hard thing. Look at the beta of your portfolio. To exit, you could use a volatility stop (VSTOP – Google it). ‘VSTOP’ is a calculated stop loss point that incorporates the volatility in the stock. Look at moving averages. You might sell if it breaks the 10 day.

Markets. When reality sets in, Trump will not be able to sustainably increase US growth. We will still live in a slow growth world with an aging population and high debt levels. Talk of tax cuts is positive for the markets. Tax cuts are nice but there is a lot of rhetoric about trade barriers and that is negative for markets. He would take profits on the banks because they had a huge, huge run up. The avenues for growth are not obvious. The opportunities are sectors that got pummeled. Alternative energy, utilities, companies with growing dividends, and spots within infrastructure look promising.

Market. Fixed income has been a risk on trade since Trump won. When you look at this as a whole, fixed income is one area where investors stand to be shocked in 2017. Given that yields have been so low, investors had been pushed to take more and more risks to get any sort of net positive yield. For many investors, especially retail ones, it has often meant going from provincials and governments to investment grade, and from investment grade to high yields. Many investors confuse the word bond with safety, even in the high-yield space, which is very much correlated to the equity market. He has been short on the duration curve for a while, and his message to clients is that fixed income is going to get you 2%-2.5%, and it doesn’t get any more exciting than that. It is very difficult to add value, trading fixed income in this market unless you are a large institution. The best thing he would suggest is to use a passive strategy for fixed income, and look to make extra returns on the equity. As soon as you start stretching, you get into the lower quality debt, which has a whole slew of issues itself.

Market. Everybody was surprised that there was a Trump win, but there was also supposed to be gridlock. There is now an opportunity for 3.5%-4.5% of GDP growth at the end of the stagnation, and that is what the markets are really cheering here. Interest sensitive stocks are definitely vulnerable here. Thinks pipelines are maybe going to 18 or 19 times, and banks, etc. going more to 13 or 14 times. There are tons of opportunities both on the US and Canadian markets.

Market. Trump has some very good economic policies, which is positive for the economy. The issue we are going to face is, are we going to have the candidate Trump in the president’s office or are we going to have a president Trump. He assumes that he is what his family says he is. If so, his policies on the economy are very good. He will get tax cuts through fairly quickly. Believes that in his first 100 days he will stop regulations in their tracks, and do a review department by department to find out how many of those regulations they actually need, and which ones they can get rid of. Corporate tax cuts are going to be important for the bottom line of earnings, and the economy may actually pick up some steam next year. The first 3 or 4 weeks following the election was a sector rotation moving out of dividend paying. The banks along with everything else are starting to react, and he thinks that is the shift that is coming out of the bond market. The credit quality of borrowers has improved. We have now been 6 years since the financial crisis. There has been massive deleveraging going on in the US. People that couldn’t get loans 3 years ago, actually qualify today. Banks are now loaning pretty close to where they were at the time of the financial crisis, which has been a short-term phenomenon within the last 6 months. A 1% rise in interest rates has a 16% hit to the bottom margins of a bank, an amazing leverage factor. The banks are well positioned and well capitalized.

What do you think of Scotia Bank Split Shares? Scotia essentially bought their own stock and managed it as a fund. They basically split their shares in half, which means investors can buy capital shares which participates in the growth of the bank and any growth in the dividend; or they can buy the preferred shares which captures the excess dividends that the company pays. The preferred shares are very safe in this product. Think of them as a deep in the money covered call write. The capital shares are effectively a Call option, and the way you make your money on that is that they distribute the excess gain and dividends to the unit holders, on a monthly basis, which is why there is a fairly hefty dividend. He likes the banks.

Is Black Scholes still relevant? Black Scholes is the model used to price options. One of the factors in this model is interest rates. In theory, if interest rates are declining, you would suspect option premiums to be lower. That is not exactly true. Interest rates are only one factor in the equation. The other offsetting factor is dividends. So really, when you are pricing an option, you are pricing a Call versus a Put. That is the arbitrage Play. If he buys a stock, collects the dividend, and sells a Covered Call against it, he is getting a dividend and that is part of the pricing of what affects that Call option. He can write a Put option, and put the money that he would’ve put into the stock into cash, which is exactly the same position. The Put option needs to pay him more in today’s environment, because if the underlying stock has a 4% dividend, the risk-free rate of return on that cash is actually only 1% or less. Because of this, he gets a higher value for the Put and a lower value for Calls. If interest rates rise, one would think that that parity would start to narrow.

An ETF that tracks the Russell 2000 or one that tracks US regional banks? In a stronger economy, small caps are going to benefit. One would look at a number of regional banks in the US, and they would actually fall into that small-cap category. Neither one of these is a bad play on the US economy. His inclination would be to move to the Russell 2000, as he thinks it is more diversified.

A strategy for a retail investor to play a lower Cdn$ vs the US$? There is a US currency ETF that trades on the Philadelphia exchange. You can buy a Cdn$ one and buy puts on it. He is not sure that there is going to be a problem with the Cdn$, and would encourage you to look at the performance of the dollar since the election. The US$ has been on fire, and of course the world hears that, and tends not to hear too much else. The Cdn$ has actually held in pretty decently against the US$, and many other currencies have not. It leaves him to think that 1) we have some strength in the value of oil, which has been a reason it has bounced up just recently, and 2) he doesn’t think Trump is going to come down hard on NAFTA, but is going to tweak it.