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

Dividend ETF’s? Like all the factors in the smart Beta products, dividends are the most widely known for the average investor, and maybe 2^nd to value as a way to play the markets. Sometimes dividend stocks do really, really well, and sometimes they don’t. Right now, if you look at a lot of the dividend indexes, they’ve had decent performance. He doesn’t like the relative value today, and would be underweight dividend stocks at the moment.

ETF for US regional banks in Canadian funds? The BMO Equal Weight US Banks Hedged to Cdn (ZUB-T) plays a lot of the regionals, but some of the larger ones as well. If you want the pure Regional ETF, SPDR S&P Regional Banking (KRE-N) has many of the ones that the BMO has, but doesn’t have a lot of the big ones.

How maximum diversification works. This process gathers a basket of stocks that helps you to diversify as much as can be done, and still get exposure to the index. He focuses on correlation. He starts with the same universe as the Market Cap Benchmark, but what the formula looks most closely at is correlations. He will assemble a portfolio that uses the securities outside of the starting universe, that have the lowest possible correlation to each other. When you are able to assemble a portfolio in that way, it will be the most diversified portfolio that you can create of a given universe. One of the goals is to generate a higher return, but also deliberate with less volatility. The MER on this is 60 basis points, but you’re getting a much better ride. Not only is this less volatile, but it is better performing than the market cap benchmark over a full market cycle by a meaningful amount. He is equally exposed to all of the risk factors in the market. (By Faizan Dhanani, Managing Dir. for TOBAM, Mackenzie Investments.)

Comment. Corporate earnings appear to be growing, and it seems healthier this time. A big part of the problem in the past was the rising US$, which offset growth for a lot of companies. The purchasing indexes are showing actual demand on services and products which is a healthy sign. The market has always done quite well after a new president is elected, and we are seeing that follow-through again this year. In certain sectors, this is a knee-jerk reaction. For the sectors that have jumped up, like financials and pharmaceuticals, that may be all the gain you see for the next year.

Market. Ironically, the election has been a pretty good thing for equities, and going forward, more importantly, it is going to be very good thing because it has really accelerated a backup in yield. There has been a huge move from about 180 to about 232 on the 10 year. There is a 100% unanimity right now in Fed fund futures, and on the 14^th the market fully expects them to raise rates. That has been one of the catalysts for stock pickers, fundamentalists, investors who like to follow the stories, who really need to see the Fed getting out of the way and for the broader economy to take part. As a generalization, you want to avoid the interest rate sensitives, because they are not going to do well going forward.

Canadian or US stocks? The US will likely grow at close to 3%. Canada will be lucky to grow at 1.5% next year. You have the Cdn$ that is likely to fall against the US$. It really depends on your timeline horizon for investing. However, in general, if you are of the view that faster growth begets faster stock price (higher revenues and higher earnings) and better multiples, with a longer time horizon of at least 6 months or perhaps a year, you would be better off to convert some of your Cdn money now, because you are likely to see a decline in the Cdn$ over time, and will get a better stock performance in the US as well as the appreciation of your Cdn$. If you are more cautious and don’t want to take that risk, you could play it through Toronto Dominion (TD-T) that has a high level of US exposure.

Gold? He sees gold going down. You could certainly see it sub $1100 because of the strong US$. With the stronger US economy going forward, you don’t need to hold.

Big banks rate reset preferred shares? The new ones that were issued are pretty good. The pref market in general has been all over the map, but the rate reset preferreds look fairly attractive, and are set at a much more reasonable level. If you are looking for income, that might be not too bad of a place.

Market. It’s always nice for markets to go higher, but you don’t always want to look at the past price, you always have to look at forward expectations being priced in the market. If you were a believer in an efficient market in 2016, you are taking it on the chin right now between BREXIT and the US election. Nobody thought Donald Trump would win, but not only did he win, but the forecasters got the actual market reaction wrong. What is most interesting is that there is no talk of valuations now. There is still a lot of uncertainty. If you are taking leverage to invest in the market to chase that next hot stock, pinch yourself, take a breath, and ask yourself if the fundamentals are backing these types of moves. He loves dividends on stocks, especially dividend growth. A lot of people are buying the higher yielders, but he prefers the ones that can grow their yield over time. Prefers total returns over just straight dividends. The ones that grow yield over time usually have a bit more financial flexibility in that they cannot only grow, but can take those excess funds and reinvest them in growth.

Marijuana? At this point it is hard to call this an investment. You are speculating. On 2018 sales, they are trading at about 6 to 8 times sales, depending on which company you are looking at. You have to wait 2 years until valuations get to maybe a reasonable level, and you are still talking high growth tech company type valuations. When they are moving 10%-20% on any given day, on limited news if any, it is speculation. With the government releasing their review by the end of November, there is kind of a catalyst on the horizon, but he would prefer to wait for the report to come out.

Market. The best 6 months of the year started off with a shock with a presidential election. The technical cue to get into the market for the best 6 months’ trade was actually realized on November 7, a couple of days before the election itself. There was a gap higher from the 200-day moving average, and then the market just took off from there. Everyone was pessimistic going into the election results, and everybody was hedged, so essentially you didn’t get that shock selloff event. The market just kept on grinding higher. From about mid-2015 to early 2016, we have been bumping up against the 200-day moving average as resistance. Now that we have confirmed that as a level of support, cash is coming off the sidelines and the markets are grinding higher, and everyone is becoming more cyclically focused. They are shedding their defensive positioning, especially in bonds, utilities and staples.

US $. The pace of the rise is presenting concern. Up 6% in this quarter alone. When we get 4^th quarter earnings come January, we could see that bite some of the companies, and that is a risk. The US$ rising itself is not bearish, but represents a strengthening economy, it is just the pace of the rise. If you have a rapid rise like we have seen this quarter, they can weigh on some economic data.

Retail. Seasonally, retail tends to peak today, so you want to shed your retail positioning and rotate back into the broader sector, the consumer discretionary sector.

Canadian Banks. Next week starts the Canadian bank earnings, which typically creates a “sell on news” event. We have had a phenomenal run since the period of seasonal strength began for some of these Canadian bank stocks back in August. You want to take those allocations in your Canadian banks, avoid the “sell on news” events, and look for US alternatives, hopefully on a bit of a pullback.

S&P 500. Everyone is waiting for a retracement because, after all, this market just shot up unexpectedly. The best period to assume that a pullback will occur is during the tax loss selling period. Seasonality remains positive through the beginning of December, and then we get the tax loss selling period, which occurs between December 7 and December 15 on average. The S&P 500 has only been positive 20 out of the past 50 periods. 60% of the time it is negative. Average loss is about .05%, so it’s not a big deal.

Santa Claus Rally. This runs from December 15 to the new year with an average gain of 1.91% on the S&P 500, and it has been positive 80% of the time for the past 50 years. If you want to have the retracement to get into some of these positions, the best period to look for that is during tax loss selling.

Cdn$? This is heavily influenced by the price of oil. You get a bump up in the spring for summer driving season. The price of oil goes higher and so does the Cdn$. Summer driving season is over and there is no demand for oil, so the price of oil goes lower and so does the Cdn$. The period of seasonal weakness is between October and mid-December. If you are trading US investments, you probably don’t want to have them hedged at this point, because you are going to get that benefit from a falling Cdn$.

Market. Pipelines and telcos are low growth companies, but everybody has been buying them for the dividend in this low yield world. Suddenly, Donald Trump comes in and bond yields pick up. The Fed undoubtedly will raise rates at some point in time. These stocks are vulnerable because they are trading a pretty lofty PE levels. A lot of the Cdn$ is due to oil prices and what happens with that, but secondarily, rising US rates while Canada stands pat, implies continued strength in the US$, at least in the near term, which will be somewhat negative for commodity prices. A rising US$ is deflationary for America, and also impacts emerging markets. Thinks the Fed views that they have no choice but to start raising rates.

Canadian bond funds? If these are regular bond funds investing in high-quality bonds, there are 2 questions. 1.) Find out what your MER is, because with a 2.5% bond, there might not be too much left. 2.) What is the risk of rising bond yields. If this has a lot of longer-term bonds, they are going to get hit hard if yields start to move up in Canada.

Gold? A stronger US$ usually means lower commodity prices. Also, rising interest rates means lower commodity prices, especially gold prices. The cost of producing an ounce of gold has risen dramatically over the last 20 years. He has never owned a gold stock in his life.