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

Market. There have been new highs for the Dow and for the S&P 500 in the wake of a new president. However, there is also a bit of a selloff in the bond market. The so-called Trump rally is not so much a Trump rally as it is a rally of people realizing that the Republicans have the house, the Senate and the presidency all at the same time. Having all 3 of them concurrently is generally good for markets, because there aren’t going to be the typical political impediments that might be there otherwise. Trump’s agenda, if it is followed, will be stimulative in terms of lower taxes, less regulations, etc. The flipside of that is that there is a lot of spending on infrastructure, and there are a lot of things being done to put up tariff barriers, and those are the kinds of things that cause you to hike rates, which in the end, is bad for bonds. People should be prepared to take a little more equity risk as there is a great deal of risk in bonds.

A strategy for moving from 40 equity stocks into ETFs? One thing you must consider are capital gains and capital losses, and offsetting them to minimize your tax liability in 2016. If you are going to have a whack of capital gains, wait until 2017 to sell those stocks in January, so that you can defer the tax bill for another 16 months before paying your taxes in April 2018. Beyond that, there may be a few stocks that you wish to hold. You don’t have to sell all the stocks. Also, there is no tax implication whatsoever for anything you have in a registered account. For the number of ETF’s, he generally uses 6 asset classes using one or 2 positions for each asset class.

Bonds? In traditional bonds, there is really no place to hide in his opinion. There is nothing that he would consider as good.

Emerging markets. He is quite bullish on this area in general, and India in particular. Both BMO and Blackrock have really good India ETFS. India is a good story. They have a very highly educated workforce. Their GDP growth is actually faster than China. Their population growth is likely to overtake China in the next 10-15 years.

Dividing a $6000 TFSA accounts into the VGG-T and CDZ-T? You have to remember that you could lose some tax benefits with regards to VGG in a TFSA. He doesn’t recommend using US products in a TFSA. However, this one trades in Canada, so you might be able to get away without having to get a T1135. Both of these dividend products are fine and he would approve of this.

Superficial loss rule. When you sell something that has gone down in value, you must wait 30 days or more, before you buy it back to prevent your loss from being denied.

Potential affect of an increase in interest rates on utilities? You have to realize that interest rates are just the price of money, and how much banks charge someone to borrow. Right now, rates in Canada have remained ridiculously low, but slightly higher in the US. They are likely to start going up in the next few weeks in the US, and that will have some impact on the Cdn$ going down. You shouldn’t be particularly worried, as rate changes are likely to happen on only one side of the border, and only in the order of .25% or .5% of 1% in a given year.

Market. He is seeing some value, especially in defensive parts that have sold off. Feels the bond markets moved a little too aggressively, really all based on an increase in inflation expectations. When you contemplate some of the policies that could get implemented in 2017, they may not have as big an impact on inflation as people think, especially the infrastructure spend. There is a lack of shovel ready projects that probably won’t materially contribute to economic growth in 2017, it is a 2018 initiative at best. Tax cuts could have a very big impact on corporate profitability and consumer spending. That makes him feel a lot better about earnings growth materializing next year. However, the pullback we have seen in some of the defensive sectors such as utilities and REITs, is a good buying opportunity. If interest rates go up a lot more, it is going to put a negative dent in economic growth in the US, because the US$ is going to rally, and because it does cause financial conditions to tighten, and actually impairs the one bright spot in the US economy, the ability of the consumer to spend and borrow. He has seen a bit of a transition from the defensive sectors that led the market in the 1^st half of the year, utilities, the staples and the telcos, where they were doing very well, but have now actually become laggards.

Market. The strangest thing is the obsession with the election. This is probably a huge opportunity, because you have the Republicans in control of both the House and the Senate within the Congress. They control the presidency, so we are going to get tax reform. We are going to get deregulation which is massively bullish. The market is pricing in a number of rate increases. There has been a significant increase in long-term yields. The marketplace is saying that it thinks interest rates are going to be higher and that the financial repression is ending. This is hugely positive and hugely bullish.

Gold. Gold was very interesting at $250 an ounce in 2003. The price of gold at that time was probably into the 70 or 80 percentiles of the cost curve. Absolutely nobody was making money. He feels that a lot of these things are “buy the rumour” and “sell the news”. Today there is a lot of leverage out there. He also believes the US$ should do well, which is never good for gold.

Market. Oil companies have cut costs and got rid of marginal projects to such an extent that when and if energy prices rebound, there is enormous leverage. Oil, generally speaking, has a long cycle, and is now more efficient. Staple and discretionary stocks have come back, but still look expensive. They are really good companies, but are rich and they have just started to turn over a little and get a little bit cheaper. He keeps hoping they will keep dropping, giving a better opportunity.

Market. From June until November, there were very clear themes leading into the US election, sectors that were outperforming on a relative basis that were all economically sensitive sectors. Investors were very defensively positioned coming into the market. The election took place and those themes took off. The positioning was so defensive, and people were so cautious going in that they ignored what was happening in the market and some of the economic changes that were taking place. From June until November, the cyclical sectors of the market had very clear relative price performance. Going into the election, the sectors leading were semiconductors, financials, materials, technology and industrials. Those sectors don’t lead the market if we are about to head into a big problem. We are now at one of those moments where we have to put the pedal down a little. The next 2 years are likely to be very strong. Economic and earnings data is getting better. Stocks are cheap relative to other assets. It is important to know what to Buy, but also what to Sell. Since June the things that act like bonds have been weakening, and sadly that was the most crowded part of the market. Doesn’t think interest rates are going up in a hurry, but will likely see 10 years of rising interest rates. REITs, utilities, telcos, etc. are likely to underperform.

Markets. Ottawa wants an end to coal for 2030. If he was the CEO of a utility, then he would probably view Trump’s bringing back coal as a temporary thing in that kind of timeframe. The world is moving away from coal and the coal jobs are not coming back. OPEC is going to talk up a cutting back on production of oil, but they have always cheated. If OPEC cuts back then the US and Canada will just boost theirs. He thinks there might be a freeze on production levels. Oil stocks on the TSX are priced for $60-$65 oil. If oil goes up to $60, these stocks could go a little higher than they are today, but they are basically discounting this level. You could be a buyer on dips, but don’t chase it. Oil is lower for longer. Fixing roads and bridges is not going impact any US infrastructure ETFs as they are pipelines and utility stocks. There are no companies in these ETFs that would benefit. The exposure is zero to Trump’s infrastructure spending.

Educational Segment. Momentum and value in smart beta ETFs. Vanguard has a couple of smart strategies. They think smart indexing is an active strategy. They debate Larry in disagreeing it is active in that it is a set of rules. The Momentum strategy is benefiting from a behavioral bias in the market place where investors are slow to react. The Liquidity strategy focuses on companies that are smaller and don’t trade as much, aren’t in the news as much and so may be undervalued. Investors overpay for liquidity in the market place. Less liquid names, also have more risk. A quarter of Vanguards assets under management are actively managed.

Markets. The US$ and the Markets have both been going up due to the Trump effect. They will need time to digest what has just happened. It is important to consider changing government regulation and how it effects each stock you might invest in. The market is starting to discount that we will see less regulation and lower taxes in the US. Trade policies changing are murkier and will have to play out.