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

Of the Big 6 Canadian banks, would it be wise to buy the laggards? Looking across the banks, they have differentiated businesses. He has focused on the ones with the largest US exposure. TD Bank (TD-T) would probably be the key name. The ones with the highest multiples, around 12X this year’s earnings, are the ones with the larger exposure to US wholesale. Those are the ones that are going to have the best earnings growth.

Bonds? These have had a 32 year-run and are trading at yield levels that are unsustainable. Unlike the last 32 years, where you made capital gains and income, you are going to have a very small dividend offset by capital losses. This is the asset class that is going to struggle.

Market. A report just came out from the Canadian Security Administrator, talking about whether or not we should keep embedded compensation i.e. trailing commissions in mutual funds. The investor needs to know that for the 1^st time ever, regulators are serious. Regulators were talking about this 22 years ago. 22 years later, they’ve gone from “this is a good idea” to “tell us how to implement this”.

Is an equity/fixed income portfolio of 50/50 still recommended? A resounding Yes. You might even want to find ways of being more aggressive in cutting back on your income portion. A good way to decide what your income component ought to be is to take your age, multiplied by the decimal of your age. That is your income component. E.G. if you are 50, this would be 50X.5 = 25% in income. If 60, 60X.6 = 36%. When you get up to age 70, it is 49% income, and is basically 50/50, and you don’t need any more income.

Markets. He is calling for a correction after the Trump rally. Statistically, most times from the beginning of the year until some point later, you can buy the market cheaper than when the year first started (80% of the time). US Earnings season gets ticking this Friday. There has been a huge move in some of the banks since the election, looking at higher interest rates and deregulation. The reality may be much different than the market is looking for. Net interest margins will not be meaningfully impacted yet. A year from now we will see the impact of interest rate increases. Hopefully now banks will have freer use of their capital. Are autos looking at trade wars – it has not come out except in the twittisphere. Oil poked above $50 and shale producer rig count rose in the US. Over the next 6 months it will go up to $56 and then will remain constant for 4 or 5 years. It remains questionable whether OPEC can execute on their deal. We have not seen the impact of Brexit and won’t for a year or two. There will be a hard line on both sides as to what that looks like.

Educational Segment. How to play the market if you are risk adverse in 2017. Are Trump policies coming in or not? Over the last 10 years the marginal tax rate for corporations has come down from 50% in 1955 to 35% recently. Analysts expect 22% earnings growth from the S&P. The PE of the S&P is 21 times. It is a 23% world GDP economy. The banks have been the big leader since the election. It’s going to take a lot of interest rate hike to get the banks back to where they should be with interest rate spreads. There is a new president, first term, new party. The average pattern has half a percent gain. We have already exceeded that. The inauguration is pretty much the high point for the year. Get into options late in the market cycle.

Markets. He expects oil to go below $40 this year. OPEC is successfully getting compliance for reduced production; the problem is that the numbers don’t work. In a chart showing past cheating by OPEC to 1995, there were three cuts that occurred before the numbers started working before OPEC got compliance. This first compliance cut is not enough. Libya is increasing production, and Iran/Iraq are raising production and so are non-OPEC countries like Russia. The way to get around OPEC quotas is to call everything ‘condensate’. When everyone realizes that compliance is not there and that cutbacks by non-OPEC companies is not happening, everyone is talking rising production in 2017 over 2016 and he thinks we will bust $40 in Q2. How low we got is dependent on how big the build is in inventories.

He is a big fan of Natural Gas. Inventories are coming down, especially over the last couple of weeks. We came down from 4 to 3.1 TCF. This is the not the same as oil. US production has come down. Demand is rising and production is falling. He thinks the price of Nat Gas could retreat in March. With the lack of drilling we will not fill storage during the injection season.

Income over two to three years. There is a new ETF from BMO that is a high dividend ZWH-T (US) and ZWE-T (Europe) and also a Canadian one. You will get 6-7% a year and he loves these in a defensive market.

Markets. The Trump rally kept going after he was on the day after the election. It has been an interesting couple of months. He is still quite cautious on markets, especially given the move up in the markets. He thinks investors are getting set up for disappointment with regards to Trump's pro-growth policies. He can go long or short the market and in Canada, US or off shore. He is running a little bit net long right now. He has built a long position in Gold and Energy spaces.

Canadian Pipelines for a long term hold. He has been short for half a year. He only has ENB-T right now. It is a low growth space in a challenged industry. They are quite interest rate sensitive. He has countered his shorts by being long in various renewable power producers.

Golds. He likes gold and started to about a month ago. He thinks the US might try to talk the US$ down. Inflation expectations have really started to take off. DGC-T would not be a bad one to own, or use a gold ETF. Gold is a safe way to safeguard yourself against Trump’s tweets against companies or industries.

REITs. He does not own any. He owns Dream Unlimited. REITs in general are just more interest rate sensitive than he likes. If you believe rates have bottomed and will not move much higher you could get some good returns out of it. DRG.UN-T is one he would like.

Market. We are coming out of a 3-year period where bonds have outperformed stocks. It now looks like we are coming out the other side, which raises the question, are we going to hit 20,000 on the Dow. In the very short term the answer is yes. He is expecting a bit of a correction in the 1^st quarter, but once that is behind us, it is onwards and upwards. You will have an opportunity to sell bonds over the next 2 months as the prices move back up and yields come down a bit. Take the cash and put it into equities, because he thinks there is lots more legroom and upside on equities over the next 2 years.

Market. We are definitely getting a little boost from the Trump rally, and thinks it can continue for a while. Longer-term, he is a little more worried about the protectionist and nationalist type policies that can spur inflation, making goods more expensive. Inflation is not a good thing for the market. Energy is still recovering, but is still nowhere near where it used to be. Companies have kind of adjusted to the new lower energy prices. Still thinks there are a lot of opportunities in energy.