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

Marijuana? This is going to provide wonderful income for the government, and at the same point in time it is being legalized globally. It is really, really difficult to pick winners and losers. A very interesting industry with rapid growth, but picking a winner is a crapshoot.

Markets. Seasonality would tell you this is the sweet spot (Dec to May) for North American equities. People have been surprised at the intensity of the rally, however. His view has been that we are on the cusp of a regime change where the baton is being passed from the monitory authorities to the federal government. Stimulus will be dialed back and spending and tax cuts will take over. Having a united house means the table is set to enact substantial policy change. They may not get everything through congress, but he expects a significant portion to get through. Financials, US industrials and energy have been themes he is positive on. The bond market has been in a secular bull market for 35 years. He takes a balanced approach, but he thinks the time is right for caution in positioning the bond portion of portfolios. The era of negative interest rates is coming to a close. There is a lot of money in the bond market in search of capital gains and there is a lot of capital in the equity markets that is chasing yield.

Fixed income over the next year. There are policy diversions between Canada and the US. Canada did not change interest rates this morning. Next week the FED is expected to raise the rate a quarter point. There are expected to be a few more rate increases next year. There is uncertainty in the economy that would prevent the Bank of Canada from raising rates. Global capital is mobile and at the longer points on the cuve, he expects rates to rise in the US. Canada is not going to be immune from that gravitational pull. It will pressure returns in Canadian fixed income. Prudence is the order of the day.

Preferred Shares. He does incorporate them into a number of client portfolios. They are a way to counter the oppressive forces of low interest rates. They have merit in a portfolio. It is very difficult to generalize about the asset class. Each security has its own unique features. Make sure you understand what you own. You should emphasize quality. Income is secondary. He favours rate reset shares.

Marijuana Industry. His approach is to be quite conservative. Some like to speculate in this area but be does not. The recreational use legislation does not yet exist.

Market. Donald Trump is usually better for business. Business has been restrained for 8 years by regulations. There was a major break out in the US$. For the last 3-4 years, Brian has been pounding the table for the US$, saying that we were going to have a Ronald Reagan rally. The US$ Index under Ronald Reagan went from about 80 to 160 against world currencies. Under Donald Trump, he sees it easily going to 160 from their current amount of about 100 over the next 4-7 years. We are only in the first inning of interest rates going up, and if Trump is true to his word, expect a big bear market in fixed income, and a big rally in the US$ and in US assets, including equities.

Gold. Thinks gold is going down to $400 an ounce, because of higher interest rates and a higher US$ and anything that is detrimental to gold. Looking at a time frame of 3 to 5 years, the Congressional Budget Office is forecasting fiscal spending of $5.3 trillion over the next 10 years. That breaks down to the US government growing the economy 2% per year during that time. That is the US government and doesn’t include the private economy.

Energy. Christmas came early with the November 30 announcement that OPEC had struck a deal. He hadn’t seen this happening. There was a tremendous amount of pessimism going into the November 30 meeting. Even the most bullish forecasters were starting to doubt that something would happen. We had a $6 rally in crude prices. Now it comes down to whether or not members will actually stick to these targets. They also have 600,000 barrels from non-OPEC producers, committed to be taken off the market. Half of that is Russia, and Russia has a terrible track record of keeping their word. Even though the deal was not expected, there were still signposts that suggested the market was going to balance itself at some point in 2017. This deal has effectively accelerated the point at which the markets balance, and can start working through these high inventory levels around the world. OPEC is now producing about 34.2 million barrels a day, and that is up substantially in the last couple of months. He thinks that with this impending deal, there was a race to get production up because producers probably knew that at some point, if the deal was going to be arrived at, it would be based on where their production had been most recently. We don’t need oil prices to get back to $80-$90-$100 for North American companies to really make healthy returns. He looked at some of the individual well economics of Canadian producers at $90 Cdn per barrel. They are generating approximately the same rates of return at $60 Cdn. Currently, we are now more of $70 Cdn, so there are a lot of very investable companies in Canada and North America at these price levels.

Markets. This is the best time for performance for the TSX and the S&P. The US market during December averaged 1.4% over the last 50 years, up 70% of the time. The first half of the month the market is usually flat and then the second half of the month has an average 1.6% return 80% of the time. In Canada it is 2.1% on the month 84% of the time. It is still back end weighted in Canada as well. Trump is going to reduce tax rates and this will impact aggressiveness of tax loss selling. This year is different because of the Trump Rally and it should continue through to inauguration day (Jan 20) at which point markets typically drop as the new president begins in office. The following 2 to 3 months after a new president is elected, markets typically go lower and then rebound after that. Jan 20 will be a significant top in markets.

Educational Segment. Why the TSX outperforms in the early part of the year. The Canadian market outperforms the US from December to the end of February. It has to do with commodity prices, which move higher. Crude oil is at the end of its seasonal weakness after which it moves higher. Silver moves higher from December into March. Copper moves higher from now until April. Gasoline goes up from now until the beginning of March.

Markets. He was pleased with the Trump rally. US financials are probably his largest weighting and he has owned US industrials for a long time. For him it is a stock by stocks call. He has been reducing position sizes recently. He does not focus on yield but on the company behind the business. There is a rotation out of higher dividends as interest rates tick up. Buying back stock at an attractive price is just another way to deploy capital to him. He likes companies that know when to raise dividends, buy back stock or make acquisitions.

Canadian Banks. He does not own any of them because he found better value in US financials.

Market. We are in a strong seasonal period, and with the Trump election, people have come to the realization that although there are quite a few unknowns, net/net it is a pretty positive development for markets in the near term for a potential stimulus and confidence in the economy. In the last 5 years, we have had an economic recovery, but it has been a grudgingly slow economic recovery. A lot of that had to do with business confidence. One potentially exciting thing that comes out of the Trump election is that we could get some higher confidence, where businesses start to invest a little more. Thinks Trump and both houses are positive for the economy, and we are going to see slightly better than expected growth. Also, with the potential tweaking of tax rates, there could be stronger than expected growth, which is very positive in this low interest rate environment.

Marijuana? These have had huge runs. None of them are really making money, and some of the valuations are absolutely nuts. If he were doing anything in the sector, he would be Shorting some of these. To him it is just inevitable that eventually the valuations are going to go down.

Market. The market has gone almost a decade without a correction, and you normally don’t go that long, so something was going to happen. He is 60%-70% cash and just waiting. Doesn’t want to get caught flat footed again with another massive correction and no money to deploy, so looks at corrections as an opportunity rather than as a disaster. He doesn’t buy the argument that rates are going to go that much higher. We live in a world with very little inflation and technology destroys a lot of jobs, more than we create. There is also a demographic issue in the developed world where we are getting older.