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

OPEC. There’s going to be a deal, but the deal is going to be to freeze production, not cut production. The history of OPEC is that they always cheat, and there is basically no chance in his mind, that even if they agree to a ceiling at 33 million barrels, that they adhere to it. It is all about demand, so is global demand in a slowing world going to increase? OECD has said that the world is going to grow a little bit better because we are no longer austerity driven, but we are driven by spending. The GDP formula is GDP=C+1+G(X-M). When the government borrows and spends like they expect to on infrastructure, mathematically GDP is going to go up, but here’s the thing with the consumer (C). His average client is probably around 60 years old, and their financial plan indicates their money is going to last 30 to 35 years. It doesn’t matter how low interest rates get or how much the government is going to spend, aggregate demand (G) is not going up, as people are living longer. This demographic headwind that we are facing is going to be really toxic for growth for the next decade and decades to come. Increasing government spending is only going to add on to the debt. That is another massive headwind. We have some very difficult economic challenges going forward.

Oil. An OPEC Expectations chart shows that 12 months’ forward oil prices is really going to struggle to get through $50. As soon as we get up to $50 you are going to see a lot of Forward Selling next year, which ramps up supply.

Cdn Banks. Right now, the banks have a lot of tailwinds because of the perception that interest rates are going up, but he believes that the Fed will raise rates in December and the Bank of Canada is on hold. The next move after that will be a rate cut by both the bank of Canada and the Fed, not a rate increase.

US ETF’s for an RRSP portfolio? He holds the BMO US Put Write (ZPW-T), where they are writing on great companies and writing Puts 15%-20% below the market, and are harvesting about a 7%+ yield per year. On the other side of that, he owns the BMO Covered Call Utilities (ZWH-T) which looks at some of the best quality dividend payers in the US, and writes a covered call strategy on half that, generating around 6%. The combination of those 2 exposures to the US market gives him a yield of 6.5%, and a risk of about 30% of the S&P 500. He thinks that is the absolute best way to get exposure today.

REITs, utilities and preferred shares for a 5% return for a Buy and Hold investor? From time to time, interest rate sensitive sectors get hurt. He likes BMO Equal Weight REITs Index Cdn (ZRE-T), BMO Covered Call Utilities (ZWU-T) which is yielding over 7%. He has a half position in each one, and has recently been adding to this.

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.