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

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.

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.