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

Marijuana stocks? He doesn’t own and has even contemplated trying to Short some of them. You want to be very careful on the timing because it is almost the next emerging bubble in the Canadian market. When you start to look at some of the underlying fundamentals and the market valuation of some of these companies, there is nothing in the way of profitability and very scant revenue numbers in many cases.

Market. Revenue growth for the S&P 500 for the last 4-5 years has been quite anemic. Global growth continues to be very slow. That situation is unlikely to change meaningfully in the next year or 2, and is being reflected in very low interest rates. Thinks investors are beginning to figure out that stock buybacks are going to slow down. Revenues have been pretty flat, except for companies that are growing very fast, and yet dividends and stock buybacks are increasing at an increasing rate. Companies have been gorging on very, very low interest rates and borrowing a lot of money and are now in a situation where many of them have increased the borrowings to a considerable extent. They are losing flexibility at a time when technological disruption is really taking root in many, many different industries, and are increasingly unable to respond to competitive threats because of very high debt levels, low growth levels and very high dividend payout ratios. Thinks investors are beginning to slowly realize that the “increasing the dividend” and “increasing stock buyback” stories at a time a time of very anemic economic growth, actually may be increasing risks for investors.

Markets. 40% of the Dow companies are reporting this week. The numbers so far have been good. We have been adjusting to the new earnings reporting standards. Adjusted earnings are rising a bit now, but the old GAAP earnings are up 15.37%. If you consider the market multiple we are trading at 23 times earnings. He does not see the earnings growth in Europe that analysts are forecasting. He does not agree with a lot of the adjustments being made currently. The uncertainty around the EU and Brexit will prevent the signing of current trade deals being anticipated. The Canadian economy is struggling. We are stressed here. Canada has one of the best debt to GPS ratios in the world, but you can’t do that. You have to add in the provincial part. That puts us at 95% and up there with all the other countries. He does not think there is room for more stimuli in Canada.

Bond ETFs. As we all age and face retirement, the rule of thumb has always been more safe money and fixed income. After tax and inflation you have negative real returns for the next 30 years in almost every country in the world. Bonds are a losing bet. You will be worse off every year. A 60% bond portfolio does not make sense anymore and is a big challenge going forward.

ETF to Short Canadian Real Estate? You would have to short XRE-T or another real estate ETF and you would have to do it in an unregistered account. REK-N in the US is an inverse of the real estate market in the US. Hedge funds short a real estate company as a proxy into the real estate market when they want to short that market.

If you study performance of Mutual funds and managers, 85% don’t beat the market after fees. The industry will not go away. Within 10 years Mutual funds will be held in inverse of current proportions to ETFs compared to what they are now.

Educational Segment. Smart Beta ETFs. They are smart indexing products. Low beta or volatility strategies address investor outcomes using Beta. They look for low beta. If you weight beta and ensure diversification across the market place, you get less risk. Low beta is not expensive but in line with the market place. There is also a ‘quality’ based set of ETFs. They look at debt to equity to reduce volatility. These ETFs are managed by computer and not actively managed by a portfolio manager. You pay a bit more than a non-smart ETF. The low volatility and higher quality strategies have historically done better through history.

Markets. Real assets such as Agriculture, Real Estate, Collectibles, Commodities, and infrastructure are at their cheapest relative to financial assets since the late 1920s. When you look at some of the metrics on some of these you see monetary policy. They prop up financial assets. Emerging market real estate is really quite cheap. Depending upon the type of real estate, there are different kinds of metrics. Student housing, for example, looks cheap in Latin America but in the US it looks expensive. People are going into Britain and buying real estate. Companies that export outside of the UK are doing quite well.

Financial services. If you look at their ability to manage their rate exposure, they can’t manage it in Europe with negative interest rates.

Investing in US Companies. Short term currency risks are the fastest way to lose money. Be very careful round currency risk. There is more currency risk and uncertainty to come. Look for a fund that manages currency risk for you.

Favourite commodity recommendation with stability 5 years plus. There is decreasing supply of trees worldwide and increasing demand. Timber should appreciate 6% over the next 30 years. You need to increase exposure as you see supply coming off line and decrease as demand comes on line.

Market. He remains positive on the market, as he feels US earnings have turned the corner. As we get into 2017 and possibly into 2018, you are going to see an acceleration of earnings. That is going to result from a number of thinks such as continuing consumer spending, CapX picking up and exports, which will be retarded a bit because of the recent 3.5% increase in the US$. Looking into 2017, once we see oil prices having some stability, then we will start seeing a pickup in activity in Western Canada, which will start the earnings flow. He is pretty fully invested, but will pick out names that represent great value, and if necessary, will sell something in order to buy it. Sees good value in the banks right now, a potential for energy stocks which can go up a lot more, and the cyclicals that benefit from capital spending.

Energy. He doesn’t necessarily believe $60-$65 for 2017. If we see a good base at $50-$55, there will be a good follow-up improvement.

Percentage of gold stocks a portfolio should have? He likes to use 2% or 3%. It’s a good asset class. (See Top Picks.)

Resources.

Oil has been an energy that was chronically oversupplied for the last couple of years. He is happy with the trends on the “supply” side, especially on OPEC’s and primarily in the US. A little disappointed on the “demand” side, not quite what he expected like in 2015, but still growth year-over-year. Now you have the Algiers “sort of” commitment to at least try and formalize an agreement of production for OPEC. He hopes that is the “line in the sand” to say that $50 is the floor, and hoping for something closer to $60-$65 by the end of 2017.

Natural gas in the short-term, is more likely to go up. There has been a big reversal. With less injections over the summer, the supply side has kind of normalized.

Zinc looks good from here. It has come off from its lows earlier this year, and is now over $1. There is some momentum as the market continues to digest the coming shortage. Through 2017 we could see prices approaching $1.20-$1.25.

Copper seems to be stuck just above $2 a pound, and justifiably so. There are a number of projects still getting built and coming on over the next couple of years, which creates that overhang over copper prices. He is assuming that everybody builds everything more or less on time, and that supply comes into the market and should keep prices in the $2-$2.25 range.