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

Market. The ground has shifted since Donald Trump’s election. He has come in with a view of lower taxes, “Making America Great Again” and interest rates have gone up 75 basis points in the last 3 weeks. Thinks we are in a decisive turn on bond yields. It is possibly the thirty-year turn. Yields have got ridiculously low. Commodities now have bids that we have been waiting decades to see.

Convert Cdn$ to US$ or buy Cdn stocks that have a lot of US exposure? He buys US stocks for areas in the marketplace that we don’t have in Canada. In the next 12 months, he believes the US will outperform Canada by quite a bit. More importantly, US interest rates are prone to rise faster. Owning Canadian companies with US operations gives you a secondary effect.

Market. He sees the market move as a secular one. It took years to develop, and it will take years to unwind. Although November was a catalyst that allowed for the acceleration of the process, it really started earlier than that. The 10-year treasury bottomed in July at about 135, and is now about 1% higher. Interest rates had generally started to move, and some of the related industries reacted to that. Anyone looking at what has happened over the last couple of weeks, might be thinking it is too late and that they can’t get into this rotation, should think again. He thinks it will go on for some time. Over time the reflation trade moves that we have seen will continue, and will reward the types of companies we have seen over the last couple of weeks. About 95% of his clients have a balanced portfolio, and in the fixed income portion, he has been very short on the curve. That has allowed him to come out of this with a very short duration of around 2 years. Currently he is about 50% overweight in the financials.

US Market. Post the election, risk assets have rallied hard, and stocks are up 3%. Small-cap stocks are up 11%. The safe assets, US treasuries and gold, have sold off hard. Thinks that both asset classes have moved too hard and too fast in the short term. However, clients should still continue to be overweight equities relative to bonds, and to be fully invested as you are not earning anything in cash these days.

US cannabis market? The state of Colorado is the best example of the economic benefit that marijuana can give to a state. Colorado continues to revise upward its state income, by allowing for legal marijuana. However, he has not found a safe way to invest in this space.

US pipelines? In 2014, investors sentiment for the US pipelines (The Master Limited Partnerships) was at an all-time high. Valuations were really high. 2 things happened. The price of oil started to collapse which put a lot of pressure on revenue, and 2) the perception that the Fed would raise interest rates put pressure on the stocks, that historically return all cash to shareholders in the form of dividends. Also, they are very capital intensive and thrive under an interest rate environment. Those were 2 major headwinds. Feels the interest rate risk is still in your face. It all depends on the pace that the Fed will raise rates. The worst is probably over. The bigger issue is their tax ramifications so be careful if they are in your taxable account, as you have to file a K-1. Also, if it is in your IRA, you have to generate a certain amount of income. The worst is probably behind you now.

Market. Expectations were very low on Donald Trump, and when people came to realize that there were a lot of different things he could do, that really helped the stock market. Some of the issues he talked about was bringing taxes down, allowing US companies to bring home money sitting overseas, individual taxes, corporate taxes, reducing bank regulations, and changing Obama care is much as he could. What happens in the US really resonates around the rest of the world. There is a lot of push to increase fiscal stimulus.

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.)