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

Market. Trump was a person the markets did not like. The market was up 500 points a week ago Monday when they heard that it was likely Hillary was going to win. The stock market futures were down a huge amount overnight, and then all of a sudden he made a speech that was more conciliatory. From Tuesday through today, the markets believed everything he said and doesn’t believe that he is going to be a wild animal. He is not so sure, and is looking to take advantage of opportunities where markets have overreacted. Investors should take a close look at interest rate sensitive investments like bonds. US interest rates are up a full 1% since early July, and about half of that move has occurred in the last week, since Donald Trump won the election. All of a sudden today, you can get about 50% more interest on a 10-year treasury rate, then you could in July, so he is going to take a look at extending his clients’ bond durations a little longer. He is also going to take a look at REITs which have a little higher yield, but he isn’t quite ready to pull the trigger today.

Gold? There have been a lot of questions lately about gold, because a lot of people fear the worst for this president. Gold has become the anti-dollar. What is most predictable about gold is that if the US$ goes up, gold is going to go down, and vice versa. The reason is that there are countries around the world that have reserves, and most of their reserves are invested in US treasuries. When the $ goes up, they are happy with their treasuries, but when it goes down, they are unhappy and they start looking to diversify their reserves, mostly into gold. It is not so much an inflation hedge as it is a way to hedge against the US$ going up. He finds that to be terribly unpredictable, and therefore he would prefer not to take a position in gold.

Market. Potentially, the 33-year Bull market in bonds is over. REITs have spiked up 40 basis points over the past week, but 10 year treasuries are back to where they were a year ago, so we actually haven’t done much in this one year timeframe. Everyone is now focused on the pro-growth policies that Trump has announced. Those should be positive for equities, but there is also his no-growth policy of protectionism, anti-trade and decreased immigration, which could potentially increase inflation. Going forward, we have to monitor what he wants to do, both good and bad, and how that is going to impact the interest rate inflationary outlook. Markets are saying that we are going to get higher growth, which would imply that rates should slowly move up. Going forward, if we do get faster growth, that should imply a higher inflation. If we do get faster growth, potentially we will see money flowing out of bonds and into equities. Interest sensitive names such as the utilities, telcos, REITs were hit quite hard this last week, but she feels it was overdone, and those stocks now look attractive and the ones she would be focusing on.

Markets. He has said many times over the months that he thought Trump would win. His expectation was that the markets would sell off. He was right for about two hours. The reality is that congress is not going to let Trump spend and cut taxes like that. Larry does not see this playing well on Wall Street. You have this extreme movement to the right and he sees this as a head wind. Once infrastructure has been upgraded, the economic impact is gone. All yields going up is not good for the economy. It won’t give net interest margins for banks. Iran is going to keep pumping and it will not come back, but fracking will come back and the supply story is not going to back off. Oil should back off to below $40. The oil stocks are not selling off nearly as much so the energy sector needs to sell off 10% still. There is too much optimism in the energy stocks. OPEC probably won’t be able to do anything at the end of the month.

Educational Segment. Smart Beta ETFs. First asset’s approach is to work with morning start. They have been working on quantitative modeling with dates going back to the 1980s. They created a screen. They look for companies that are trading below net asset value and have growth potential. They screen for companies with price momentum as well as earnings momentum while having value. These two strategies since inception have extracted some of the better companies. Over 2 years the two strategies together outperform 90% of the time and 100% of the time over 4 years. VRX-T was in the momentum portion and was rebalanced on a quarterly basis and got trimmed back. You could equal weight the strategies.

Markets. When we look at the presidential cycles, it ties into that we are coming into a seasonal strong period. Typically after a November election the market is free to take off. The election cycle allow us an opportunity to buy into the market. We saw an S&P bull run of 8 years. He is disciplined to the season forces. The markets should have some strength over the winter, but we may be in a mini bubble. This market might eventually pop but doesn’t think it will happen in the next three to six months.

Global Market. Markets were pretty flat line until the US president’s election was over, and caught everybody by surprise. Suddenly everything goes haywire. Bond yields are rising overseas, emerging markets are getting crushed, the US$ is rising, Cdn$ is falling, and everybody is scrambling to rotate from one sector to another so that if interest rates are rising, insurance and banks are in favour. People are also rotating out of the sane stocks such as the NASDAQ, Facebook, Amazon, Netflix and Google, back into the infrastructure plays. As a portfolio manager, his play is to have all bases covered, so he is not doing any sector rotation or any big calls one way or another. It is just a matter of being able to manage that correlation risk and concentration risk. He is not going to shoot the lights out, but at the same time he is not going to lose 20%-30% in a year. It keeps investors in the game, so that no matter whatever happens down the road, they are not going to run out of money.

International diversification? Canadian stock market is mostly financials and commodities. When looking at Canadian stocks on the TSX 300, you are going to find very little revenue exposure outside of North America. US companies are much more aggressive, so there is some diversification. Long term studies going back over 20 years has shown international investments have enhanced returns by 1%-2%. He wants to own International stocks so that there is less correlation risk by having multiple currencies in a portfolio. Doesn’t think of companies as to where they are domiciled, but as to where their revenues are coming from. When he can find global companies that are doing 80% of their revenues outside of North America, it gives him the opportunity to diversify further, and reduce the correlation risk.

Gold? People had a visceral reaction to the Trump win. You buy gold in the US, because the deficit will be $1 trillion next year, irrespective of who is president. There are balance sheet liabilities that are approaching $20 trillion. You buy gold because there is a negative real, and sometimes negative nominal interest rate, and because spending globally is out of control.

BC junior gold miners? Northwestern BC is extremely active; largely as a consequence of the tremendous discovery made by Pretium (PVG-T). That is a very mineral rich part of the world. Although those stocks are ahead of themselves on a global basis, they will probably continue to do well as a consequence of money flowing into gold, and money flowing into Canadian mining stocks generally.

Market. Thinks the reason for the Trump win has been something that has been going on for the last couple of years. We recently had BREXIT, Justin Trudeau rode to power on a popular wave, Brazil and Argentina lost their governments, etc., etc. The voting population is generally unhappy. If you listen to all the rhetoric, higher rates are going to come, and banks are going to go back to the old days of interest rates of 1.5% for lines of credit, etc. It is also going to allow banks and organizations to start to grow and to reinvest in R&D. That will be a stimulus for the economy and will create demand for higher paying jobs, rather than the part-time, underemployed workforce that we have recently seen. You are definitely going to see a selloff in staples, utilities, and even the pipelines to some degree. You are going to have to be very careful how you tread, because as interest rates rise, it is going to be a negative impact for fixed income. It is a little too early to check the emerging-market rally right now, because when rates do go up, you are going to see another selloff, because a lot of the debt in the emerging markets is US$ denominated.

How can a person benefit from a downtrend in the Canadian economy? Generally, the way international investors do that, is by putting capital in other markets. When the global financial crisis hit, Canada held up very, very well, so what investors did is to just export capital to Canada, and the 1^st place they went to was the banks. One of the obvious things you can do is to just buy a basket of currencies and/or a basket of international blue chips. Another way is to Short the banks, but in this environment, he would not be doing that.

Markets. The reaction to the Trump victory initially was the accurate one. It is tough to find people who saw this coming. His policies are pro-growth. He is bringing cash home from other jurisdictions so it can be spent in the US, which is pro-growth. Some of his policies are very good, but people worry about some of what he will do on a global basis. What has come out of this is a very strong rally. The defensive sector has not paid off in the last couple of days. There has been a massive rotation in the last couple of days. Industrials and infrastructure stocks have benefited.

Keystone and the impact on various companies. You need to focus on the price of oil short term. The ability of Canada to get oil out of the country is a long-term factor where as price is a short term factor. OPEC discussing quotas is more important short term than Keystone.

Market. His firm tries to prepare for worst case scenarios, and anything above that is gravy. He tries to buy businesses that are so sustainable that they are going to be around no matter who is president and no matter what is going on in the world. The most important thing is just being invested, and to preserve and grow wealth over time. We are now facing an environment where the market has done a bit of a 180 here with his view of Donald Trump. The most interesting thing are the bonds selling off, with potential inflationary pressures. In that environment, you want to own equities. He wouldn’t hold cash as a pure defence, because that is where you might get hurt because of 1) a low inflationary environment and 2) given low interest rates. Trying to always take the “middle ground” through thick and thin tends to work pretty well.