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

Market. There was no change in the rate by the Fed, but the market clearly interpreted this as dovish, and there was a market rally. The market is very fixated on the short term, but Janet Yellin is seeing rates as staying unusually low for a long period of time. She also said that if the fund rates go to 2%, they are going to do more quantitative easing and add $4 trillion of bond purchases. He thinks the market will be comforted by that. Thinks today’s is very short term. Expects dividend paying stocks, which is his specialized area, will be particularly attractive relative to current long-term bond yields. Central Banks are beginning to realize that negative interest rates have negative consequences for banks, pension funds, insurers, etc.

Qualities to look for in companies? You are looking for a strategy that makes sense and that they can enunciate clearly. Also, looking for a strategy that is well thought out, consistent, and if the circumstances in the industry change, how adaptable are they.

Gold? Had been quite optimistic on the sector earlier in the year, and is surprised by the amount of upside it has had. In a world of negative interest rates, he thinks gold is pretty attractive. Monetary policy has not really affected GDP growth, and with currencies being volatile, he thinks gold will attract more attention over time. He can see gold going higher, and wouldn’t rule out that they could go back to previous highs by 1925.

Market. Feels secular stagnation is making a resurrection. Secular stagnation is an outgrowth of the great depression. During the Great Depression, everybody felt that economies were stuck in a slow growth mode for a long time, and would continue to weigh on the economy. However, there are different dynamics and history doesn’t really repeat itself. Central bankers and policymakers are going to fight it tooth and nail. Thinks the next wave is “helicopter money”, an important development and one that his firm is keeping an eye on for clients. This is direct spending by the central bank versus quantitative easing which is just buying government bonds that are already issued in the secondary market. Helicopter spending hasn’t been done since the 30s by the Bank of Japan.

Infrastructure? There is a lobby group called The American Society of Engineers which are forecasting that between now and 2025, if the US doesn’t get its act together and spend on infrastructure there is about to be a $4 trillion loss due to lost sales, costs, etc. due to bad infrastructure. The incoming presidential incumbents certainly have the ammo to spend on infrastructure, and he views that is moving its way into the popular psych, and over the next few years expects we will see the return of fiscal stimulus.

Emerging Markets. These have been trod on for the last 4 years, and investors have definitely been sour on that class. He tends to like the commodity importing countries such as India and China. Looking at the history of emerging markets, they tend to have big booms or big busts, either hot or they are not. Thinks emerging markets have bottomed and are tending to be a bit more resilient than developed markets.

Healthcare through an ETF? Healthcare fits in with his theme of a post crisis financial environment. After a financial crisis, all industries that tend to be inventive or creative, tend to do incredibly well. That would apply to technology and healthcare. Biotech valuations have come down a little within the healthcare ETF’s due to Hillary Clinton’s policies. Feels healthcare in general is a good overweight. It is aligned with aging demographics and the post crisis financial environment. He likes the area in general and is overweight it in client’s portfolios.

US infrastructure ETF’s? This is difficult, because a lot of these tend to be a little mislabelled in the sense that they tend to be utility plays. He is working on the thesis of “Where is this money going to be spent?” if “helicopter money” is going to be initiated. He has yet to find a good infrastructure ETF.

A green or socially responsible ETF? There have been a number of countries that have signed on to the Paris Accord to limit carbon emissions by 2020. If you look over the last couple of years, any green ETF has been very disappointing. There are going to be bright spots in the future. One of the industries he feels would be ripe for an investment at some point, will be solar. It is going through a consolidation, and they have to get the demand up. The way to do that is to lower the cost of solar panels, which is exactly what has happened.

Market. When the Fed raises interest rates, he doesn’t believe they’re going to do it at each of the next few meetings i.e. in a fast cycle. Rate increases are likely to be gradual because there is still subpar economic growth in the US and in other regions. If they hike rates too aggressively, you would see financial conditions tighten. We are in a low yield environment, and people have gravitated to dividend stocks in search of better yields, and if you look at certain sectors, there is certainly a risk that there could be a rotation out of so-called defensive and expensive dividend paying sectors. What he tries to do is to identify companies that have a very sustainable free cash flow yield that are generating a lot of money with clean balance sheets.

Markets. Credit is becoming a major threat in China. This has been a major risk for years. 100% of the growth in China has been fueled by debt since the Lehman moment. You see an increase globally in defaults in debts since 2015. There is a warning signal here. Trump is picking up inch by inch. He has a reasonable chance here.

How to Short. The simplest way is to buy a long ETF with inverse exposure, avoiding those with leverage. You can cushion the downside or profit from corrections. We are almost certain to have a recession within the next two years. You can’t short in your RRSP, so you have to buy inverse ETFs.

Parking Cash. He assumes that means risk-free. There is nowhere to park cash risk free with a yield. It does not exist today.

Covered Call Strategies. When he is neutral to negative, he wants to hold things that he can get more yield from and that have less market risk. Covered calls do this.

Agricultural ETFs to take advantage of sector mergers. You won’t get a pure exposure to those affected. They will be 4-7% of the ETF. COW-T has 80% exposure to the US. MOO-N has closer to 40% of the chemical side of things.