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

Markets. He is taking a very cautious view, especially with the big rise we have had on the February lows. Feels the markets are probably a little overvalued. His call was for the S&P 500 to be right around where it is now at the end of the year, so we have a long way to go. This really relates to looking at the macro economic picture, both in the US and globally. Right now we are still getting very mixed messages. What has been powering the economy over the last few years has been the recovery in the housing sector, and that looks like it is kind of sputtering. Today’s existing home sales numbers were a bit disappointing because they were well below consensus. The market doesn’t seem to be too worried about it, and that is a frustrating part for a lot of people. His current cash position is around 75%. Doesn’t believe in “buy and hold” currently, but believes you need to focus on good quality companies. When they get really stretched valuations, you need to take some money off the table and protect your cash.

Favourite US bank? His favourite is Bank of America (BA-N). It is much, much cheaper. Wells Fargo(WFC-N), J.P. Morgan (JPM-N) and US Bank Corp are kind of the 3 sisters that people love to go to, because they are very high quality banks. Have the fewest hairs in terms of companies, so people gravitate to them and give them richer valuations. (See Top Picks.)

Market. If you take the FANG stocks (Facebook, Amazon, Netflix, Google) out of the market, you actually had a bear market in the US. More than half the stocks are down more than 20%. There are certainly some good value opportunities. Now that the Fed has made it plain that they are not going to raise rates as much as people had thought, they are taking their foot off the brake. At the same time the European Central Bank has come back with another billion euros each month to buy things like corporate bonds and with more negative interest rates, liquidity is there. Emerging markets are now as cheap as they have been in 2 decades.

Playing rails ex-North America? A good play would be Kansas City Southern (KSU-N), which has a big Mexican operation. Also, you could look at one or 2 of the UK rail operations, such as First Great Western or Govia. They don’t make much of a return, but will give you some exposure.

Canadian Banks. Sell now and buy back at a lower price? Canadian banks have really done pretty well. There are going to be higher loan losses. Also, housing prices could be off slightly in the prairies, but the majority of the property market is looking pretty good. Stick with the Canadian banks and don’t try and time it.

Markets. The easy money of the last 4 or 5 years is behind us. There are people waiting for those times to return that are on the sidelines. He built up 25% cash in January and put 10 of that to work since. Risk aversion is coming online so if you get it wrong in a small name you really get it wrong. His favourites are not necessarily the highest paying dividends. He looks at sustainability of the dividend, their company’s ability to raise it. We are close to the bottom with oil prices. Don’t confuse this with the share price of oil companies. Oil may go up and some Canadian names will still not make money. He would rather miss 10-15% of the upside, but have conviction that we have turned the corner. This pull back has given him opportunities in several sectors. Utilities were great.

4% net return for 30 years. Stay away from volatile, emerging markets, and small caps. Buy dividend paying stocks in Canada and the US, keeping taxation in mind. You need the US for diversification reasons. Throw some fixed income in. 60% dividend and 40% fixed income.

Emerging market allocation. He has zero direct exposure to them. From a theoretical point of view it sounds exciting. He stays away because those markets use different accounting standards so he can’t use their financial statements the same way and those markets lack regulation. He prefers multi nationals that trade on the US markets.

REITs. The space has appreciated a lot more than utilities. Valuations are richer. Now there are so many players bidding for premium real estate. REITs have lagged compared to utilities. The market has less appetite for risk than 4-5 years ago.

Energy. Doesn’t think Saudi Arabia is going to give up on their strategy very easily. Also, Russia has an absolutely terrible track record of complying with what they say they are going to do. They’ll come on board and say they are going to freeze production, but will lift production in ensuing months. That’s their pattern. March and April are typically refinery turn around season. Refiners come off line, and get prepared for the heavy usage season in the 3^rd quarter, which is the traditional seasonal pattern. He expects the bloated inventories globally are going to crest in the April/May time frame, which will be about as bad as it gets. Hopes to get visibility in terms of balancing supply and demand in the 2^nd half of the year. The jump in oil recently has been driven to a large extent by Short covering. Shorts are running scared because they think something more might happen, but he doesn’t think anything will happen. Expects there will be another retest in oil prices, which sets us up for a 2^nd half which looks quite constructive. Concerned about the slow pace of LNG on the West Coast. Some of the front running projects that he thought had a high probability of getting constructed, now seem to be stumbling a little. Thinks the Canadian dream of being an LNG exporter are diminished.

Markets. We are moving from zero interest policies into negative interest rate policies. The US is dealing with a strong currency and reduced exports. But they are the reserve currency. Everything in the world is traded in US dollars. They have a more powerful currency. They can print as much currency as they want. You should buy both US and Canadian equities. Revenue in the US is reduced when it is translated to US dollars. Canadians could buy US companies because of this at reduced valuations. But this is a currency trade. There are a lot of companies that have Canadian costs, but US revenues, perhaps because of international revenues. He likes these. The Chinese are supporting their RMB.

Railroads. They are an interesting play. Warren Buffet bought in recently because getting land rights are incredibly difficult to get. They are a reflection of the overall economy. He thinks less oil will flow than they once did. Most stuff in Canada goes by rail.

Markets. We had a reflexive bounce off in some of the commodities. We had persistence in sectors with stable earnings and good trends. We are at high levels of inventories to sales. The Fed is worried about some things. The Yen is the big trade that tells us a lot about markets. We had a rounding bottom in 2015 and now it broke out. He owns the Yen. The Yen is telling us the market (S&P 500) is tired. We might see a revisit of the December/January lows. You want to go into strength in the S&P.

Markets. He doesn’t see big pain. Doesn’t think we are extended that much. The stock market is different than economics and whether Canadians with mortgages are extended, which there is some of, he doesn’t see cratering. By sector it is difficult. Energy and materials have their own drum. If you have a view that oil is going to $45-$50, which he does, it is pretty back end loaded. Thinks energy/oil stocks are ahead of themselves, and there are some bad inventory numbers coming in the next month or so, where you might get an opportunity to pick away. Has almost no weight in oil, so he will be looking. Likes financials, consumer discretionary and industrial, where there is value stock by stock, but not the whole group.

Gold. Kind of flat. Would be interested if it got back into the mid $1100. Stocks have had a better run than the price of gold so far this year, so thinks stocks are a little ahead of themselves.