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

Are Canadian Banks good for growth and dividends? There has been a real “sell Canada” trade over the last little while, and the banks got caught in that. The banks have grown at a far greater rate than GDP growth, and he questions how long that can continue. He would focus on dividends as you are not going to get a ton of growth from the banks. The dividends are safe.

Markets. After any piece of economic data comes out, there is a web site (https://www.frbatlanta.org/cqer/research/gdpnow.aspx) that does an update. It has a real time analysis of the US economy. Their current forecast is weaker than it has been recently. Jobs are a byproduct of the forecast, rather than working into it. Gasoline demand may have peaked in North America. The US Population is 5% lower than 10 years ago. We have not seen an aggregate demand for unleaded gas even though car sales have improved. Even the demand in China will peak in the next 5 years. The new battery technology (lithium sulfur) will double the capacity of batteries, but make them lighter.

Monthly Income for an 85 Year Old Investor. At that age you don’t want volatility and would prefer bonds, but after tax and inflation you don’t get any expected return on bonds. He cannot see anyone of that age going into all equities or a target dated fund. A basket of short term corporate bonds might get you 2.25% and might be the best way to address the fixed income part of your portfolio.

Educational Segment. April Showers and No May flowers. He sees a lot of risk. Looking bottom up, analysts started out looking up, but as earnings are coming out, they have taken estimates down just before that. The risk this year is that earnings don’t deliver. Looking top down, the analysts are worse. In 2015 they had big expectations, but then they were wrong. As markets sell off, they start lowering their forecasts. There is downside risk as we get into earnings season again. You should take some money off the table right now and buy back later.

India – a core emerging market holding there? He loves India and the demographics with the average age 28 years old. The currency is devalued 3-5% a year for the last 40 years. That is the challenge here. He does not know of an ETF that hedges the currency. ZID-T is one in Canada and is a way to play India, but you have currency risk. He thinks markets will pull back later in the year. It would be good if the value got back to February’s lows. It could be 1.2-2% of your portfolio and up to 4% if you are bullish on India.

Markets. He only buys half as much as he is considering buying these days because we had a bull market for 6 years. If you take out extraordinary items we are at 24 times and that is where we are usually at at the height of a market. Free cash flow is declining because revenues are declining. Once you get over 30 stocks you are not reducing risk by holding more.

Markets. He is more of an active trading oriented manager, and this is the kind of market that he likes. He came into the year fairly heavy net Short the market worried, and then it sold off pretty dramatically and he jumped back in pretty aggressively in late January, and then was sort of selling again into the end of March. Worries about the overdependence we have on the large banks, like the dovish comments from Janet Yellin last week. Thinks there would be greater confidence in the economy if they started to normalize rates more. Economic growth is slowing down a little and earnings have peaked and are rolling over a little. Valuations are back to the high end of the range. He has checked back and took some profits, and raised his cash position. Everybody seems to be in the bearish camp, and he hates to be on the same side as everybody else. Still worries about China, not the growth, but their banking system.

Energy. Has gone from Long to Short on oil. Oil is rallying, but it is hard to buy in the short term. There is going to be no production agreement from OPEC.

Favourite Canadian bank for income? For income this is the time to look at these. You are fighting some US short selling, who think we are into a repeat of what they went through in 2007, but he doesn’t think that is happening. Canadian banks give you better diversification. Loan books are so much stronger than in the past. National Bank (NA-T) sticks out as being really cheap. Also, likes Bank of Nova Scotia (BNS-T) for the International play. The whole banking sector looks interesting to him. The valuation on the Royal (RY-T) is higher, so he would prefer others.

Why has natural gas gone up from $1.60 to $2.03 lately? This could be called a bit of a trading bounce off extremely low levels, because of the US$ starting to roll over. All commodities are basically tied to the US$. It is hard to get excited about natural gas which has an excess of supply.

Gold? Keep 5% in a portfolio? He averages in the range of 3%-5% in gold related stocks. Right now it is at the low end. The bigger call is getting the US$ right. Thinks the Fed will eventually start raising rates, and the US$ will firm again, which will be a bit of a risk for gold. However, it is a good to have a bit of a hedge in your portfolio. He stays away from political risks, so would stay with domestic assets, and single mine companies, maybe in the mid-size, and has some production growth with the possibility of being taken out. 2 of the big ones in this category are Detour Gold (DGC-T) and Kirkland Lake Gold (KGI-T).

Market Call Tonight is focused on Income Taxes, not investing.

Economy. There could be 5 years of muted economic growth. We are looking at world growth slower than it has been historically, and demographics is part of the reason. Once you get the slower growth with the GNP, you are going to see that going back through the markets. Also doesn’t think there is going to be upward pressure on interest rates. His advice to investors is to look for good quality dividend paying companies.

Markets. There was carnage in the markets at the beginning of 2016 after the rise in interest rates. Mid-Feb they revised their outlook and we went up. We are still struggling to take out the S&P highs of last year. The Fed are watching markets and markets are watching them and so there is an paralysis of analysis. He is out of the bond market because you get nothing. Negative interest rates are bit of an ominous indicator.

Preferred share resets. The preferred market in Canada has been crushed by rate resets. CPD-T is a Canadian preferred ETF and PFF-N is the US equivalent. The same thing has not happened in the US. They got popular in 2009, but then rates did not go up in Canada so preferreds have really gone down. They are great for the companies that issue them.