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

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.

Energy? Crescent Point Energy (CPG-T) is the only thing he owns. Prefers oil to gas. This one has growth in Saskatchewan and Utah, and nothing in Alberta. You actually have to look at pipelines and where they are going. It looks like we are a while before another one is built. He wants to be safe for now, and would rather give up 10% now, and then chase a little bit after it started moving.

Markets. In January he felt this was the first significant correction of a new, long-term bull market for stocks. S&P 500 broke out to new highs at the end of 2012, exceeding the 2000 highs. 12 years of sideways markets resolved to the upside. Looking at 2 previous secular multiyear bull markets, 1951 to 1966 and 1982 to 2000, there was about a 10% correction in about 2.5 years over 6 or 7 months. Both had been through a tough market and a lot of people said we were back in trouble again, and in both cases, the market turned and rallied between 100% and 150% over the next 2 years. We have passed the 1^st significant correction of a new longer-term bull market for developed market equities. He is very bullish. We are in a long down cycle for commodities, and there will be retracement rallies like we are having right now that will make things look a little better. In general, if you can have low inflation and low input costs, especially in energy, that is a great thing for a developed consumer led economy. Of course the biggest one in the world is the US.

Canadian Banks? They are all quite different and some have better setups than others. As a group, their capital is in good shape. They don’t have major problems right now with loan losses. If oil stays below $40, then it is going to get tougher and you will see more headwinds. Canadian banks will probably grow their earnings at around 2%-3% over the next couple of years, given the headwinds in the Canadian economy. Prefers looking at some in the US. If he had to choose one, he would focus on Toronto Dominion (TD-T) which doesn’t have huge capital market exposure in Canada or a lot of Western exposure. Also, has good US East Coast exposure.

Stop/Loss percentage? He uses a point and figure price chart, which helps to identify inflection points. There are lots of ways you could use this, but you have to look at each security. He wants to see higher highs and higher lows. When he sees a security make a high, a low, a lower high, followed by a lower low then he is out. That means there are more sellers than buyers and the pressure is coming from above.

Markets. Chinese numbers continue to signal a slowing in their economy. We had this massive economic expansion over the last few decades. All the Economic expansion in the US recently has been all debt financed. We have to get used to slower economic expansion. They can’t keep borrowing and spending at the pace they have. It is the aging demographic. You can’t take interest rates to zero and expect an aging demographic to start spending. Monetary policy is less potent than in previous economic cycles. They will probably talk about June being on the table. The rally since Feb 11 will be meaningful to the Fed. The behavior of European markets signals a lack of confidence to him.

Beyond ZWB-T. If he is right and the world is slowing, then covered call strategies tend to extract a little extra value. If you want Europe ZWE-T gives you exposure to dividends. ZWH-T gives exposure to US. ZWU-T gives Canadian utilities, pipelines and telecos, all with covered calls.

Keeping share value near NAV for ETFs with low luquidity. You rarely have a huge deviation from NAV because of arbitrage, as long as the underlying holdings have liquidity. If the number of ETF units outstanding gets too low they may redeem your units, and wind it up or roll it into another ETF. You don’t lose you money.

Educational Segment. After the recent market rally what comes next? The markets popped in the last week and now we are into a period of resistance. We are in a global bear market and have we bottomed? Market breadth: The US market has had good breadth, but not around the world – mixed reading, slightly negative. Valuations higher than ever, earnings likely to be flat for the rest of the year, so we are on the high end. A lot of earnings growth is from share buy backs over the last 4 years. Is the market respecting support and resistance levels – no. He believes we are in a bear market. He believes we will retrace to around the 1600 level (25% from the peak).

Markets. He invests in quality so you can withstand the ups and downs. The valuations in the markets are high and so there is a risk of contractions in the multiples. In December the median price to earnings was higher than in 2007. Today you have much higher valuations. You can find individual companies, however. You want a strong business model, and an attractive valuation. You want stocks that can outrun the problems of the economy if you want to be aggressive. Consumer staples are the sector he would consider the least safe. He does not short stocks. He is not a believer in stops. If he buys on valuation then if they go down it is a time to buy more.

Banks. He owns 4 of the big five as long term core holdings. There is probably no sector in Canada that will give you 4 to 4.5% dividend yield, at a low multiple, that is protected by the Canadian government. He considers them to be long term holds. Over the course of a year there will be trading opportunities, however.