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

Canadian Banks. News was better than people had anticipated. All 6 have reported and 4 have increased dividends. 4 of them beat relatively convincingly and 2 were pretty close to earnings. If we use the bank sector as a bellwether, it is saying that the weakness in the energy sector and Western Canada has not been as pervasive as we might have thought. There is still a question mark as to what we will see in the next couple of quarters, in particular because of the multiplier effect that the lower price of crude is having, not just in Alberta, but also throughout the rest of Canada. He is currently buying banks aggressively. Valuations are probably more attractive than they have been any time since about 2011.

Interest Rates. Negative interest rates are stupid. They increase risk because they are effectively forcing banks to lend money, perhaps to organizations that they wouldn’t want to. Rates are so low to begin with that if corporations want money they can basically go and get it. Also, feels it discourages savings to some degree, and savings are effectively an insurance policy. Governments want people to spend more money which is silly. It makes companies produce more than what they normally would, and to expand more than they would, which has created gluts in certain areas. This is new economics that really doesn’t make sense, and is more likely to lead to a recession.

Gold? A year ago he was buying a lot of gold companies. Right now has been selling some. Often, before PDAC (a mining show starting this weekend) gold stocks seem to really move. Doesn’t know if there is a relationship, but thinks that maybe there is. Finding a good gold company with low debt is difficult to do.

Canadian Banks? Have been reporting fantastic earnings, record ones in some cases. The economy is supposedly not doing well at all, but banks are making so much money that there is a disconnect that he doesn’t like. They keep raising the dividends, which he thinks is a mistake. They should be paying down some debt instead. Banks have got into trouble before, and that creates dangers. If you have dangers in the banks, that means major dangers for the economy. He would be wary of buying common shares at this point.

Market. The market has been pretty hectic this year. Started the year with a huge drop and almost looked like a potential recession in the US, which was scary. There really wasn’t any economic underpinning for that, so it is now bouncing back. We are now getting back to a better footing. There are definitely legitimate concerns, which is why he is not looking for a rock ‘n roll year. You should be looking for more mid-digit sort of returns. The US is clearly on a growth path and the employment picture was very, very strong, and as a result the Fed was able to raise rates. Doubt if they will be raising rates too many times this year because of the slow growth. When picking names, you want to be optimistic and judicious in something you are comfortable with, and if it went down 10%-15% you are comfortable having bought it.

Your top pick in Canadian Banks? On the long-term, Canadian banks are very solid investments. Shorter term there are some issues with an overheated housing market and exposure to the oil patch. From the most defensive point of view, his top one would be TD (TD-T) and to a lesser extent Bank of Montréal (BMO-T), followed by Bank of Nova Scotia (BNS-T) and Bank of Commerce (CM-T), and finally the Royal (RY-T) and National (NA-T). Thinks things are going to be a little slow this year. There is some cost cutting going on and dividends are still going up.

Markets. Oil is a big part of our economy and our market. It is going to be choppy through the first half. We will not see the drops in inventories and production that we need to see until 2017. The market will anticipate this in the second half. He is skeptical that shale producers will ramp up at $40 oil. The rig count hit 400 last week, down from over 1600 at the peak. Declining rates in the wells are adding to that. Oil fields tend to run out at 4-5% per year. Banks are the favourite dividend payers with Canadians. The banks continue through corrections at a pretty good clip with dividends and earnings going up. You will do well over the long term.

Percent value for each sector. He has a hard time buying consumer, cyclical, tech and healthcare in Canada. He wants to see dividends. He has a small consumer weighting. He is over weight in utilities, pipelines and telecom plus banks. US consumer and healthcare plus Tech compliment his omitting them in Canada. He maxes out at 5% on any one holding.

Yield ranges and yield paying ETFs. He can buy a 1% dividend up to 6 or 7%. He would go lower if he saw it going to the 4% level in the future. Don’t preclude yourself from a lower yield stock, but do have a higher yielding one to offset it. Yield ETFs also have a fee associated with them so he avoids them because he also charges a fee. For private investors yield ETFs are okay.

He owns preferred shares in taxable portfolios for less volatility. Total returns are probably restricted to a 6% yield.

Markets. After a lackluster earnings season the markets will focus on US elections, China slowing, event risk around employment numbers and what the Fed will do with interest rates. Employment numbers is one of the factors that the Fed uses in deciding on interest rates, along with firmness in markets. The fed should not be trying to trade the economy, but they will adjust interest rates according to current conditions. Central banks cannot change demographics and the massive amount of debt. In the G20 meeting in China, they knew what the solution was. People are living longer and need to work longer. Benefits need to go down and taxes need to go up. No politician will ever win on that platform.

Bank ETF recommendation. X-North America, there is some (e.g. EUFN-N) that focus on the better banks in Europe. But he feels the bottom is not in. Wait for March 10 for an announcement from Europe.

Portfolio Construction. Canada is a little more than 3% of the world. You should have a bigger portion because of the dividend tax credit and only for that reason. The US is 53% of the world. VT-N is the entire world index, for example. Start there, recognizing that Canada has 3%. Part of your portfolio construction is related to your means and your ability to take risk.

Educational Segment. Super Tuesday. The political establishment is mortified at what Donald Trump has been able to do. You have this rip in the party. Texas is key here. Trump has been able to win because the Republican party is split. Texas is tomorrow night (Super Tuesday). After that Trump may be able to be challenged. He has not said one thing that is economically decent. The markets are not likely to go down on Wednesday because you have the March 10th ECB announcement. Then you want to wait for March 15^th, after that volatility will increase. You want to take down the risk after the 15^th.

Market. The S&P was range bound for basically the whole year in 2015 at 2040-2135. It dropped below that in August and at the beginning of this year. We are now in another range, where 1950 is really the cap, and this is the 3^rd time we have tried to get through 1950. We have to get above that and stay above it in order to be positive. Consumer Staples has been the leading sector and is breaking above its last highs. When defensive sectors are leading at this time of year, that typically means the market is really nervous. The same thing is happening with utilities. If the market starts to go up at this point, those 2 sectors will actually suffer a bit.