A Comment -- General Comments From an Expert

A Commentary

Market Outlook The S&P500 run up does not worry him. The bull market was in place all last year until the latter half. The market is really going sideways in his mind. He tends to look at US stocks more frequently as Canada lacks the fundamental liquidity. Strength in the US dollar may hurt Canadian holdings, because of the currency, it does help to add to the profitability of US holdings in general.

US Home builders. The US home builders market is still way behind from the peak, despite a rapid population growth. Existing home sales are also not substantially higher. He has chosen the play the space through a Home Dept instead.

Gold now rallying? He likes the recent technical rally and he thinks it could go higher. The US Fed is negative on rates, which would be positive for the entire market. It is unusual for gold and stocks to rally at the same time.

I bought rreferred share ETFs for safety and yield, but their value has decreased. Preferreds are like high-yield bonds. Credit spreads are expanding now, so investors want a premium over risk-free rates. Preferreds act calm, but when they go off the rails, like in 2008, they really go off. There are likely rate-set reset preferreds inside those ETFs, so those resets will fall along with yields, which impacts ETF price.

An actively managed ETF portfolio vs. a managed mutual fund one. There are pros and cons. Mutual funds offer intra-day liquidity, not ETFs. But ETFs offer lower cost. Is paying more worth it?

Be careful in the market now. Investors are over-confident and are taking on too much risk as they reach for yield and returns; these stocks do worse in a correction. Mid-caps are underperforming the S&P by 9% and micro-caps by 22%. Global growth is slowing. Given all this, money managers are investing in bigger-caps and less so in smaller-caps. Not good. Now, utilities and other defensives are outperforming. Consider the risks in these sectors. Actually, the best risk and return is in bonds, especially government bonds (not junk).

Market. He does not think there is anything more important going forward than the trade issues between the US and China. There is an important dinner meeting Saturday night and we will see how that goes. Trump is being urged to take a very hard line on theft of intellectual property. Any deal that does not include China admitting this exists and how they are going to get rid of it will be judged as a soft deal and a non-win for Trump. This is going to become a political issue going into 2020. Trump wants a rate cut. China has less risk in the talks and more staying power. But technology companies in China are going to hurt US suppliers. Regarding Iran, diplomatic solutions are always the best. Trump was initially against war but he is adamant about doing deals and putting his stamp on things. There is always going to be a hot potato in the middle east and that is never going away. Gold prices have soared on the geopolitical tensions, the Fed easing again and the weaker dollar. All of that is bullish for gold and it is one of his biggest equities.

The US 10 years have hit 2% in the last two weeks. This is going to be a big hurtle. 1.5 was the pre-Brexit low and we will hit that when we go into recession. He sold all his long bonds. He is slightly short. He expects interest rates to keep falling.

The US capital markets are the most liquid in the world but from time to time volatility shocks can happen. He loves gold and thinks it is breaking out here. We probably have another 10% in gold and 20% in gold equities. He would prefer a gold equity ETF, although it is not early.

Defensive Move Recommendation. Bond yields are low. He would not rush into bonds. Utilities and staples are expensive. He would prefer to be defensive with puts. Stay in the great companies you own if you want to own them.

Educational Segment. The Earnings Recession and What it Means. We will know after this quarter if we are in an earnings recession. It means we had two quarters of negative growth. He wants to be protected when (1) markets get over valued and (2) there are geopolitical issues as these can trigger a recession. Earnings weakness is coming from trade. 21.5% of the S&P is technology. Because it is such a big sector it will be swinging earnings round and round. When we go into recession we will get a multiple contraction as well as an earnings contraction and this is the worst case. He maintains low, low risk portfolios but with as high a yield as possible, moving into areas such as bonds, cash-like instruments and gold, etc. to lower overall risk. It is always all about asset allocation.

Market. He is seeing signs of froth in the market. Investors are probably happy with the year-to-date returns but there are more traps than there are opportunities as we get to half way through the year. Beyond Meat is trading at 90 times sales. Uber investors are subsidizing rides about 30% right now.

The capital asset pricing model doesn't take into account yields, but Europe has negative yields across the board, like Swiss bonds (they pay a negative return, so you pay them to hold your money). It's unbelievable. So if interest rates go negative, then stock prices more infinite. Stock growth doesn't matter; valuation is all that much more attractive, remarkably cheap. Stocks are attractive. He owns bonds, but it's risky to go long-maturity bonds if interest rates go up. Short-term bonds are attractive, but stocks are the most attactive asset class.

All US stocks vs. GDP since 1971 to determine whether the value of the whole market is supported by underlying economic growth: there were peaks in 1999 (dot-com bubble), 2007 (before the crash) and especially now which is extremely high. This means we are at elevated levels, so we need to be cautious. Caution is necesarry. Also, growth has outperformed value for a decade. Before then, they were basically in line (based on the Russell 1000 growth vs. Russell 1000 value charts). He's looking for value in companies that are still growing modestly below 10x earnings and growing in dividends because their cash flows are still growing.

Long-term returns in Canada vs. US since 2000 The US has outpaced Canada since 2000, though that gap has recently narrowed. After the tech bubble burst in 2000, the TSX benefitted from the backlash against tech stocks. Then, after the Great Recession, Canada benefitted from the junior oil boom. If you traded that, you would have done really well. But if you are a buy and hold investor, then the US is much better; the US is better-diversified whereas Canada is dominated by oil and banks.