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

Market For almost a year now people have been talking about a correction coming. Because we've had 9 years of pretty strong gains in equity markets there is still optimism left in the market. Referring to Jerome Powell comment from the FED yesterday, after seeing just a small glimpse of good news we see buying coming back into the market. Looking at 2019 you have to ask yourself whether you are in the camp of things slowing down and being more defensive, or if that was just a little breather in the market and if we are going to get back to rosy days. He tends to be more conservative, thinks now is an ideal time to become more conservative heading to 2019. Doesn't see the same type of growth catalyst for 2019. Not overly optimistic.

Interest rate hikes slowing down Going into this year they reduced their weight to interest sensitive and defensive equities such as utilities and telcos, and those names did suffer in the first half of the year. As we went through the year central banks have soften their language both in Canada and the U.S., and now we are seeing these defensive names becoming popular again. Tech is down 9% within this quarter, whereas the defensive names they like such as utilities are up 4%. Seeing a shift back into defensive and interest sensitive names.

Dividend growers or dividend yield? It's always about dividend growers as it speaks more about the overall wealth of the company. If you are too focused just on the yield and you buy a company that pays a 5-6% dividend without looking at the fundamentals, their ability to raise de dividend may be impaired, and not only that but the share price may also go down more than the dividend yield.

Move from bond ETFs to preferred shares or floating rate ETFs Just because the word bond is present doesn't mean that it can be synonymous with safety. Even in the world of bonds there is a wide range of risk ranging from governments bonds all the way to the other extreme being high-yield bonds. Preferred shares can be seen as fixed income part of a portfolio but it is important to recognize they don't have the same characteristics as bonds. The good is that the tax treatment of preferred shares is generally as a dividend, so if investing in a non-registered account you get the benefit of paying less tax on the yield. The bad is that they rank lower should things go bad with the company. If you are a bond holder you get paid ahead of a preferred share holder. There are several different types of preferred, such as perpetual which are very sensitive to interest rate, all the way to fixed rate-resets, and there is other considerations there. Preferred shares can be an alternative to bonds but it is not as simple as looking at the yield, from tax to credit quality, as well as what type of preferred you buy.

Wall street banks vs smaller regional banks in recessionary environment? It depends if the earnings are coming from banking operations or wealth management and investment banking. You have to ask yourself what exposure you want to consumers. He feels pretty optimistic about the U.S. consumers primarily due to debt to income ratio being considerably lower in the U.S. vs Canada.

Market Outlook - A lot of normalization going on the Market right now. Higher volatility. Investors have been blessed with low volatility for a long while. This is kind of a reminder that volatility is part of the investment process. The US shows more average market valuations. The economy is still growing. Shorter term is surprising that a few words from the Fed can move the market so much. That is why he prefers to look at the fundamentals of a company. He prefers US banks over Canadian Banks now because of the growth south of the border. Still thinks Canadian Banks have a place in Canadian investors.

Breaking news: US Fed Chair Powell has just commented, urging caution, that the impact of hikes is uncertain. The Fed pause narrative has picked up steam. We will certainly get the Decmber hike, but may take a pause after that. Growth stocks have dominated almost every investing style until the past few months and is now done. He sees more rotation into profit-oriented stocks. Inflation has come off because of the falling price of oil.

Interest rates: why do Feds keep referring to historical rates? Historically, back to 1947 interest rates in the U.S. were 2.7% on the 10-year (close to current levels). Rates went from 2.7% to 7.7% over the next 20 years. Traditional bonds fared the worst, but stocks did fine, annualizing at 6-7%. So, stocks can bear rising rates as long as it's not a shock. That's why Powell and certainly Trump want a pause to see hikes digested. Interest rate cycles are nothing new.

The US Fed Reserve decision today puts the market on a different path for the rest of the year. Rates are just below the “neutral range” said the Fed, which caused a massive market rally. A rate hike in December is still probably priced in. He thinks the US Fed should be hiking with the state of the hot domestic economy. Trade tensions could heat up again with a weekend G20 meeting of world leaders. He thinks there have been positive statements out of the US ahead of the meeting that a deal might be struck with China – but expect the unexpected. He continues to like Canadian Financials and Industrials.

In the credit market are spreads finally widening, and at a rapid pace this month. Global central banks have supported markets with very low rates, but that's been changing as they raise rates. He expects continued declines in equity markets and likely a recession in late-2019 or 2020. The U.S. tax cuts benefitted businesses both short- and long-term. He doesn't see significant inflation in the near future.

Junior mining sector Precious and base metals: If we enter a recession, be long precious metals, and be short base metals. Among base, he likes zinc (i.e. Hudbay Minerals).

U.S. vs China trade war: This is a president who believes himself to be emperor. If he wants to put tariffs on Europe or doesn't like GM, he doesn't care. We've never seen this. If you're going to wait to see what Trump will do, you'll never invest at all. He's holding only 3% cash. He's slow to reinvest, though, and has taken some profits, but he believes there are always opportunities. He liked Scotiabank's results today--very good with 16% growth YOY in Canadian, and glad they divested their Caribbean operations. They're trading at less than 10x trailing earnings. Canadian banks as a whole are cheap and Scotiabank will grow. In contrast, he's bearish oil. He's incredulous that Ottawa hasn't solved the pipeline problem as Alberta oil companies go under and the country loses millions each day in revenues.

The U.S. Fed's announcement tomorrow He expects Powell to say he'll stay the course, meaning 2-3 interest rates increases coming, though it'll depend on economic data and if there's an economic slowdown. Also, keep an eye on U.S. housing starts, which are flat. The US Fed could pull back the reigns pretty quickly.

Berman's Call was pre-empted in its entirety by GM announcement. .

GM announces it will close the Oshawa, ON plant: It's sad because it was a major plant, but the reality is that the industry is changing, moving towards e-cars and other things. Look at the rise of Tesla. Oil prices and markets today rebounded today. Our economy is doing relatively well, but our oil situation is beyond a nightmare--look at the WCS discount vs. world oil. This crisis will be addressed short term with more rail transporting oil, but we still have issues to deal with (namely pipelines). He hasn't seen selling like this of Canadian oil. Meanwhile, the U.S. tax cut was a mistake. Sure, it juiced up the American economy, but it really just amounted to record stock buybacks by corporations -- it didn't trickle down. Meanwhile, the deficit is rising in America and will continue to. Canada should not go down this road, even if it scores political points.