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

Volatility over trade and foreigh currencies: He likes the opportunities that volatility brings. Lack of it breeds complacency. Valuations in tech are getting pretty high and he suspects there will be a rotation out of tech. He's moving into energy where there are bargains. (He has a 12-24-month outlook.) This has been a momentum market, but focus on the future, not tomorrow morning. Oil is down today, but the oil chart over the past year is bullish overall. In two or three years there could be c.2007 discussions of there being not enough oil. In Canada, these stocks have come off a lot since the TransMountain court ruling, but the new Enbridge line 3 should be operating by end-2019. In addition, Keystone or TransMountain will go through (he's confident that TM will under Trudeau).

Market. Kicking us out of NAFTA would hurt so many US consumers that he believes something will be worked out in NAFTA. Donald Trump is a tough negotiator but it would not be possible for the auto industry to go forward without NAFTA. Regarding the growth of Amazon, this company is doing remarkably well and is extremely well managed. He sees it as priced for perfection and, despite is continuing growth, he would wait for a pullback. Generally, he sees the market as highly valued. With rising interest rates, the deceleration of growth in China and the tariff issues affecting China, he sees some dark clouds on the horizon that should not be ignored. Investors should be prudent and should hold some cash.

Comment on Dividend-Paying Stocks. The caller asked how to compare the value of companies that pay dividends, versus those that do not. Consider two companies that have identical cash flow and other comparable characteristics. The one that does NOT pay a dividend MIGHT be worth more, if it does a good job of reinvesting the money that it is not paying out in dividends. However, if the company is not investing the money well, paying dividends provides more value to the investors than sinking that money into ventures that don’t cause the company to grow its value quickly enough. In general, he likes to get dividends from companies that pay them out of their free cash flow. He does not like it when a company borrows money to pay dividends or buy back shares. Borrowing for dividends or buybacks has been commonplace recently but it is not sustainable.

Comment on currency risk. He does not recommend hedging for currency risk because so many of the companies that Canadians invest in are already doing their own hedging for currency. It is easy, and expensive, to overhedge. And even if one does hedge, that does not take away the currency risk in the stock because so many businesses are global--their currency issues impact their earnings whether an investor hedges or not. He recommends looking for good earnings growth over time. Currency fluctuations will balance out over time and no one accurately predicts the relative values of currencies over time.

Comment on bond funds. The struggle for bond investors is that Canada bonds yield only 2% and high-rated corporates yield only 2.2%. There is not much yield to be picked up if someone want to keep really safe. He recommends that a retired investor put some money into a laddered portfolio of 1-to-5 years of high-quality bonds. For people who can withstand higher volatility, a high-yield bond fund could be a better alternative. He is a bit cautious on bond ETFs and prefers ladders of individual bonds.

Which oil company can evolve into renewable? For example, BP has moved in this direction in fits and starts. A lot of oil companies engage in mere lip service, like Exxon Mobil. Total (TOT-N) however is the standout--they've created a VC arm to do M&A in green.

Stay patient. The political pendulum has swung away from "green" because of Trump, Ford et al. who want short-term, cheap energy, but ignore climate change. The Liberals' gambit with the TransMountain pipeline has angered all parties. He looks at the long-term and believes the pendulum will swing back to green. Keep an eye on the U.S. midterms. Also, India is now investing more in renewables than coal and gas. China is also moving into renewables, leaving the West behind. Technology can revolution an economy and he believes green tech will have this very effect.

What happens when PPA's (Power Purchase Agreements) expire? These are contracts that power producers sign with the utilities at a set cost at set number of years. Whoever owns the asset decides what to do next.

NAFTA. For now, there’s still hope. Canadian dollar has been pulling back. But the economy overall is built on a house of cards. Oil and timber exports are really holding the exports up. If NAFTA goes away, can the consumer still hold up the economy. Some risks in the employment numbers. Canadian economy is hinging upon a lot of things where there’s risk.

Market over the summer. Great summer for equities. Shrugging off things and shooting higher. Usually see market weakness between May and October, especially in a mid-term election year. But not this year. Markets continue to grind higher.

US Housing. We look for breadcrumbs to follow that will lead us into the next recession. Housing is one of those breadcrumbs flashing a warning signal in the US. In US, below average sales, above average inventories.

S&P 500 seasonality. Go into defensive plays for September. Hurdles for cyclicals like financials, industrials, and materials. But can’t argue with the trend of higher highs, and higher lows. We’re close to 3000, which will be like a magnet to the upside. For the month ahead, be a little bit cautious.

Market. The NAFTA discussions impact individual portfolios as 60% of personal portfolios are Canadian focused. If you held a diversified portfolio the impact would have been lessened – this is one of their core tenets of investing. Today, he would look at bonds more closely now as it allows non-correlation to market noise. Had an investor had a reasonable holding of US Long Term Treasuries (like the TLT-N ETF), it could have resulted in a net portfolio increase during the financial collapse of 2008.

Is than an ETF on the TSX that tracks the S&P500? If you are not inside an RRSP, the Horizon HXS-T has no taxable distributions, so it is tax advantaged. The Ishares XSP-T can be hedged for currency or not. The EQL-T is an equal weight S&P500 fund that can be bought in Canadian dollars and it gives you better representation of the smaller holdings (good if you have concern of the current FANG concentration).

Can a single ETF create a diversified portfolio? It is possible to own one ETF to get diversification. The only problem is tracking error. If the TSX goes up 27% and the global market is only up 6%, then you will have investor anxiety. You need an investment advisor to help balance this out. The HRA-T ETF is a global, equal weighted ETF that he would recommend.