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

Market. Probably the worst week ever for the US President and still little market reaction. He thinks this is a positive sign. Valuations are fair. We had a great earnings season. He remains constructive. A bump in the rates is not unexpected. It won’t draw money out of equities, which on a relative basis is still the best place to be. You need to have some exposure to stocks that are not sensible to trade wars. It is business as usual. There is a lot of blaster without a lot of action out there.

Market. Investors are more worried about volatility than what they should be. Generally, year to date, market has been very good in the US. Just as we have entered the summer is where we see things getting shakier. Seeing a trend away from FAANGs into value stocks. Some of these value stocks are very cheap. The companies below the big FAANG stocks are seeing money flowing into them as well. Below the FAANGS, there are a number of companies he likes. He looks for innovators and disrupters, and there are quite a few good companies. Bearish sentiment has been up year to date even though S&P has hit record levels. Bullish sentiment has been dropping like a stone since January.

Lately, investors are paying more attention to geopolitical concerns around the world and trade negotiations which could have a severe impact. For eight years we've been in a benign recovery and suddenly the U.S. economy breaks away from the others. We're getting more and more an uncertain economy. Will China's growth slow down? Last year, we were talking about a synchronized global economy, but it isn't synched anymore with these trade negotiations. Trade policy could have a severe impact. The U.S. started this, so are they going to win big? Worst-case scenario: global recession or even depression, especially when debt is so high. Meanwhile, central banks are normalizing monetary policy. Trump's woes have been a cartoon that investors just let play out.

Overview. There is a balance of sentiment in the market, which is healthy. On the one hand there are concerns about trade, interest rates and age of the market cycle. On the other, corporate America is doing well. The last earnings cycle, just completed, shows 24.6% growth of earnings, following 24.8% growth in Q1. He expects 20% for the full year, and 10% next year. The market has been relatively flat, so with the growth in earnings, the market has evolved from full-or-over valued to fairly valued. Earnings growth tends to create a longer-term effect than the transient political trends. Some companies will suffer from the specific issues, and the role of active investment counsel is to identify these companies. But overall, the market will probably do well and the market will forget about the past transient issues.

Comment on Uber. Uber just appointed a new CEO. In his view, this is a good sign as it moves toward an IPO. However, he does not buy any stock at the IPO. He thinks that new IPO’s are often mispriced and waits until the stock demonstrates a track record as a public company.

Comment on US Health Care. He thinks this was out of favor because of uncertainty about how President Trump would handle Obamacare. The sector has recovered as people realize that the government is not providing solutions; they are coming out of the industry instead.

The S&P 500 over the last 3 months was trading at the top of a trend channel. The medium-term outlook is positive. We still have upside to the mid/late-2020's. There's further upside to go. We're in a secular bull market phase. So, buy on the dips? Actually, sometimes sell. For example, with Valeant when it broke trend in 2015, he reduced exposure and risk. However it's tempting, from a fudamental perspective, that the lower a stock goes, the more attractive it gets.

The increasing value of utilities: commercial hedgers positions in US 10-year bonds are at record levels. The hedgers are the smart money, and the not so smart are hedge funds and speculators. The smart money sees push higher in bonds, and bonds are inversely related to yields. If bonds rise in price, then yields decrease which is a positive for the bond proxies: REITs, utilities and staples.

Gold: $1,200 is important support. We saw a head fake when it broke below that and we're trying to climb back towards it. The hedgers (the smart money) are at record long positions while speculators are at record short, and the last time this happened was 2016 right before a sharp run-up. Moves in gold stocks can be strong. But gold also faces the headwind of the U.S. dollar.

Not much has changed in the markets in the past 18 years. There's little to buy today (like in 2000). FANG and pot stocks have replaced the dot-com stocks of 2000 as their market caps have expanded to extremes. He won't short this
market, but will hold cash. The FANG stocks worry him. In January, the market peaked at a fair market value. There's strong support at 2,600 on the S&P. He wants to do something now, but is not comfortable doing anything.

Educational segment: Long-term U.S. interest rates & the yield curve: A week ago, JP Morgan predicted 10-year rates would rise to 5%. Larry fell off his chair laughing. Jamie Diamond, CEO at JPM, is wildly bullish; he must believe that the American economy will be wildly robust to handle such high rates. The 10-year is 2.80% now. If it rose 100 points, the American mortgage and housing market would collapse. He doesn't think the economy is strong, because there's double the debt since the Recession. Larry feels we'll be in a low-rate environment for decades. Over the weekend, there was a lot of talking of shorting the 10-year. In fact, the net short 10-year futures contract has never seen a larger position since inception. It's massive now. There's talk of a big short squeeze with rates decreasing, not rising. Secondly, he expects the Fed to raise the flat yield curve in a year's time; the yield curve will invert by mid-2019, based on data from the New York Fed. Today, the chance of recession is 14%, but 25% is a warning level. Equity markets historically peak around 8 months before a recession starts. By the time a markets bottom--and when the Fed declared it a recession--the damage has been done, with a 29% drop in the markets. When the yield curve inverts, the market is within a quarter of the market peaking. So, the yield curve is the best indicator of a recession.

U.S.-China trade talks: As the lender to the world, the U.S. has to run trade deficits (by definition). Trump needs to win on the issue of stealing intellectual property, and this won't get resolved soon. Larry believes China will buy more LNG regardless. Meanwhile, Trump will continue to push with more tarrifs. Markets will continue to respond to news that's remotely positive on trade, as at Friday 2 pm. Larry feels we're very late in the investment cycle with flattening yield curves and rising interest rates, which is more important than the market noise. He sees signs of the market faltering with fewer stocks leading to the upside. Again, we're in the late cycle. When it comes to emerging markets and currencies (i.e. Venezuela and Argentina): there'll be a credit shock at some point, but he doesn't know when. But it'll play out over many months.

Canadian gold: It could dip below $1,100 again. At this point, there's a lot of production that doesn't make any money, and gold production declines. $1,350 is the high-end of the range, and he sees gold in a range. Ultimately, he sees a breakout to $1,500, but he can't say when. Buy into weakness.

FANG stocks: Long at some point, short right now. For years, there's been a strong momentum trade where FANG has led higher, but now we're seeing a rotation starting. We're now the end of this phase where the growth money starts to pull out and move into value stocks. This make sense in this current late-stage cycle. FANG won't get cheap until the next recession; now they're expensive.

Why would anyone invest in the Canadian market? There are some great Canadian companies that pay quality dividends and our financial system is robust. However, Canada is 3-4% of the world, so you shouldn't hold more than this in Canada in your portfolio. He's been underweight Canada for years and instead has been global. ETFs allow you to do this. If oil picks up, Canadian stocks take off, but he foresees oil as range-bound for a while.