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

Educational Segment. Bond Supply and Unwinding Quantitative Easing. Part of the equity market anxiety earlier this year was related to volatility. Inflation pressures are still building. The Fed is unwinding the balance sheet and the ECB may announce they are doing the same thing later this week. There is a VIX for everything. He showed a chart of the VIX on 10 year bonds. It has been declining for a number of years since 2010. He thinks we will see bond volatility spike up again but not to the '08/'09 levels. It will cause anxiety in the equity markets, however. If we see equity markets weaken after 1 pm today then the supply of bonds will be a problem. The ECB is probably not going to put net new supply into the market until 2020 but the question is who is going buy the Italian bonds. He thinks it will be a big problem at some point. The markets are underplaying the risks. Corporate balance sheets everywhere are not in good shape. S&P companies have never been more leveraged compared to revenues before. There is probably going to be stresses in fixed income and equities as well, and at the same time. It is not as simple as going into a balanced fund.

Market. Oil. OPEC has succeeded in bringing oil inventories down and in fact at the fastest rate in history. There is going to be drama and volatility in two sources considering increasing production. Most production growth in North America takes 4 to 6 years. We have seen the biggest contraction in history in the spending on new long term projects. Spending will stagnate until 2023. He feels oil prices will fall until then. Oil inventories are going to reach an all time low in Oct 2020. He feels inventories will fall below what refineries need to function. We need demand to fall and will do that through high oil prices. At today's GDP levels we would need $120 oil to get demand destruction. He seems $80 oil in 2020 months.

Pressure pumping is one of the more cyclical parts of the market. He thinks the stocks are oversold but does not see a catalyst for them.

The G7 tumult: Trump is aggressively challenging the established liberalization of trade and system of multilateral trade. In the UK and EU there are changes too, all creating a lot of uncertainty for investors. That said, he believes investors are looking past Trump's bluster and looking at the real dealmaking instead. Canada may still get pushed into a bad deal -- or no deal -- on NAFTA. The stakes are higher in Asia for Trump: solving North Korea military tensions and trade with China. He believes North American trade will get settled.

Cannabis stocks: He's made some money here, but he's traded them, not buy-and-hold, because of their enormous volatility. The law will get passed, but there'll be another vote in the Senate. He expects it to pass in September or October. The big question remains, How much demand will there be? Nobody knows. He doesn't. If demand is huge, companies will grow into their multiples. But there could be a one-time lift in demand then fall off and that'll pressure stocks. We're in a consolidation phase, so the smaller producers are more attractive than the big guys who will buy them. Look for a low-cost producer or a company with an edge like Organigram whose weed is not grown in greenhouses which makes them more interesting in terms of quality control.

Market. Overall he thinks the market is in the “late-innings” of the game, suggesting risk is rising, but you can still be bullish. Oil is higher and inflation are not out of control. Interest rates can still come up modestly without hurting the market. You have to be careful, the market is near the top of the cycle and as things start to break down, you have to have the discipline to step away. In the emerging market sector, it is starting to run out of steam as Turkey, Venezuela and others are becoming a mess. Thailand and India still look good.

US economy. Third longest expansion in US history of 108 months or so. Slow, sluggish expansion with GDP growth around 2-2.5%. Going forward, she looks at sentiment, manufacturing and services activity. No signs of a recession in next 12 months. Thinks we still have another year or two of runway, though you still have to monitor. Most importantly, consumer spending is very healthy. Consumer spending accounts for 7% of US GDP, unemployment is low at 3.8%, they’ve de-levered, and house prices have gone up. Canada household debt is much higher than US. Canada’s 5.8% unemployment is historically low, but our household debt levels are higher. Rates are creeping up, which will impact those debt levels.

Equities. Still likes equities, despite volatility. S&P 500 still 3% off highs in January. US companies have increased both bottom line and topline growth, and tax reform was another catalyst to add to earnings growth. Tax reform hopefully will encourage capital spending, providing more widespread economic activity.

Ontario election. Conservative party should be more beneficial to business. They promised to roll back the minimum wage increase of $15 planned for next year, which will provide less of a headwind for businesses such as food services.

Market. A minority government in Ontario would cause problems for policy change. Over the last couple of years the polls have only been predictable in that they have predicted the opposite of what happens. We have seen a completely different market coming off the February lows. It is led by very few growth companies. Every 8 to 10 years you have to take a stand on what you like and not buy what is being rewarded at the moment. This is when money managers earn their money. If you become more and more concentrated as the market does, then you take on a lot more risk.

Global growth looks good and synchronized. However, two things will limit its pace: the US Fed raises rates and reducing of the U.S. balance sheet. There's also a debt that will hang over the US for the long-term. Inflation will generally be in check--this provides an opportunity for stocks. We're not seeing extreme valuations. Margins will be flat, though earnings remain strong. Overall, not a bad scenario for the stock market. Also, the U.S. yield curve is flat and historically that means the economy can grow only so quickly--it'll be limited. He doesn't see a recession coming. The Fed has to be careful not to raise rates too quickly. Overall, the U.S. is doing incredibly well, growing faster than the rest of the world.

Is it worth dollar cost averaging? If you really like a stock like BNS, it's not a bad method. It's better than waiting till the year-end to buy a lot of shares (compared to DCA'ing smaller amounts throughout the year). Also, it's cheap to trade stocks now. But make sure you've done your homework on a stock. A mutual fund or index is really effective for DCA.

Market. He includes sentiment and market breadth to score the market from 1-8. Currently, he ranks it at 3 – mildly bullish, but is holding more cash (20%). The old lows from February and March held at 2580 on the S&P500, so the trend is still intact. Sentiment indicators are neutral, meaning they are neither bullish nor bearish. Things aren’t dire yet and he is still 80% invested. He does not see a large risk to higher interest rates and is not afraid of inflation. Hold good quality stocks and stay the course he says.

Gold. He has an extensive blog on the topic (valuetrend.ca). Gold has been stuck with a lid at $1360 /oz. It is near support. He would not be a buyer yet, but could trade it as a swing trader on a short term basis. Over and over and over it has tested the upper bound, but has not broken through, so he is not keen on putting new money into it.

We're not in a frothy market as in January when investors piled on the bandwagon. We're currently not in a euphoric state. We have a bit of room to go, but we are getting stretched. We have at least a year before we get really worried, assuming we don't see a lot more rate hikes. We should we fine going into the second half of 2018, but we're beyond 9 years in this rally. Next year would mark a record stretch for a rally. US equities are still bullish, especially tech. Canadian has some catching up to do. He sees value in Europe and Japan. In Canada, don't look at sectors, but pick individual stocks. That said, energy has done well, like Suncor, though oil this week is in retreat--maybe rotate out of that. Telcos aren't faring well either. In spaces like healthcare, be selective.