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

US money flows into energy. He has had the right fundamental outlook – oil prices improving to over $60. However, energy stocks performed so purely against indices for so long that it made it a small percentage of index value and appeared too complex to large investors. Now that the Permian is facing similar pipeline constraints as Canada, the Canadian stocks are looking very cheap in comparison.

Market. 2018 has been tougher than 2017. Likes technology and they are still overweight on the FANG stocks. Pipelines in Canada are seeing different factors affecting them like the difficulty building the new pipelines. Interest rates moving higher affects all the market in general but more the high dividend paying stocks. Some investor disinterest in Canada. The Canadian dollar being softer vs the US dollar. The Government policies aren’t spurring economic growth like in the US. The competitiveness of Canadian businesses is being affected by many different factors.

What do you think of the tech sector? We like the sector. Overweight in his funds. There is some negative connotation to this group as these risky high growths high valuation out of control companies. Facebook (FB-O), Apple (AAPL-O) and Alphabet Inc (A) (GOOGL-O) are very profitable. Actually, ones of the most profitable companies in the world. You are paying for the growth. The same with Amazon (AMZON-O) and Netflix (NFLX-O) that are disruptive, and you don’t have to use the basic valuation methodologies they teach you at Finance 101. You want the to continue spending in taking market share.

Market. He thinks investors are wondering if this is as good as it gets. You had a nice 10% rally in December/January. Earnings growth will be phenomenal this year because of tax cuts. We will go back to normal PE multiples. The market has priced in normality again. He is still constructive on the stock market.

Long term recommendation. Technology and healthcare are here to stay. SYK-N, JNJ-N, BMY-N, GOOGL-Q, and AMZN-Q are possibilities.

Market Outlook. We are still in a bull market. Bull markets don’t end unless there is a recession or extreme valuations. There is always a counter trend move and we are facing a powerful counter trend move. Anything could happen but probably this is a chance to reload. The debt load of part of the population in Canada is an area of concern. The S&P/TSX has stagnated for a long time and trading at 14 earnings with similar earnings growth story as the US without the tax cuts. So Canada is probably a good place to be. The Canadian pipelines are attractive now with high dividends that are safe-ish and growing.

US dividends are treated as interest income, is there anyway around it? The tax policy encourages Canadians to invest in Canadian companies. He thinks it makes sense. The Canadian market is 2% of the world but it’s a large world and there are many opportunities here. From a cash flow perspective, the extra advantage given by the dividend tax credit is very powerful.

Market. He sees companies beginning to spend more this year and we have not seen this for many years. Combined with revenue growth and margins expanding, it points to things being not so bad. Investors are still skeptical, but things are where they should be. The TSX is being held back by the skew against certain sectors, particularly financials. An earnings recovery along with economic expansion and interest rates increasing are all healthy indicators. It is not all rah-rah, but there a few positive factors.

Manager fees. Fees are the big problem with fund managers – especially when they charge 2.5%. He does not like the way the industry is structured. That is why he runs an independent firm and they do not charge the same fees. He does not own Canadian stocks.

US Fed Rate: there was talk if would they be more hawkish. But inflation data has gone into the 2% range while there's wage pressure. Inflation never stops at 2%, but keeps rising. So, the Fed hammers it down with rates to end this cycle. This cycle came out of the Recession 10 years ago, which needed extreme monetary measures to turn around the economy. So, this cycle has gone on longer. Instead of lower rates encouraging. What were great tailwinds are turning into headwinds for the economy and markets. He can see the bull case, but he's inclined to take the bear case. They raise rates so they have some dry powder in case they need it. Lately, he's been defensive, holding more cash and more short positions than long. It's been a fantastic earnings season, but we're seeing slowing growth and squeezed profit margins. This may have been the best quarter of the year. We're late in the game. If you're playing, be warned. He's cautious. Now reminds him of 2007 and the late-90s.

How much cash to hold? He lived through crashes in 1987 and late-90s. He holds at 30-40% cash.

Are U.S. interest rate hikes not good for U.S. banks, because banks like JP Morgan are recently down? Generally, rate hikes are good. But the yield curve is now flattening. Short-term rates are rising, but long-term less so, so this works against the banks. Instead long rates need to rise higher than the short ones. Also, expectations over bank reports have been too night, and loan growth has been dismal.

Historic freak show: last year we had record-low volaitilty vs. today's which is way over 1% a day. Now we pay the price for high volatility which will continue into the summer. Comparing 2018 with 2011: in February of both years we
had a pullback, then a rally, then a second pullback. In June 2011-October 2011 we saw a 22% pullback. Expect a summer correction, but not a crash. In the next week or two, he will slightly reduce equities. Now, the market is slightly
above the 200-day moving S&P average. When we break beneath that 200-day, then sell. Opportunities: maybe Canadian, but he'll go into cash.

Can bonds fluctuate in price from market fears? Interest rates, definitely influence bonds. Inflation: the market will perceive what inflation will be in the future, which will effect the premium on a bond upwards. Bonds are more complicated than stocks, and bonds move quickly. It's hard to answer this questions, since bonds are not simple like stocks. Currencies and world events also effect bonds.

When do you sell and how much, using 200-day moving averages and technical analysis? He uses a combination of a lower-low and a break in the 200-day and wait three days (in case it's a one-day spike). This time of year, he raises a bit of cash to 15% maximum. If a stock breaks down, he uses a ladder approach, the Bearometer, consisting of a series of indicators, triggering selling until he hits 50% cash. (He uses the S&P 500 as his guide.)