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

Strategy using weekly and daily charts? Different time frames, so each chart tracks the momentum of a stock over different spans. It boils down to: if you're a short-term trader, use a daily chart; if you're an intermediate trader (a few months) use the weekly.

Overview. The DOW is taking another hit today, we are near the year’s low. As the market is moving up and down, it is hitting lower highs and lower lows. 23,300 will be an important point for the Dow. We might hit that very soon, yielding our first major correction since 2009. We are down about 10% for the year but we could hit 20% or 25%. We are having the correction now because: (1) The Federal Reserve is increasing the cost of money, which reduces the value of earnings; (2) The money supply is tightening. The US money supply was growing at a rate of over 7% per year but is now down at 4% under the MZM terminology (see https://en.wikipedia.org/wiki/Money_supply). If you want 3% economic growth and 2% to 3% inflation, you need 5% or 6% money growth or more. The money supply is not growing fast enough and so money is getting tighter and that in turn drives the US dollar higher. (3) The amount of debt that has to be raised is enormous, but the Fed is not buying more and Europe is not buying more, so interest rates are rising. So money is more expensive and tighter. He thinks this is why the market is correcting. He thinks the DOW could go down 3000 over the next three months and he thinks people should be cautious about buying today, and hold onto cash, because there will be great buying opportunities late in Q3 or in Q4. He thinks energy stocks could be caught up in this.

Energy Prices. When he was on the show previously, he was bearish on natural gas (December) and then bullish. Since then, natural gas plays like Birchcliff and Painted Pony have gone up a lot. Birchcliff is up 50% from its lows. He thinks natural gas will come down a little, but oil will come down further, perhaps 20%. He sees a $10 risk premium in the current price of oil. Also, if the US dollar rises 10%, the price of oil (in Canadian dollars) will drop. He thinks oil will drop to the $50’s in the next 2-3 months, which will bring the TSX energy index down by 15 to 20%. He thinks that the risk premium is partially based on anticipation of a possible loss of supply of oil from Iran, but he doesn’t think that Europe will go along with those sanctions. In addition, after the upcoming elections in Iraq are held, it is possible that the pro-American faction will win and Iraq will rapidly increase its sales of oil to address the war damage to its economy or that the pro-Iranian faction will win and limit oil production to keep prices high. There will be more news in mid-May and at that time, the price of oil might come down hard. The market is currently bullish on oil because crude oil inventories in the United States are down by over 100 million barrels and wordwide they are down by over 200 million. He showed a chart on World Oil Supply and Demand from the Federal Reserve Bank of Dallas (chart is at https://www.dallasfed.org/-/media/Documents/research/econdata/energycharts.pdf) . This shows that the demand for oil will be outpaced by supply growth. The implied oil change is for an increase in inventory in 2018 that looks similar to 2014 and 2015, which will be bad for the price of oil. This year, the United States production has gone up from 9.8 million barrels at the start of the year to 10.58 million. The US production has increased over 750,000 barrels in just 4 months. This rate is more than the increase in demand.

On Light Oil in Saskatchewan. He is optimistic about the light oil in Saskatchewan. On his list, there are three companies (large cap, intermediate cap and junior) that have exposure to Saskatchewan: Crescent Point, Spartan (now Vermillion), and Surge Energy. This is a desirable area because (1) takeaway capacity is not as difficult from Saskatchewan and (2) this doesn’t have the differential issue.

Cash. He thinks many of these stocks have gotten ahead of themselves. We are not quite yet at the start of the growth cycle for energy. If there is a pullback on energy, he expects to see the energy index at 150 or less and from that level he expects to see explosive growth.

Market. Lower taxes are a huge part of the boost to earnings. For the entire quarter analysts were increasing numbers and they are still being beaten. Earnings are good enough to carry the market. We tested a recent 200 day moving average low in the markets and bounced up. There has been top line growth but not as much as he would have liked to see. Today we are just beating the 2009 revenue numbers. Increases above that are almost entirely due to share buybacks. The city group economic surprise indexes for the US and for Europe are showing that Europe is expected to miss dramatically, but not the US. He expects the Euro to get weaker over the next couple of months. As of October this is going to be the longest economic expansion since the second world war. We are late in the game.

Bitcoin is not an investment in Blockchain Technology. BLOK-N is an ETF that plays the Blockchain theme. It has MSFT-Q, INTL-Q and NVDA-Q for example. He thinks it is highly speculative. Valuation is stretched and challenged right now.

How did interest rate sensitive companies make money when interest rates were 10%? Pipelines have a huge cost to building the infrastructure. That was tougher when interest rates were higher. When you have a lot of debt on the balance sheet, margins are compressed. It's all relative.

Market. There is a push pull going on between cyclical and defensive themes. The market is hoping it can process these interest rates. Utilities and a few defensives are starting to percolate up now. He is not giving up on the pro-growth theme, however. We are seeing some value buying in the defensives. He won't commit to the theme until he starts to see the pro-growth theme slow more.

Educational Segment. Currency risk. Over 20-50 years it will cancel out but short that that, they will trend. Between 4.0 and 5.5% each year, currency either hurts or helps your performance regarding US dollar investments. With ETFs you can hedge and non-hedge currencies. With some other currencies in the world the effect can approach 9-11% either way.

It's one of the first months this year when the TSX was up while New York markets were flat or down, but the overall markers are still in a downtrend. The good news: this is a consolidation. He holds higher levels of cash and is investing small amounts of cash. He suggests holding cash. Berkshire, Boeing and Fedex still have strong fundamentals despite the recent sell-off. Sit tight and wait this out. On another note, the 3% 10-year U.S. yield is hurting, say, Canadian telcos, and of course companies that are heavily levered. That said, what will truly worry analysts and markets is a 3.5% yield.

Which energy stock in the US with growth to buy? He doesn't invest in this sector much. He did own Exxon for quite a while. He prefers an indirect energy play--the infratructure side like the OIH ETF or US Silica (SLCA-N). He prefers buying Canadian energy where he has many more choices.

Whart's a good income ETF? The problem is that Canadian ETFs are heavy in pipelines and banks which are in trouble and are flat, respectively. REITs are in the same boat. However, consider the TXF ETF, a basket of tech companies. Or: instead of high income, look at a low-vol BMO ETF.

What gold bullion ETF to buy? Gold has been dead for a while. That said, he's playing gold through the names like Franco Nevada. The old adage is that US dollar and gold don't correlate. But he would buy gold hedged to the USD or playing through a Canadian gold name.

Market. He thinks we have a new head wind this year – the threat of inflation and risk of higher interest rates. Consumers’ biggest asset is their home and real estate, so this is causing some concern. The good news is that valuations are nowhere near those of the late 1990s before the tech bubble bust.