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

cannabis: The whole cannabis space is a bubble. There's a lot of speculation in this space with crazy deals. It's a mind trap. The more powerful you make the weed, the less you need to smoke. And we don't know the laws of impairment yet. There are lots of crazy expectations out there and he's pretty sure that some people have already lost money. There will be big drops in share prices.

Market. Canada had a surprised economic contraction based on housing. He is not too concerned about that. The stock market today is really concerned about global growth and whether Trump will derail this nice cocktail we have had with trade wars. One month’s data and especially based on housing does not surprise him. In 2017 we were third last in the world in terms of market performance. Now we are up to 12^th worst. We have uncertainties and headwinds that cause money to be moved outside of Canada. It has created a market that is at the same point as where it was 14 years ago. He has been hanging out in Canada and it has been a very happy story.

Balance sheets always matter. You want to look at a company relative to the peer group.

Market. It’s a real market again. This is when you get opportunities. This separates the men from the boys. Markets are governed by fear and greed and over the last year was all greed. When there is fear lots of investors make irrational decisions and there are opportunities with irrational price movements. Buy what you understand. If not, hire a professional a good money manager that makes money off the mistakes that other people make. This year is all about individual stocks. Stock specific more than sector specific for this year. Yield is great, but fundamentals is what matters and there are very good opportunities now in the Canadian Market.

Grandfather buying for (grand)children's future? Start conservatively, like TD which offers dividend growth with Canadian and US operations which can benefit from rising interest rates in either country. Also CN Rail. Don't gamble with, say, a marijuana stock which could go under. A TD Bank won't.

Market. He is hoping the Ontario budget will show some tax relief and improvement on the provincial debt, but doubts it will come. He hopes there will be something for small business owners dealing with rising taxes and electricity charges.

How are you dealing with higher market volatility? He tries to understand the companies they invest in and try to determine fair market value. So when the market volatility negatively impacts good companies, they will step in and buy. They currently have between 5-7% cash available at any time, which is higher than the 1-2% level when market volatility is lower. They play defensively by favouring dividend paying stocks that show growth in their dividends.

How will REIT distributions be impacted by higher interest rates? It depends on the health of the sector. A hotel REIT in a growing economy can see earnings continue to grow and not be impacted as much by higher interest rates. It also depends on the health of the balance sheet. How much debt is on a floating rate? Generally speaking, rising short term interest rates are an indicator of an improving economy. He does not think the rise in interest rates will be much higher and companies with good balance sheets and good cash flows will be able to fund distributions.

When he looks at today's valuations, he sees that earnings have to rise for two years to return to equilibrium. The market will correct or goes sidewaks for a while. With more volatility all around, step back and look at your stock price targets; and if a stock doesn't reach that target, then move on and buy something else. This is the perfect opportunity to take advantage of cheap prices. Important: Have cash to deploy during those 10-20% dips. He holds 20% cash. Investing is about how much you avoid on the downside more than how much you make on the upside. Don't chase yield. Few stock markets are up for 2018. He likes companies that generate free cash flow that's growing.

How do you calculate free cash flow? Simply, CFO (cash flow from operations) minus cash dividends paid minus capital expenditures. If it grows over time, you have an unusual company that merits a closer look.

His outlook hasn't changed since he was last on the show recently. Volatility will continue for the next little while. There will be violent shifts. The technical quality of the recent rebound was suspect. We've seen our peak in economic and profit growth. Profit margins are peaking as material costs and wages rise. We've had a great 9 years, but it can't continue forever. Headwinds, like rising interest rates, are emerging. 2018 reminds him of 1987. He's staying defensive. There will be buying opportunities, but investors will be wary. He's staying on the sidelines with a lot of cash. If he buys stuff, he'll move in and out of it quickly, even tech. For example, he sold some Facebook recently based on valuation, not the headlines.

Are we 6 months from a world collapse? It's possible, but unlikely. Financial crises always arise from a debt crisis. There's high consumer debt in Canada and corporate debt in China, for example. He doesn't think a collapse will happen. However, he feels we're closer to a recession than anyone thinks. Stocks peak 6-9 months before a recession. He's read some worrying financial reports from the U.S. and abroad. He sees warning signs, particuarly debt, and he's staying cautious.

Floating rates preferred shares as a fixed income strategy during rising interest rates? He's overweight, at 15%, preferreds in his portfolios. The problem with them is they're not equity or debt, so in a down market they get the worst of both worlds. There's a sustainability issue, so they will act worse than bonds. They're attractive now--and he's been managing them recently--because the gross yield is so high.

What to do during high U.S. volatility? He's hanging onto what he has. He isn't adding to holdings and reducing a bit. Maybe he's chicken. US tax cuts may help the economy. Rising interest rates, yes, but they're not long-term rises which truly matter. He's cautious about the American economy beyond 2018. There are warning flags, like a possible trade war.

Market. He focuses on small and midcap companies that are likely to rise based on their own fundamentals. He often invests heavily in a company, and several of the companies he invests in are bought out because small healthy companies are good targets for buyouts. He’s sitting on a lot of cash. The markets have been very expensive, especially since Trump became president. There is risk in trade wars and from multiples that are too high given rising interest rates. The US economy is growing, 2-3% growth, while good, is not good enough to keep up with the multiples. He found good value in small caps and mid caps, but the companies were taken over after he bought them. The heavy investment in ETFs focused on large caps is creating opportunity in the neglected small/mid cap space. He is particularly interested in Canadian companies expanding in the United States. Several of these are primarily American companies that have a Canadian head office or Canadian companies with strong American subsidiaries. They offer a lot of growth opportunities within the US. His investment approach is to look at growth opportunities of individual companies rather than focusing on the macro.