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

Compared to the last few years, the recent market swings are shocking, but we are actually getting back to
normal, with this increased volatility in early 2018. The bark is often louder than the bite when it
comes to politics (i.e.Washington). For long-term traders, pick your spots and stand by your
convictions. Day to day, this will be a rough ride--It's unproductive to watch the markets so closely
every day like this. The key thing is to be comfortable with what you own, prepared to
absorb say a 6% drop, and keep looking long-term.

Market. He thinks the recent volatility is the new normal. The VIX averaged less than 10% implied volatility last year, while this year we are averaging over 15%. Trade tariffs are not good for the market and maybe the recent Trump Administration warnings about China are simply a way to bring them to the negotiation table. These concerns are clearly adding volatility to the market. He does not think we will see a quick resolution as trade deals take years to complete. NAFTA will likely hinge on a May 1 deadline with the upcoming Mexican elections. The leader in the polls there is very anti-American.

Why diversify when correlations are increasing? An excellent question, he says. As information flow has improved over the past 50 years, correlation among markets has increased. Over a 10 year period, correlations among regions and sectors have approached 1. You still have to look at valuation and you want to put money in areas that are relatively better value, not the expensive ones.

Educational Segment. Should market similarities with 1987 have us worried? Last week he saw a lot of technical comparisons being made to 1987, prior to the crash. The recent corrections do look like the pre-crash period. There were similar trade tensions and trends toward Central Bank tightening. Despite this, he is predicting a pending crash. Wrong policy decisions on trade by the Trump Administration could cause problems, however. The crash in October 1987 caused a 40% retracement back to where the market started the year. It took about three years for the market to recover back to the previous high – an annual return of about 14%. There was a lot or market noise in between, but good returns in between. He is concerned about the next recession, where he thinks there could be a market drop of 35-40%, when earnings fall and market multiples fall to below normal. He is getting concerned about 2019, when he sees many fundamentals pointing to headwinds and greater risk of the next major recession.

Preferred Shares versus Bonds. By and large the newest preferreds are rate-reset shares, compared to perpetual preferreds where the dividend is fixed. With rate-reset shares, an increase in interest rates will see dividend yield increases, which gives better protection than bonds and perpetual preferreds. He likes the Horizon Actively Managed Preferred ETF (HPR-T) over buying individual preferred stocks. He does not mind paying a higher MER in this class of ETF for the management. He thinks a general rule for preferreds could be to hold 10-20% in your portfolio.

High Dividend Stocks. Just because a company has a high dividend does not make it a good company, he says. He prefers to buy a diversified basket of dividend payers in an ETF, especially if it uses covered calls.

General Market Comment. He thinks we are still in a secular bear market that began in 2000. From a cyclical perspective it has been a bull market since 2009, set off by central bank spending, he says, which has meant the global debt bubble has not been allowed to deflate. Now, we are seeing volatility returning to the markets over the past six weeks and this likely here to stay.

Market sensitivity to interest rates. Market sensitivity to interest rates is much greater than in previous cycles, since we have not had a recession to cleanse the bubble growth like in the past. Flattening of the US yield curve, combined with protectionist trade actions is leading to another inflationary or stagflationary impact which could stall long term growth and could become toxic to the market. If we see a break below 200 day moving averages for a period of time, it may unleash some pent up selling pressure.

Commodities relative to equities. Relative to equities, the commodity sector is the cheapest it has been since the 1970s, which was a great time to be buying commodities. He thinks this could be similar. Interest rates and inflation expectations are starting to bubble, leading him to favour commodities.

Cash holdings. He got way more cautious on holding more cash when he saw the changes in Federal Reserve lending during Quantitative Easing. With the risk of rising interest rates, he sees market volatility increasing in the equity markets. He thinks we are going to so a lot more volatility going forward so holding more cash is good.

Clean energy outlook. He does not have a 20-year crystal ball on the geopolitical or social opinion. He is an investor and is not paid to make bets on social policy. To him, the entrenched infrastructure of the fossil fuel industry is not going anywhere soon.

When do you decide to cover short positions? He uses a quantitative process for about one-third of their portfolio. This system calculates change in quantifiable measures. He will cover a short if a company moves out of the bottom decile, for example. For the fundamental side of the portfolio, he still uses a portfolio approach of his 150 different short positions. For these he would use a stop-loss and a long term technical chart.

Oil outlook? $60-65 crude oil is sustainable for the next few years and will go up. Demand will remain strong. US shale alone cannot by itself supply demand. The Saudis alone may not longer have the power to control the price, but along with Russia and OPEC, they do. But beware of political risk, like the US' hawkish attitude towards Iran, and Venezuela's implosion.

What happens if Alberta can't export in the future? It's not just Alberta, but the entire country. We're leaving resources in the ground that we can get high prices for. That said, he expects pipeline expansion will get the go-ahead down to the U.S. including Keystone. TransMountain, maybe. Oil by rail will continue to grow to reach markets. Alberta will do reasonably well, but of course do much better with pipelines.

Market. He thinks the market made a change last year benefitting the pro-growth sector, while energy is still lagging behind. Utilities on the S&P500 have fallen since December. He says inflation is causing this sector to fall making it interesting again. If inflation really starts to run away Central Banks may not be able raise interest rates fast enough to keep up and this could be the concern for the sector.