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

Regional US banks? The big multinational banks have been doing very, very well. Regional banks are really coming on. In a lot of cases, you are getting exposure to small and midsize commercial ventures. Depending on the geography, you might get a pretty good lift. Regional banks tend to do well with rising interest rates. You could buy the SPDR S&P Regional Bank ETF (KRE-N). He likes the regional bank Comerica (CMA-N).

T.I.P.S.? Inflation protected bonds will see the rate go higher as rates go higher. It has a floating rate that is tied to the inflation rate. It is going to do better than a fixed rate bond in the event that rates and inflation go higher, which he believes is likely to continue. If he had to own something in the bond market, he would either own a high-quality corporate bond with a short duration of 2-3 years, or something like T.I.P.S. that would benefit in rising rates.

Canadian lumber? NAFTA and trade issues are risks. You’ve got 9 million millennials in the US starting to move out of their parents' basements. The home building industry is performing really well, and when there is strong demand, they will pay the higher price for Canadian lumber, whether there is a tariff or not. He wouldn't shy away from the sector. You might consider investing through the ETF Guggenheim Timber (CUT-N), which gives you a basket of US lumber companies. A great way to make not too big a bet, as there are some packaging materials in there as well.

Junk bonds? High-yield bonds. A lot of people are in them because the yields are higher. There is higher risk. Within the last 3 years, the extra return investor is getting for taking that additional credit risk has become narrower and narrower as we become more and more confident. He doesn't have any high-yield exposure at this point. He is bearish bonds, and is Short the bond market.

Market. US bond yields are hitting a 4 year high, which is somewhat bearish for stocks. If everything did well when rates were going down and rates were low, what happens when rates rise and yields go up? It makes borrowing more expensive, buying back shares more expensive and consumers have to pay more. Also, when the risk-free rate rises, it means you need to earn more money on other more riskier assets in order to justify holding them. For the first time since 2006, the dividend yield on the S&P 500 is now lower than the yield on 2-year treasuries. The federal reserve is forecasting 3 rate increases in 2018, 2 more in 2019. If that happens, that brings the short-term rate back to 3%, implying that 10-year bonds yield at least 4%, which is more in line with long-term averages.

Low risk, high-yield dividend fund? Buying stocks just for yield doesn’t make sense. In a rising rate environment, a lot of high dividend mutual funds own a lot of low growth businesses that are interest rate sensitive, that will do poorly if interest rates keep going up. He would not buy one. If someone wants income, they should own fixed income and buy a high yield Bond fund, where you are getting interest income, but those bonds will have maturity dates, and you will be less susceptible to rising interest rates.

The Chinese market and a Chinese value stock? He doesn't invest in places that don't have a rule in law, so he doesn't own Russian or Chinese stocks. Chinese accounting doesn't have the same accounting rules. It is a state-controlled economy. The state intervenes in many businesses. He would be very, very careful about buying Chinese stocks.

Oil? The analysts have all been wrong in 07 and were all wrong a few years ago. Oil will never be what it was because renewables are gaining market share every year. Also, the US which was a massive importer of oil 20 years ago, has now become basically energy self-sufficient. Every time oil prices rise, the fracers come back in and start pumping like crazy. Barring some kind of terrorist activity or geopolitical unrest causing displacement of production, it is hard to see oil rallying sharply from here.

Market. He would welcome a bit of normalcy back in the market. You don't get 7.5% month after month after month, without creating a giant problem down the road. Let's just take normal markets making sure things are well priced, and go back to normal ways of investing so that there is an equal amount of risk and reward. Getting in at a lower price would make investors feel better, but they can get in today as long as they have a long enough threshold, and they'll do just fine. It won't all be positive, it won't all be good, but over time you will compound your money at a faster rate than inflation. You will also compound your money at a faster rate than your neighbour, which gives you an increased buying power over time.

Market. NAFTA: He believes they are at 50 out of 2000 pages of the agreement in negotiations. There may be two more meetings by April. If they haven’t moved ahead by July 1, when the Mexican elections take place, then he thinks Trump will be giving them 6 months notice to get the deal done and it may be a little bit worse for Canada and Mexico. He expects Trump in his next state of the union address to stay on script. This could be a surprise to the markets. US earnings look very, very good, both from a sales and a bottom line perspective. The question is how much of this is priced into the markets.

Canadian REIT Recommendation. Regardless of which one you use, we are at the high end of valuation in REITs. He thinks the Canadian sector will start to sell off with rising rates, but the US REIT sector is just starting to become interesting.

Educational Segment. The Bond Market and Interest Rates. Bond gurus over the last couple of weeks have come out and said that the bull market for interest rates is over. It has been 38 years now. One reason is technology as it advances and reduces the cost of everything. Society is aging and last year people took more money out of social security than money was put, into it for the first time. But he does not believe the end of the bond bull market is coming. He thinks the yield curve will invert by the second half of the year for North America. This does not support 24 times trailing earnings. Typically we eventually get a 25-50% correction.

Market. He has been seeing the markets as expensive and the euphoria worries him. Marijuana is the kind of mania you see at the end of a market. He focuses on Canadian companies that are expanding in the US. With tax cuts it is an extra boon.

Market. At these levels, it is very important for investors to ask themselves if their portfolio is constructed appropriately. If it goes higher, you make money. If it goes lower, are you ready for it? If you are buying the stock, you want to know why are you buying the stock. Is it a fit in the portfolio or is there risk that goes with it? When buying a stock, you should always have at least 5 reasons to want to buy. If you don't have 5 good reasons, then don't buy it. How does it fit in the portfolio? Everybody wants to own all the Canadian banks, but in 2008 they all fell 40%, and it takes 5 years to make that back. Finally, what are the risks?

US Treasury TIPs. If we get any kind of inflation in the US, with infrastructure spending or the drop in the US$ relative to other global currencies, the US with then start to import inflation, and this is where these bonds come from. As people get into retirement, bonds don't protect you from inflation, but these do. They pay 2.18% plus the inflation rate every year.