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

Educational Segment. The ‘Melt Up’. We are probably in the past phase of the market cycle and the market will probably ‘melt up’. The final phase of the acceleration up before a bubble takes 3 to 3.5 years to play out and you get a proportional decline. The start of this melt up was the election of Trump. The S&P within 9 months to two years will peak out in 3400 – 3700 range and will end the ‘melt up’. The change from previous market cycles is the amount of money in ETFs which affects advance decline lines. He thinks caution prevails rather than chasing the market higher.

Market. Canadian equities will play catch-up on the year. He thinks there is a catch-up trade this year. It is actually driven by commodities, which should do well and help make up some of the lost ground. He is a concentrated fund, holding 20 positions. Recently he has been cycling into some cyclical plays. You want some base metals and energy exposure. You are seeming a lift in the commodities but it has not played through into the equities. There is an upgrade cycle in the energy space that is due. Mining stocks are trading at a discount to their US counter parts. Extraction companies have a compelling risk/reward ratio. CS-T deserves a premium multiple. TCW-T is good in the oil space.

Market. We may be poised to return to more rational behaviour. In 2017, there were only 8 days that had more than a 1% corrective movement. Normal is closer to 40 days. You should have some wall of worry to climb, a staircase kind of look, and there was none last year. There were a lot of signs that there should've been a correction last year, but it never happened. An S&P 500 Index chart going back to 1980 showed the normal volatility up to about the late 1990s and there were plenty of corrections. From about mid-1990s, as the tech bubble took off, volatility evaporated. That resulted in a period of sideways followed by a strong market correction. This was followed by very low volatility in 2004-2008. A series of volatility followed by a correction. Even in the beginning, after the 2009 bottom, there was some pretty regular volatility. It then migrated into a period of no volatility from 2013 to 2016. In early 2016, there was a period of market volatility. We are in another one of these really low volatility periods. That usually means we usually head into a period of sideways chop or possibly a correction, but the very least we are going to get is a sideways chop. He thinks there is going to be some rotation into more value oriented sectors, some of the overlooked sectors like US banks, energy, some of the conglomerates, areas that everybody has been ignoring.

Moving averages? There is Simple, Exponential and Weighted moving averages. Simple Moving Average is the most commonly used. On a 200-day moving average, it basically takes the average for the last 200 days, adds them up and divides by 200. Weighted basically takes the most recent days, and weights them more than the early days. Exponential is another version of a Weighted Moving Average that is more complicated, but basically further weights the most recent data. The problem with Exponential and Weighted moving averages is that it frontloads the Weighted moving average, so it is almost like having a shorter moving average. Simple is probably the easiest to understand and to use, and is also the most commonly followed.

Energy. There has been the biggest dislocation between the price of oil and companies that produce oil themselves. Last year was particularly frustrating, because he was fairly accurate in terms of the macro calls and thought he would end the year with around $55-$60, and with that there would be a profound tightening of oil inventories, surpluses would fall by the greatest extended history, and that occurred as well. He nailed all the macros, but at the end of the year he was still down 36%, with stocks not even rallying when oil was up. This is creating a great opportunity for buying companies at 10%-15% free cash flow yields, companies with cash on the balance sheets, strong outlooks, etc. He believes we are in a multiyear bull market for oil, despite lingering concerns that people have about too much supply. The market is, was and remains undersupplied. Inventories will continue to fall. We are entering into a seasonally weak period where inventories build. He thinks the oil price of $55-$60 is going to stay.

Market. We are now at valuations similar to what we were back in the 2000 go-go Internet periods of tech. We are at a lower interest rate, and the greater concern is what happens if interest rates rise. That would generally be a positive for Canadian bank stocks, and would typically reflect an increase in demand, which means that profits are rising. So as long as rates on US 10 years don't go above 3.5%, then everybody is happy. In spite of people having concerns about the valuation, world economic growth is still proceeding. In the oil and gas patch as well as in the mining space, companies have worked long and hard to reduce costs of production.

Marijuana stocks? There is a concern that a lot of people are getting ahead of themselves. The stocks are discounting, in some cases, total production sales into 2019. One analyst said that the overall average valuation is now 20X Enterprise Value to EBITDA based on 2019 production. You have to remember that a lot of the companies are in the mood for production. The real key is distribution and sales. Canopy (WEED-T) has a really good opportunity to say that this is going to be about low cost, getting branding. There is also a huge opportunity with LGC Capital (LG-X) which has a great opportunity to be in south Africa, and if they get approval, will be able to export globally. Thinks the demand will be there when the full recreational market opens up in Canada. The advantage we have is that it is federally approved.

Market. There is going to be a business in Canada in Marijuana but it is not nearly big enough to support the $6 Billion market Cap of just WEED-T. What worries him is that he is seeing unsophisticated investors buying online and having no idea how to value the companies. It reminds him of the .com bubble. Heavy users will grow their own and the government price that is set will be unsustainable. The whole thing is a complete bubble. It will end in tears.

Negative Sectors. Sector allocation should precede stock selection. Be wary of oil sands. Frackers will get back into business in the US and oil prices will be down by the middle of the year. Don’t own oil production. Don’t own precious metals. Gas is better than oil. Cryptic currency does not form a part of his portfolio.

Market. One thing to be careful about with the Dow is that the price weighted index versus the market weighted index gets a bit, convoluted over time. When looking at the long-term health of an investment portfolio, the Canadian market offers a great set of long-term conservative dividend paying opportunities that can really help track that move from bottom left to top right sustainably for your whole investment horizon, versus a quick move up to the right over a few years or months that can ultimately come right back at you. He would like to see, especially the longer rates like the 10 year, start to move up, which would indicate further health in the economy and that the economy is able to absorb the increases that are happening in the short term. However, eventually that will choke a growth and you wonder about all these leveraged vehicles that are built on the world of low interest rates that we have had for almost a decade.

Marijuana stocks? There are lots of companies you can buy, especially in Canada. They have been going up pretty sustainably over the last 1.5 years. Depending on the time of day they can be up 10%-15% or down 10%-15%. There is a lot of volatility. If you have a belief in it and want to be invested with a portion of your portfolio, there is no problem with that. He is not investing in this sector.

Should $50,000 Cdn be converted to US$s now? The Cdn$ is one of the hardest things to forecast. It's his view that the Fed leads the Bank of Canada, and if oil stays range bound between $55 and $65, you'll probably see the Cdn$ weaken a little from here. $.80 is a pretty decent level to be getting US dollars.

Market. Things look pretty good. We have some short-term hurdles as always, and we’ve had a lot of overbought situations that really never manifested. The last significant correction was back in August. The intermediate term is looking pretty good. We have an issue as rates move higher, i.e., what is it going to do and how is it going to change the landscape. There will be a possible short-term pullback, but looking at the structure of the different sectors, it’s a pro-growth theme. The defensive side of utilities, bonds and staples to a large degree are starting to trend downwards compared to the S&P. It is a sort of sector rotation. That means the pro-growth theme is going to move ahead, but part of that is the inflation theme.

Energy. Oil looks pretty good. $60 is sort of a key level, which is part of the pro-growth theme. The important part is the breach that occurred last year, and we now have an upward trend. All the oil producers were pretty good.

Should extra Cdn$ be switched to US$ at this point? Last year this would have been a good question, because it was a little clearer. Given that we have a sort of pro growth theme going on, the Cdn$ is probably going to want to move higher. The drive is definitely higher for the next 5-6 months. $0.83 would be the next spot, and that would be a good time to make the switch.