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

Market. One side looks pretty good. Confidence is high and there is earnings growth. US tax reform and Wall Street Reform are positive which helps earnings. The other side can’t be ignored if you are managing money. It’s how investors’ psychology plays into all this. After years of positive markets, with relatively low volatility, he expects that over the next 12-18 months, it will look uglier than it really is because, as we start to get volatility and a pullback, it will be further compounded by it being the first time it’s happened in a while. Once that happens, combined with the fact that there is a lot of bond money in equities, when we start to see some corrections, the volatility and the depth of how much markets go down, will be compounded by investors moving more capital out, taking a pause to digest the fact that every $1 million is now worth something like $900,000, etc. He feels pretty good about the earnings trajectory and what is going on from a global economic perspective. We will be going through a period that is relatively choppy.

Market. He tends to look at fundamentals, and is interested in what earnings, interest rates and inflation are doing, and how the companies are handling that. Companies don’t seem to go up very much on good news, but certainly get hammered if their earnings disappoint. There’s been some selling pressure recently, but thinks it is profit taking and readjusting of portfolios for the end of the year. The challenges for 2018 are that interest rates are going to go up and by how much, along with the overall market valuation. There is not a lot of upside in multiple expansion at this time. The probable good news is that earnings are still going up. He is looking for 8%-10% in the TSX and the S&P.

Market. We have seen this movie before. A speculative run-up in the market, and things like Bitcoin are a symptom of a manic approach. There is something at the top of the market that gives you a clue that the top has at last arrived. However, it doesn’t necessarily tell you when the top is, however all the preconditions are in. One of the important preconditions of a top is that there has to be a storyline that the market can’t go down because something is going to stop it from going down, and of course, it is going to be that the feds are coming back in again if there is any weakness. All the preconditions for a bear market are here, except for what is the trigger, and he hasn’t a clue.

Crypto currency? The argument for crypto currencies is very interesting, and particularly for Bitcoin, i.e., if you take the total amount of debt outstanding globally, and assuming that a certain number of transactions are going to be settled, Bitcoin ought to be worth some percentage of the total amount of debt outstanding. The number often thrown out by the real bulls is 1%. If that was 1%, then the Bitcoin would be worth $1 million. However, when you ask what the intrinsic value is, you can find it, because there isn’t any. Therefore, the value is anything you want it to be.

Market. In a short-term trading window between now and February, we can play all kinds of games, and pretty much guess that financials will probably do pretty well, as well as some of the healthcare stocks and media. On the flipside, a company like Royal Caribbean Cruise Lines actually has zero percent effective tax rate. To make an analogy between what we are seeing in the stock market right now and a car, we just got a reduction in the gasoline price, but what is the fuel efficiency of each and every car. He thinks we are going to get a little side swiped by too much focus on the taxes and are going to forget to look at the fundamentals of the companies.

Market. The risk of uncertainty in the white house is going to matter at some point. What matters now is the tax bill. We are getting the follow through pop today in the markets. We expect the president to sign the tax bill in by Christmas and then we get a sell-the-news effect. There is an awful lot of good news priced into the market.

ETF Return of Capital. There are two types: (1) they need to pay out a dividend on funds that recently came into the fund, so all unit holders get the same distribution. This is a good return of capital. (2) The underlying assets may pay a lower dividend than the ETF does, so they pay you back some of the capital gain. This is not a good return of capital.

Robotics ETFs. ROBO-N & BOTZ-N. These play the companies that build robots and create the artificial intelligence. In Canada we have MIND-T which is artificial intelligence for stock selection. He would wait for the markets to shake out in a bear market before getting in.

US Dollar investments. SHV-N is a money market fund for storing US$ in.

OIL ETFs. His most aggressive strategy is a long short strategy. He is net short crude oil via a US ETF. He is long the Equity side. He likes US pipelines is the US.

Educational Segment. Are all the benefits of a tax reform package in the US priced into the US market? He does not think this tax bill will help the people who voted for Trump. After the 10 years are up, the top 1 and 0.1% income earners will get the benefits of this package. The rest get almost nothing. Trailing earnings and expected earnings for the S&P will increase 20% and 10% per year in earnings growth after the package. There is a lot of good news priced into the market today. There will be a sell-the-news effect when it is signed. See his blog entry for today.

Market. Investors should pay attention to the short and long term yield curves. 10 of the last 11 recessions have started with a negative yield curve. We don’t actually have a negative yield curve just yet but if raising rates could tip us to a negative yield curve then a recession could ensue. This means they are not anticipating strong economic growth. Since 2008 The US have not had a robust GDP growth. The yield curve could start to flatten and go negative if they raise interest rates further. We are late cycle, although we saw a pickup in GDP growth around the world. This is typically what we see toward the end of a cycle. He would not read too much into this but it is indicative of us being into late cycle. The FED or BOC have not found a cure to the business cycle. We are closer to the next recession than we are to the last one in 2008. Leading indicators are not suggestion a recession is imminent, however.

Market. There has been a rotation out of the defensives, but in the last month or so, some have popped back up, but that is just a final rotation before we move down. GDP is looking a little better. Canada’s job numbers are pretty good, although there could be a revision. He sees a pro-growth theme moving through the market with sort of 3 groups including, 1) those involving pro-growth which would be the industrials, 2) energy base metals and financials and 3) on the other side the defensives of utilities, bonds, etc. In the middle, there is healthcare and tech. Under oil, we are sort of capped at $60 on the upside, but what is really encouraging is that on the down days, some of the components of the sector are showing a little strength. He expected some kind of correction on base metals. The 1^st salvo came in early July until a month ago, then we had a corrective phase and he expects that sector to be really strong.

Gold? If he were buying one today, it would be Kirkland Lake Gold (KL-T). You want to look at stocks that sell, produce or mine, not the commodity itself. This one has a chart that is nice and upwards, and this is a time that you want to be buying.

Market. Trading is one thing and investing is another. He wants to acquire things that are on sale. If he finds something that he likes and it is on sale, then that is wonderful. The current volatility is troubling as we have seen an absence of buyers on the downside. It is hard to do his job as a Canadian guy right now. To perform globally you need the kinds of sectors that we just don’t have enough of: tech, healthcare, & industrial. He looks for names. If you disappoint, you get killed. The market is driven by ETF buying and is overcrowded.