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

Market. Geographically Japan remains the cheapest of developed markets, and we are finally hearing other investors talking about Japan. Europe also offers good value. There are pockets of value in the US, but it is not a cheap market in general. Heading into a higher rate environment, investors need to be a little cautious. The historical PE of the S&P 500 is 16X earnings, and low interest rates have driven it to about 25X earnings. That’s not to say it can’t go higher, but the Fed is in a rising rate cycle, which implies stocks are going to be less attractive, especially the higher valued shares. In this business, you are either early or you are late. Successful investors are early, so you had better start building up a bit of a cash position or you are going to get caught off side at some point. The whole world is swimming in debt. Consumer government non-bank corporate debt has been going up every year as a percentage of GDP for the last decade. It’s been held together by extremely low interest rates. The fear is that rising interest rates are going to have some impact on government, corporations and consumers. Even if rates move up slowly, we are already seeing slow increases having an impact on Canadian consumers. High-yield bonds are about the only fixed income classes not sensitive to changes in interest rates. In the last 6 rising rate cycles, they actually did well. This is a very short duration asset class. The biggest sensitivity is to default.

Market. The great thing about NA equity markets is that between mid-October through until the 1^st week in January, the markets go higher. People are in a good mood and are in a buying mood. We are getting close to the end of the year when people are buying all kinds of things, which causes equity markets to move higher. Traditional sectors that move highest during this time are economically sensitive sectors like materials, industrials, technology and consumer discretionary, and have led the market once again, particularly on the technology side. FAANG stocks are what have really driven the market higher. The market is overbought, so what do you do now? You have another 6 weeks until the end of the period of strength is up. Hang in there, but realize we are getting close to the end. There is a whole group of stocks which have not done well this year. Tax loss selling is having a big impact, because things like metals, oils and oil service stocks are way down, relative to where they where at the beginning of the year. A classic year for tax loss selling pressures. That will probably continue for another 2 weeks and then the tax loss selling pressures come off. These are the ones that traditionally move higher between the middle of December through until spring. Be patient now when markets are going higher, but also be patient on buying because tax loss selling pressures are still there, and will be for the next 2-3 weeks.

Banking ETF? We’ve reached the end of the period of seasonal strength for Canada’s bank stocks. That is normally the end of November, and that’s the time when you want to look elsewhere. The US side is very different. Their period of seasonal strength is from about the beginning of December through until about April.

Market. Thursday they expect to have a go on the tax bill, the senate version of it. They hope to have it completed by Christmas. Markets are going to be looking at this closely. Then there should be a sell on news when the president signs it. Larry does not believe there will not be any new money added to the debt. There is a shortage of skilled labour in the US. He does not believe there will be a 5% increase in GDP because of the tax bill, as predicted. Bitcoin could be reaching a bubble. There is no intrinsic value. He believes in electronic currency in the future but he thinks Bitcoin will turn out to be some kind of payment system.

Dividend paying global ETF recommendation. CYH-T is a currency hedged. ZWE-T, ZWH-T ZWC are good for covered calls. HAZ-T is actively managed.

Service Companies vs. large Cap Oil and Gas. In the US there is OIHS-N. They are companies involved in drilling, rigs and infrastructure. E&P companies are the ones at risk to the product price. He likes the pipeline space. The commodity is going to hang around $50 +/- $10 for some time. He prefers diversified oil companies like SU-T.

Educational Segment. Financial Literacy – Robotic Advisors. Currently, the human advisor has to talk to the client and get to know them. They propose solutions, implement them and then constantly monitor and adjust strategy. Robotic advising services bring costs down. The first step is best done with a human. You need a trusted goto person. It is hard to trust something you can’t look in the eyes. The constant monitoring is best for the computers but explaining complex concepts or guiding the investor through difficult times still requires an advisor. The advisor industry will be disrupted over the next decade by robot advisors.

Market. Small, mid and large caps are currently bullish according to fund flows. The S&P was up 7 consecutive months to the end of October. The market typically does better than average over 3, 6 and 9 months beyond when this happens. The fundamentals don’t support the valuations so much and valuations are stretched. Most Canadians should be more North American based, but most have too much in Canada. He only has 5% of portfolios overseas. We need to be cognizant that there will be a pull back at some point. Investors should be building more defensive portfolios as interest rates rise. You may want to own pipelines and utilities.

S&P-500 Price Target for a correction to follow and to what magnitude will a correction be. He can’t predict where the market is going. 5% corrections happen typically every 7 months, 10% every two years and more every 4 years. We have not had a 5% correction since January of last year. We are overdue, yet when you have 7 months in a row of increases, it tends to continue up for 3 to 9 months. Instead of the market calling off, it could go sideways for 3-5 years as earnings catch up.

Canadian Banks. Because of the 2016 run-up, he thought they would take a breather but they did not. They are near the high end of their valuations. He thinks they will fluctuate up and down 5% for the next few years. They have distinguished themselves in terms of exposure. If he could only buy one, it would be RY-T.

Market. The market is expensive, but the most important thing when you are a long-term investor is interest rates. You have to think about what you can invest in with your long-term capital. Should it be real estate, GICs, Bitcoin, etc.? You look at the cash flows to determine what your best option is to deliver the best returns over the long run. He tends to be conservative, so for his clients he sticks to stocks and bonds. Bonds are guaranteeing 2.5% at most over the next 5 years, so it is not the best alternative. If rates stay low for the next 10 years, you’ll kick yourself for not owning stocks. He expects to see record corporate profits in 2017, and in 2018 the market is expecting good corporate profits. If so that would help justify the market valuations. The PE ratios on the S&P 500 are higher than they’ve been in a long time, but are nowhere near as high as they were in the late 90s and early 2000. To see what is going to happen in the future, you have to use comparative analysis. Central banks want an improving economy, but their mandates are to fight inflation. We have no inflation, and thinks that part of the blame has to do with Amazon (AMZN-Q). When Amazon says it is going to cut prices, everybody has to follow suit. Amazon doesn’t care about profits, they care about benefiting the consumer, which means lower prices.

Market. Going into the year, he underestimated the potential for equities to advance. Was too bearish, so too cautious. The US economy continues to surprise him to the upside. Europe appears to be improving. Financials conditions are still at record easy levels. The Chinese appear to be orchestrating a soft landing. It’s sort of a Goldilocks scenario that he hadn’t thought was going to play out. We are in a weird space, where it feels like you are going to need an endogenous event to knock the stocks off their perch.

Market. It is fascinating what has gone on. If someone had said at the beginning of the year that the market was going to do what it has done, most people would have said that it was unrealistic. The American market in particular, but now the Canadian market too has caught fire. It’s fascinating to watch, but it makes it much harder for him as a contrarian, to find value stocks he can buy during this tax loss season. Hopefully he can find some that he can cherry pick towards the end of the year.

Screening Criteria? He likes stocks that have been in business more than 10 years, that should be trading at $10 or less, with little or no debt on the balance sheet. Also, the stock has to be down 33% in the past year. He likes trading towards the low end of a 10-year range. Wants at least a 100% upside, often 200%, 300%, 400%, based on what the stock price has been in the past. Likes to know that management can do what they say they are going to do. Insider buying is something else he likes. If the sector is out of play, that is worth one of his points.

Oil and gas? He doesn’t think this is very contrarian now. A lot of companies haven’t come back, and some have come back a fair distance. You can look at a number of companies that have been so-called survivors. Because they’ve survived this long, that increases the potential of them surviving into the future. There are still some that will go under, but thinks they have seen the worst of it. Definitely a sector worth looking at.