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

Market. The current fair value for the S&P 500 is north of $3045, which is 19% higher than it is right now. The US market is substantially undervalued. He does his calculation every year by taking the estimated earnings, adding them to the balance sheet and grow it out a year. Next year is $3500. It’s no wonder the market is making new highs because, Fair Value is substantially higher than where the market is trading. Fair Value is his own algorithm. Since the financial crisis of 2007/2008, the market fell a lot more than people thought, in terms of fundamentals. It’s been 10 years and we are finally emerging out of financial repression. Interest rates are now starting to go up, which is a positive for equities.

A junior lithium producer?There are lots of them and it is very difficult to single out just one. The juniors don’t seem to be getting going. There are no problems with the ones that started early. Lithium is very difficult. It is high cost if it’s from hard rock, but easier to run, which takes you to the Australians, so Galaxy (?) which you may be able to buy there, but is not sure, is an interesting one. There is a lithium ETF, Global X Lithium & Battery Technology (LIT-N).

Blockchain?The problem is, you can’t buy it in stock. Believes you can buy the coins, but doesn’t totally understand the process. This has certain merits, which appears to exceed Bitcoin, but it is still tiny compared with Bitcoin.

Market. US earnings are starting on a so-so footing. The banks started off and given the low volatility of the market, trading volumes were lower than expected. Revenue growth year over year was not as great as expected so markets were soft. Banks’ profitability is based on the yield curve and so he does not get excited about the rising interest rate environment because the yield curve is getting flattened. If you add three more rate hikes, by Q3, we get an inverted yield curve and that predicts recession in 2019. He does not want to chase markets higher. Defense is called for. We are in the worse seasonal period of the year and yet markets have gone higher. Mid to end of October is historically the worst part of this. He is waiting for today’s unveiling of the new income tax changes in Canada.

Currency. If people sell the dollar, where is the other side of that trade? The Canadian dollar is not big enough for the sale of US dollars. The Euro can’t be because the Euro will break up soon. The Japanese Yen is a possibility and he does not think we will see a flight to Chinese Yuan. Don’t worry about the dollar. It is not going anywhere any time soon.

Educational Segment. Richard Thaler won a Nobel price. He is the best behavioral economist. He spends a lot of time trying to get through to viewers and teach them how to make a better investment decision. Richard is best known for the endowment effect where you value something overly when you already own. You are reluctant to sell it below what you bought it at. Even utility bills are giving you little nudges to help you make better decisions in the use of your energy.

Market. A correction is by no means implausible at this stage. There is a small stage during the last couple of weeks of October for a correction. Momentum is a bit overdone. Things have gotten extreme over the short term. There is a potential for a small correction. You should be buying because there is no end to the overall trend coming. If you have some cash, get in and buy. Several times the TSX has come close to the 16,000 level. It is pretty strong technical resistance level. It is the 30^th anniversary of the Wall Street crash, but he does not thing that is significant.

Market.TSX is finally waking from its slumber. Markets can move quickly. The TSX is up about 4% to date, which is not terrible, and if you add dividends, you get 6%, which is livable. Of course, in context with what is going on in other markets, we feel we are left behind. The Cdn$ going up hurts your returns if you have gone outside of Canada to try and get excess returns. September was a pretty good month for his clients, and October so far so good. Feels banks are attractive on valuation, and they don’t get a lot of credit for consistency of earnings they have delivered. Historically, they have returned double digit compound returns.

Market. Markets have become politicized where we have seen changes of government in most countries. Everyone is starting to see their populism moving into the markets. In Canada we have the impact of the proposed tax reforms, which is not being received well by a lot of people. Those kinds of dynamics are occurring across the globe. Quantitative easing has definitely helped markets across the globe move to high levels.

What US bank do you prefer? Under Obama, the banks that made sense were the regional banks, because the regulatory glare was very onerous. Under Trump, that has kind of softened, and we are under a rising interest rate environment. Some of the US money centred banks make sense. He owns the BB&T (BBT-N) on the regional side. He also owns Bank of America (BAC-N) which just announced very good results.

Market.He is concerned about high valuations. It’s hard to go against the tape which is really strong and good. He is more of a bottom-up and goes stock by stock by stock, which is just harder and harder and harder to find. We have to start worrying about being priced to perfection. If something comes down the road that isn’t quite as rosy and shiny as we would like, there could be pullbacks of 5%-10%, or even worse. If interest rates rise, we could see a substantial pullback, but there has been a reluctance to raise interest rates. There are also the things we don’t know about. For example, the Greek sovereign debt problem. Would that have been predicted to have as much effect as it did?

Market. We have seen the economy doing well and some of the stock markets breaking out. He looks for relative strength in both technical and economic indicators. The economic indicators were good all year but the market started to lose strength. He is more or less fully invested right now. It is stock specific in small caps. The index is now starting to show strength compared to larger caps. We are probably at the start of a period where small caps will outperform.

How accurate are fundamentals on a consumer trading platform? It is not something he uses. He suspects the data is pulled from a bigger source. The data should be fairly accurate, but you could always do your back checks. If you see an earning number, you could always pull it down from the company to verify.

Market.Investor sentiment has turned very positive, driven by the fact of increasing breadth in the global economic expansion, and expectations of sustained corporate earnings growth. We have a Goldilocks backdrop of improving global economic growth and modest inflation, which should allow all central banks to increase interest rates on a more gradual pace, rather than too quickly. Technically, we are overbought at this level, when you look at the RSI. A pause may be in order or some sort of consolidation. Volatility can flare up a little, whether it be from further fighting between the US and North Korea, or geopolitical strife in Washington. Given that we are moving into a very, very strong part of the season and seeing optimism surrounding potential tax reform, buying on dips and taking advantage of any consolidation makes a lot of sense. You want to be in the cyclicals. Financials are close to 30%, technology around 20%, and 22% for consumer discretionary. Those are the plays that will tend to move better in an economically sensitive environment. Has no exposure to utilities, real estate or telecom, although does have a little in consumer staples. He favours the high-quality companies. With interest rates moving higher, you want companies that are a little bit less leveraged. You don’t want to be at 30% cash in this environment. He likes both the international and EM markets, whether it be Europe, Asia or EM.

Market. We have synchronized global growth and low interest rates. The MIS increased its outlook for global economic growth. It was 3.2% in 2016, and has been upgraded to 3.6% for this year and 3.8% for 2018. The US and Canadian Central Banks have started to raise rates, and it looks like the UK may be the third. There is little inflationary pressure, so she doesn’t expect interest rate increases will be very rapid and will be well telegraphed. She likes financials generally, because a rising interest rate environment will help their margins, and improving economies will help their business.