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

Sleep At Night Portfolio. He nick-named the portfolios he began running for BMO-T about 4 years ago. He still believes in these very much.

ETF in AI Category. BOTZ-N and ROBO-N. They have had a phenomenal run up and are probably over done a bit at this point. Japan has a significant weight. It will be an investment theme for decades to come.

Educational Segment. (weekly series) What Investor Personality Are You?: 3. The Follower. Typically are interested in markets but don’t know a lot and are most interested in looking for a ‘tip’. Their portfolios don’t have a lot of construction or diversification. They suffer from regret aversion and hindsight bias. They won’t make a lot of their own decisions. The FANG stocks have a lot of these.

Markets. The BOC may have blown it by increasing rates so abruptly. The CAD$ just blasted off and that is never a good thing when it moves too far too fast. They need to telegraph the message better next time. It will be harder on exports in the next few quarters. He feels the proposed tax reforms are regressive, attacking small businesses. It is extremely negative for the economy. American stocks are very stretched in terms of valuations. There are better opportunities in Canada. He likes small to mid-sized companies that have leadership roles and are doing business in the US also.

Market.Believes the US is set to underperform relative to other markets, and its currency is part of that. However, we are still in a secular bull market. Looking back to 2009, we had the US equities and the US$ very undervalued and the Fed as the most accommodative of liquidity provider globally. The Fed has become almost a leading indicator of what other Central banks will do. Coming up to December 2016, there were a lot of hopeful opinions on Donald Trump and the US$ was sitting at a 14 year high. US equities are very expensive, and the Fed was no longer the most accommodative liquidity provider. Be prepared for some underperformance in US equities. Globally, economies that lagged since then have been the emerging markets. We’ve had 7 years of underperformance of emerging markets, and they just broke a 10 year downtrend in the last quarter. EMs have done incredibly well year-to-date, but there has been some froth. Looking forward, this trend is going to be measured in years, not quarters like many are forecasting. In currency ETF’s, there is a big knowledge gap with investors. Most think currency is too difficult so they become passive investors to that class. He views it completely different, i.e., as an asset class. Currency can become overvalued and over loved or the opposite, similar to a stock. The Cdn$ has some good tailwinds, but also some good headwinds as well.

Will North Korea affect the stock market?The luxury of being a macro investor is that you can lengthen your understanding of history, and look back at past episodes. He is not opposed to analysing risks and geopolitical risks. He is opposed to individualized risks in not remaining diversified. Stay globally diversified.

Market. This week and the next 2 weeks historically are the 3 weakest of the year. Analysts have a history of overestimating coming into the 3^rd quarter and then have to start pulling them down, so there is a tendency for analysts to lower estimates, and for companies to lower guidance. This year in particular, it is likely to happen in the US, because there have been 2 hurricanes which will have an impact on 3^rd quarter results. This is a short-term correction, which is going to provide you with a buying opportunity in the latter part of October. The consensus for earnings in the Dow Jones is a gain of about 3.7% in the 3^rd quarter, 4.8% for the S&P 500 and 4.8% for the TSE 60 stocks. The strongest quarter of the year comes in the 4^th quarter. People are buying things such as the new iPhone, Christmas gifts, etc.

Oil? Historically, oil prices tend to move higher from early in the year through to the end of September, then tend to dribble lower after that. In the last while, crude oil has formed a nice little trading range. If it gets above the $52 level, you could see it move higher. However, we are now into the period of seasonal weakness, and expects you won’t get a break out, and crude oil prices will move lower between now and January. If you want to be in energy, look at gassy stocks as opposed to oil stocks.

Technicals to monitor biotech and healthcare? You want to be in a sector that is in an upward trend and is outperforming the market. Also, you want the momentum indicators to be moving on the upside. Currently, this is not a good sector to be involved with.

Natural gas? This is normally from around the end of August through until the 2^nd week in December. Currently, it looks like it is forming a nice base and trying to establish an upward trend. Weather is a very important factor when it comes to natural gas. When the weather is steady, natural gas doesn’t do very well. You get a boost in prices is when you get extreme weather in the fall. Yesterday there was a rude surprise when it turned out that natural gas inventories were larger than expected, which had a direct negative impact on natural gas prices. If you own gas and gassy stocks, stick with them for now. He prefers stocks as opposed to the gas, as natural gas ETF’s have a problem with the futures contracts going forward.

Economy.He expects inflation to stay relatively low. There are many structural factors affecting inflation globally, and most global banks are puzzled by this low inflation world. Looking at yield curves globally, many of them are in the long end of the curve, which is purely an indicator of where inflation is, and they are not steepening as quickly as people would think. It is a very delicate balance they are in and they have to let people know exactly what they are doing and how they are going to be doing it.

Markets. We are in a long slow expansion that has been going on for quite some time now. There is very little excess built into the system. The US Fed will work to normalize interest rates and it is important that they do that. It speaks to the confidence that the Fed has in the sustainability of the recovery. What’s working is a reflationary trade. We are seeing a rotation from tech to cyclicals. Europe and Japan are working hard to keep rates lower. We saw secular lows in interest rates 16 months ago. Bonds do not look very attractive. There are controls in China being brought in that limit foreign real estate investment. We are seeing real estate in Canada slowing down and also auto sales slowing down.

Market.The last time he was on Market Call Tonight, he commented that he was starting to see a shift in the market structure. About 4-5 months ago, he really saw the nascent change in structure, where utilities, defences, etc. started to get a little weaker. They’ve had a little bounce up, but the big thing that has happened is a really big shift technically, that was really confirmed about 2 months ago. We now have a harmony of developed global central banks that are now talking about either raising rates, reducing stimulus, or some version of that. That is matching up with the fundamentals of the macro picture that is matching up with the technical picture which started a few months ago, and got much stronger at the end of August. The data has been a little soft lately and inflation is not really showing a sting. He suspects it is not going to, but the bankers job is to anticipate. One of the Fed governors indicated that what they had done over the last few years really hasn’t worked. The real economy has not significantly changed. We don’t have company spending. Capital spending is one of the biggest tells, that all this stuff has not worked. Experiment #1 is over, and thinks we are now into Experiment #2, that if they start to raise interest rates, it will send a message to corporations and investors, you don’t make your numbers by low costs to do your “buybacks”, you are going to have to start to assume risks. He is worried about the rally which people think is going to be quite strong. As we move into late Q1 and into mid-Q2 of 2018, where we are going to have enough time to see what has happened with these higher rates, he is really bullish on this sort intermediate term view, but suspects that the 2^nd experiment might have to have some adjustments along the way.

Crude Oil?Chart shows a bottom made in early 2016, followed by a little bit of a higher bottom in mid-2017. The next thing he is looking for is $60, which will be the next place we have resistance. As an investor, if you ever want to know about the price of a commodity, the best thing to do is to look at the price of the producers as an indication of what is going to happen to the commodities. In the case of energy, you would look at the energy stocks to see where oil would go, and, for example, in the case of gold, you would look at gold stocks to give you a bit of a tell to show where gold might go. The consensus is that oil will be between $50 and $60.

Market. Feels the growth trajectory will slow down towards the end of the year. There are some headwinds facing Canada. However, it is a good place to be, notwithstanding it slowing. Thinks it will be more opportunistic towards the back half of the year, so he is positive on Canadian equities. There was a report out of the EIA lowering the Q2 and Q3 forecasts for shale producers. You could see it about $50 for sustained period of time. Doesn’t feel there will be a further rush to increase interest rates in Canada.