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

Markets. Stocks aren’t cheap, but where else are investors going to invest. It is more and more of a stock picker’s market. It will be tough for Trump to accelerate US growth to 4%. Canada is doing far better. Stimulus spending and tax cuts are temporary. We are probably in low inflation for the rest of our lives. There is a lot of government debt. There is too much stuff in the world and not enough people to buy it all. He feels tech specialty companies are the way to go. We are running out of tech names in Canada, however.

Fixed income is very tough. You are earning next to nothing on government bonds. He focuses on high yield, but keeps getting the companies redeeming them early. He was picking away on beaten up preferred shares. He suggests keeping your duration very short.

Market. A number of consumer sentiment indicators along with other broad indicators, peaked about a month ago and have pulled back slightly. Someone suggested that they have in fact peaked and are now in for a decline, a forerunner of a major economic slowdown, followed by a recession. If this is the case, you could look for a 5%-10% market correction. Given the severity of the recession in 2007-2008 and given debt levels, the recovery is going to take quite a bit longer than normal. He thinks we have another couple of years of 2% growth plus/minus, which is disappointing. However, he expects these pullbacks will be nothing more than short-term blips.

Royalty companies, large cap golds or intermediate golds over the next 3 years? If he had to own a gold security, it would be Central Fund (CAF.A-T) or a Gold bullion fund. Over the next 3-10 years, a number of things will happen. First of all, it is insurance against a major disaster. Secondly, inflation is not a factor right now, but should it reignite, this gives you some insurance. Finally, there is going to be a day of reckoning because a lot of companies will not be able to meet their pension fund liabilities, and there could be quite an upset in International circles and gold is a protection against that. If he had to pick 2 companies, the 1^st would be Goldcorp (G-T) and the 2^nd would be Agnico-Eagle (AEM-T).

Sectors you would avoid? Very early he learned to avoid commodity stocks. Doesn’t think the world needs another hamburger stand or fast food outlet. He has never liked airlines, because they are always subject to uncertainties and price wars. On the other hand, US defence stocks are a natural, and he has looked at General Dynamics (GD-N), Huntington Ingalls (HII-N) for space weapons and defence and Raytheon (RTN-N).

A robotics stock for growth? He doesn’t own any at this time. One that he does favour is an ETF Robo-Global and Automation (ROBO-Q). He likes that it has 35 or 40 different robotic companies, but most of them are Japanese or foreign. He likes Rockwell Automation (ROK-N), but it is just a tad too high. If this had a 5% pullback, he would be buying it big time.

Market. The US market is extremely overvalued. On a Price to Sales basis, it is more expensive than it was in 2000. That tells us that there is not a lot of expected return from here. He is not saying equities over the long-term can’t be good investments, but when you are entering at a point of such extreme overvaluation, like we are now, it is best to wait. Every 10 years there is at least one 30% drop-down in stocks, and we are now approaching 10 years in this bull market, and there hasn’t been much of a drawdown so far. We are well overdue for one. The extraordinary debt bubble that has been created since 2000, never really was sold. Debt to GDP ratios are extremely elevated. When that starts to unwind and we get to the other side of the credit cycle and liquidity is no longer being created into the economy, that is when you will see the big decline in equities. Any Long positions he has are special situations. He has a lot of Short positions.

Market. The market has been a bit of a disappointment this year. When both financials and energy are a little weak in the knees, the market doesn’t do much. We have probably seen a bottom in the banks at this point. There is a misunderstanding or lack of knowledge in the US of how Canadian banking works. We are in a low interest rate environment for the foreseeable future. Doesn’t see a recession coming again, but we need to see a period of drift down of 5%-10% with some stability coming in.

Indexed based ETF’s or sector-based ETF’s? He buys both. You have to look through the name and what they hold, and decide where you want to focus. If you really feel strongly about a particular sector, that is the one that you go to.

The difference between mutual funds and ETF’s? Mutual funds are fully managed portfolios, and fees are higher because of that. They are selling to a lot of small investors and there is a fair amount of administrative costs. ETF’s are much simpler in that you have just a straight portfolio that is usually focused in a particular area and there is not a lot of investment management going on, and a lot less administrative costs. Fees on ETF’s are significantly less.

Markets. He sees a fairly strong economic backdrop. There are checks in every box he is looking for. There are technicals shorter-term that have deteriorated. He is primarily Canadian. Banks and oil have pulled back. There are a lot of other sectors that have picked up and the TSX has done well. He would like to see the technicals improve before going full into the market. The HCG-T financing adds more stability to the Canadian financials. Investors have taken some money off the table in energy and banks. HMMJ-T (Cannabis) was launched during a very feverous pitch in the Marijuana sector and about the time legislation was tabled. There has now not been a lot of news. We will not expect any news through the summer and then get some news in the area of regulation.

Market. We are getting global economic growth, but not at a significant clip. A year ago, the whole world was not growing. Europe was down, Canada was having trouble and the US was growing at 2%. Looking at some of the numbers now, you are seeing good global growth. It’s not going to be 3% or 4%, it’s going to be something like 2%. The world growing at 2% is much better than a part of the world going at 2% and the rest of the world growing at negative numbers. You are seeing low rates, low inflation and good global growth, which adds up to a stock market that continues to do well.

Individual stocks or an ETF in the European market? If you are going to be putting money into Europe, the best way to deal with that is probably through an ETF. Europe is going to do well. It is a much more cyclical economy, so you tend to have a lot less tech there, and more utilities. Dividend yields are quite high there, so he would look for more of a dividend paying ETF.

Market. He still likes the look of the US market, but is seeing opportunities elsewhere. If he had to characterize the 1^st half of this year, he would sum it up by saying less is more. There has been less likelihood of fiscal reform in the US, which has been overshadowed by an improvement in corporate profitability that has helped US equities. In Europe, political risks have diminished, and there has been an improvement in fundamentals, which has probably helped European equities. The decline in interest rates and low volatility this just screams for diversification. As the year progresses, there is likelihood that volatility increases, and you’ll start to see the correlation between some asset classes deteriorate, which means you want more broad-based exposure. He is overweight equities relative to fixed income, and is seeing some opportunities in the US, but there is probably more capital appreciation potential in continental Europe, where things are getting a lot better.

Which pipelines should be held, and which should be sold? Not knowing which ones you own, he would suggest keeping the Kinder IPO along with TransCanada (TRP-T) and Enbridge (ENB-T). He wouldn’t hesitate to add to Pembina (PPL-T) and Alta gas (ALA-T).