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

Gold. She is very low in terms of gold exposure because inflation is very benign right now. The US$ is quite strong right now. Volatility is quite low and near historic lows.

Marijuana IPOs. It is not a sector she is looking at because it is news and momentum driven. If companies can go public, they are probably taking advantage of the environment. There is not a lot of fundamental data to work on. Momentum is based on the assumption that recreational use gets legalized. It is hard to model out who is going to be winning going forward. The ETF in the sector creates momentum in stocks and it does not differentiate which ones are attractive.

Market. You can’t look at the market in a vacuum, you have to look at it relative to interest rates. Interest rates are low and are probably going to stay low for another couple of years. GIC rates are probably 2.5%-2.75%. When you buy a GIC from the bank, ultimately you are just borrowing money from them. Instead, why don’t you own the bank? You are going to get a dividend rate of 3.5% to 4.5%. You get a much better yield on equities than you can on fixed income investments. Banks are not cheap, but also not wildly overvalued. Thinks there will be some pickup and growth in the US economy, and the Canadian economy will benefit from that, and we won’t be hurt by NAFTA.

Canadian $? A lot of this is oil. The Canadian dollar has been punished enough. It could stay between $.73 and $.77. He doesn’t see a lot of movement, either upside or downside. Longer-term, rates will be going up.

Marijuana? Remember this is going to be regulated, so think of it like you would think of beer and alcohol sales. Secondly, there is probably going to be a level of profit margin, with limits on how much money they can make. From that perspective, there is going to be a lot of competition and a lot of regulations around it. It is not the investment people think it is going to be, and the returns will be quite mellow.

How to determine if an option bid/ask is overpriced? The idea that the option’s price has a certain value as a percentage of the stock price, has to do with the volatility assumption on the option. If a Call Option is 10% of the value of the stock price, and there is another Call Option on another stock that is 5% of the value, that simply tells him that the 1^st stock is more volatile and higher risk than the 2^nd one.

Resources. After the Asian flu/Russian debt crisis in 1998, you also had the original Internet boom, and no one cared about resources. We are now at a point where we finally have legitimate good valuations. 5 years ago, we were playing defence because valuations were not there. We have now recovered from that and are now in an environment that we can get really excited about. Businesses are getting incrementally better and are throwing cash flow, and you don’t have to pay a lot for them. Resource stocks are “crazy” out of favour, which is great. 12-18 months from now, the supply stabilizes and demand keeps growing.

Diversification for RESP’s for children? There are a number of different ways you can be diversified. This is a whole new millennium of technologically driven and aware people. Technology is changing the world, and we are in the early stages of a whole new evolution, so that when children are older, they won’t be typing into keyboards or computer screens, they will be talking to things and will be learning in different ways. For diversification, technology would be a good place to look. The most innovative companies in technology are the ones that have the biggest balance sheets and they are the strongest ones. Instagram is owned by Facebook (FB-Q), and is just in its early stages of its monetization strategies. Trading at a pretty reasonable valuation, but has a pretty strong balance sheet, and has a lot of room to grow. Its biggest competitor is Google (GOOGL-Q), which is sitting on tons of cash, very innovative, working on artificial intelligence, healthcare. These are big, big areas that are going to need a lot of improvement.

Market. The rhetoric is ratcheting up, as to when all the policy accommodation is going to be too much for growth. Low rates have unintended negative consequences and we have to keep an eye on that. The Bank of Canada has started to signal they are changing some policy opinions, and the Fed is implying that they want to raise interest rates which could be 6 months from now. Nothing has fundamentally changed at this point, but the spread for bias US to CAD, the CAD has been so suppressed we are at a 25-year skew that we haven’t seen with bearish bets on the CAD. All you need is a hint of interest rates rising in Canada and there is going to be a very significant snap. He feels no central bank is going to move too fast. We have low volatility which, historically, has been a harbinger of positive returns.

US REITs? REITs are a bond proxy. You have to be really careful if there some reason you have to go into this area. You have industrial REITs, real estate/broker REITs, retail REITs, etc. The whole sector will be under pressure from rising rates. He would avoid this space.

Market. There are rising corporate profits, and there is a reason for all this enthusiasm. In the 1^st quarter US revenues are up 7% and earnings are up 14%. When people ask “Why is a market up?”, it is “earnings”. Stock prices follow earnings. He expects earnings to grow in the US in 2017, and analysts expect even better growth in 2018. When people say the market is expensive, maybe it is on trailing earnings, but forward earnings are not so bad. For the past 37 years on the TSX, companies that pay and grow dividends outperform any other type of companies. Those have to be the anchor in your portfolio.

Markets. The reversal in tech shares is quite meaningful. It stands out as what was leading the markets over the last 6 to 12 months. Look at IYW-N, the tech only ETF that is up 40% year over year, vs. the S&P being up 20%. If you are a short term trader, you could buy on pull backs, but if you are long term, wait. Buy when it tests the Trump election night levels, then it is time to step in. Looking at the UK markets, they don’t like uncertainty. BREXIT is the first part of the EU coming apart, but 5 years from now the EU won’t exist in its current form. Italy stands out as the next one to move out. The soft economic numbers are getting a bit better in Europe, but it is not free and clear. The US markets are concerned with how the Fed is going to unwind or start to unwind the balance sheet. It will pull back the liquidity of the markets just a little.

If we are in a secular bull market, breaking out from $15 and change in the S&P, if we get back to those levels we would be testing the breakout of the market. And he thinks that is highly likely in the next recession. We don’t know when the next recession will hit.

Caller looking for an ETF that covers retirement homes. He has not seen one. There is definitely a growth story there. The government is considering a lot more in-home care. Something investing in that would be a terrific growth story for the next 15 years.

Educational Segment. The US Yield Curve. There have been three rate hikes: Dec/15, Dec/16 and then Mar/17. The yield curve is the difference between the two year rate and the 10 year rate in the US. We have seen a flattening of the curve following each rate hike. Short term rates are rising while long term rates are falling somewhat. This historically means that the market is anticipating a slowdown in the economy. He would be shocked if we did not get a rate hike this week, but that should be it for this year. Longer term rates will continue to fall.