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

45 years of age. Are 50% dividends and 50% growth/higher risk a viable plan? At this age, you don’t need income, so there isn’t a necessity to invest in dividend paying stocks. His strategy is, whether you are 10 years from retirement or already retired, dividend only names. Even if you don’t need the income, dividend paying stocks is a great starting point. Generally, you are buying a business that has decades of earnings history behind it.

Just acquired $1 million. What do I invest in? The 1^st question you need to ask is, do you need income from that capital. If you don’t, that allows you to have a little more volatility in your portfolio, and a longer-term time horizon. He would still use dividend paying equities, but if you don’t need income, it gives you some flexibility in terms of how much of it is in stocks versus Bonds. Focus on quality names. He is never more than 5% in one name.

How many sectors do you need to invest in to be diversified? There is no magic number. He is a bottom-up investor, so he looks at the business to see how they make money, what the risks are, what the balance sheet looks like, debt, etc. There is no reason to stay away from any one specific sector. Generally, there are good businesses at reasonable valuations in all sectors.

REITs? He has no exposure to the sector. If you are there for yield, you can get a similar yield in a lot of other Canadian companies, if not better. If you are there for share price appreciation, that space has skyrocketed over the last 5 years, and looks very rich on a valuation basis.

Buying US stocks with Cdn$. When you do this, there is the exchange rate that works for you or against you. Over the last 3-4 years, it has worked for Canadians, because the Cdn$ has weakened. Even at these levels, he would continue to do this. Be mindful that the 30-year average is around $0.80. Moving forward, you want to be mindful of the fact that you could own the stock that goes up 10%, but if the exchange rate moves against you, you could lose.

Market. Markets have just continued to go up. Thinks a lot of investors have put a lot of stock into promises being carried through. There are some question marks beginning to surface. We saw it initially with healthcare a month or so ago. Going forward, we are likely to see a lot more of that. Whether it shakes some confidence in the market remains to be seen. Investors have to keep in mind that markets have generally been going up for almost 10 years, and we are probably due for a bit of a pause. Valuations are stretched and yet earnings seem to be doing all right. GDP growth numbers are strengthening, both in Canada and the US, so there are no immediate concerns. However, you never see it coming in advance. He thinks he would be more of a net seller than a net buyer because, as a value investor, he is finding it harder to find stocks that he thinks are selling at a good discount.

Market. He would like to see a bit more fear in the market. It is always good to have people worried about the market and what they are going to do. People are a little too complacent. The VIX Index is at multi-decades lows. Every day, every stock kind of goes up, especially the US tech names. If we have a bit of a setback where people can see that stocks can go down, that would throw a bit of water on the rally, and then we could rebuild into the 2^nd quarter earnings report. Earnings have been great, but people are sort of extrapolating that we are going to be great for ever.

Energy. The problem with the TSX is that the energy sector is still a big component, even after a big decline this year. A 5% position in energy is appropriate right now. We don’t know which way energy is going to go, but right now it is just slowly drifting down with oversupply, and OPEC can’t stop that scenario. No one should be sitting with 20%-25% energy, regardless of any discount to US stocks.

Market. The current rally is being driven by solid fundamentals, part of a global theme and not just a Trump theme. If you look at things that would have been better under Trump, you would have expected domestic manufacturers, smaller companies, etc. would’ve done better, but the Russell 2000 where these companies reside, has really stalled. We are in an expansionary phase and it is a global phenomenon, and is generally good for regions. Europe has done as well or better, post the US election, than what the US has. It is economics, not policy, that is driving the market. You need to look outside Canada for more and more of where your investment dollar goes. There is better growth in the US. Emerging markets have been on fire and their balance sheets are much better. European valuation is 3 or 4 multiple terms lower than the US.

Markets. He is not worried about Trump not being able to get things through. The rally through since the election was based on Trump’s election. There is an issue with him not being able to get three major pillars of his campaigned through, but it has only been 120 days. We will not expect to see the benefits of him for the next three years. He is focusing on global growth internationally at the moment. An increase in oil prices would be bullish in the short term. He is fine with oil in the range of $40 to $53. This range is great for the stock market. He is avoiding energy stocks right now. BP is the only one he owns because of the large dividend. He is overweight technology. He likes small to mid cap names.

Markets. C-N has an economic surprise index. The EU is relatively stable over the last 6 months, but the US has really fallen off a cliff over the last 6 months so there have been far more economic reports that are coming out much worse than expected. The markets are making new highs today. The percentage of stocks that are above their 200 day average is falling, so the breadth of the market is falling. It does not mean you sell today, but that there is some underlying weakness. He wants to be cautious this late in the economic cycle. Credit is driving a lot of potential growth we are having and is masking some of the weaker underlying demographic and other trends that will limit growth for the next couple of decades.

S&P 500 – 100 points higher or 100 points lower first? He was taught never to forecast price and time in the same forecast. But he would say 100 points lower comes first. He is conservative for clients and establishing options positions. He is being more defensive.

Bitcoins. Back to about 2010 when it first started trading, it was worth pennies. We are at 2600 today. There is a bubble here. When it breaks you will get a correction like in 2013, at least 50% and then perhaps it is something to own again. He thinks we will eventually be a paper-currency-less society. This is not a currency. Currencies don’t fluctuate like this.

How to play defensively. Write put options about 10% below market and take a yield of 4%. You have to want to buy the market 10% lower. Energy may not come down that much if markets come down because energy is already down. It is already at a 50 week low. He has been nibbling at the energy sector.

CAD$ vs. Euro. The Euro has been strengthening. With an election in Italy we will likely see anti EU parties. He does not see the CAD$ rallying much and the Euro will likely weaken a little.