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

Energy. It has been a challenging year for people investing in energy. He had a good year last year, and was prepared for a better oil market than what we’ve had so far. Had felt that the drawdowns would have occurred faster. While the compliance by OPEC countries was very high, a few took advantage to send oil from their own inventories and ship them to the US. We are at the point where the cut in production should be mirrored by a cut in exports. You combine that with refineries now coming back on line, as well as the US increasing their own exports to other countries. There is still more work to do. There is a despondency among investors. He is basically all in on services, with a few US EMPs. About 80% exposed to the services. We are now at a tipping point of $50 oil in the US, where demand for services exceeds supply. You are seeing huge pricing gains with regards to sand, pressure pumping and drilling. The one area that is benefiting him the most are the US service stocks.

Energy. Recently oil rallied from $44 to $51. While that happened, there has been very little reaction on the underlying energy equities. The OPEC meeting is coming up, there are comments from Trump, but the most interesting thing is that energy production has become sort of mass manufacturing. There is a certainty today when you drill a hole. When oil prices started to rise a year ago, energy production came on strong. There is short-term noise, such as Trump saying he was going to sell off part of his strategic reserves. That was not huge in relation to the world’s supply of oil. Investors are starting to catch on that even if we do get prices rising $5, $6 a barrel, you are going to get a supply response that means it is unlikely oil goes $10-$15-$20 higher. History of periods of very low volatility happen during extremely positive markets. In the 1980s and 1990s when there were very strong equity markets, you got extended periods of very low volatility. They happened in bull markets. When you do get volatility, it tends to end very quickly, the market resets, and works its way higher again.

Market. Volatility is what most investors are wrestling with now. Volatility was at all-time lows for some time, and investors felt there was complacency in the market. We really only had one piece of Trump news this week. His pro-growth policies fell off the table for a couple of hours, and the market sold off pretty aggressively. Investors used that window as a buying opportunity, and there has been a come back in trading. 70% of companies have reported their results for the last trading period. Analysts were looking for a 9% earnings growth, which would have been the best since late 2011. However, it is not just looking at what stocks have done, it is what you are buying at today’s prices that you are getting from earnings. If expectations were for 9% earnings growth, if achieved, that would be the best since Q4 2011, and we are already surpassing that. That means that when looking at PE valuations, the earnings (E) part of the equation is understated, which means valuations are more attractive than what many are suggesting. With wage growth at about 2.5%, and the unemployment situation being fine, low volatility in the stock market, the Fed has to just be ecstatic with where things are right now.

Market. This had a bit of a comeback today. He guesses that people are just stepping back feeling that earnings season had been pretty good for the corporations, and if the US does ever get any their fiscal policies enacted, then they are going to be flush with cash to take advantage of M&A or to continue on with the stream they are doing in innovation. There are a lot of expectations built in going forward for 5-10 years. It is always nice to have some cash, because if you are fully invested, you get hit with the market. The growth in ETF’s, is not an issue now, but if it gets to 50% of the market, then we are going to have extreme volatility. There could be a 20% decline in any one day. Probably not now, but you just never know.

Percentage of cash in a portfolio? In the worst markets such as 2008, the prudent amount to hold was 20%. In these markets, if they continue to rise further, you don’t want to have too much cash, because you can’t keep up with the markets. Having about 20% cash, if you are all equity, is probably the most appropriate. That way, you will have 80% invested in the market, and if the market falls off, you have cash to allocate at a better entry price.

Fang stocks? Any stock that is trading greater than 30X earnings, and in some cases upwards of 75X, you have to be disciplined with your investing. Instead of throwing all your money into it, just put half of it in. If it doubles in price, you can sell half and then the rest is free. They’ve outperformed the S&P by a wide margin so far this year.

Market. The latest revelations about leaks from the White House could be a trigger for equity markets to take some pain. By his valuations, the market seems really expensive. He would find stable type of companies and stick with those. Keep your powder dry and have a bit of cash to be able to move.

Market. The political problem certainly adds to the basic uncertainty. It is Congress that is really going to decide what happens, not Trump. In the meantime, it adds a certain degree of confusion, as to who is in charge and which way they are going. If the US economy picks up to 3% plus, we are bound to benefit.

Where is the Cdn$-US$ relationship headed? He is a little concerned about the Cdn$, particularly in the environment that we are still facing on the negotiations of NAFTA. Thinks there is going to have to be some giving up on the dairy side. Expects that we will continue to see the loonie drift down. A low dollar is not a bad thing. He also hopes that Bank of Canada keeps our current interest rates and doesn’t follow the US with their June increase.

Banks or lifecos? Although they are both in the financial sector they are quite different animals. Right now, there is pressure on the banks, mainly coming out of the US. Sun Life (SLF-T) and Manulife (MFC-T) are both good companies. Yields are about the same. If you are interested in an investment, then he would say half and half.

Market. All the US technical indicators just broke down through the floor today, but sometimes “nothing” is the right thing to do. There are still good investments that can be found. The decision-making process in any political forum is not necessarily economic in nature, but we have to make economic decisions. The #1 factor that people are challenged by right now is uncertainty.

Market. The market had quite a selloff. People are maybe concerned that if Trump has to take gas, by either resigning or getting impeached, that his agenda won’t go through. We have gone a long time in these markets without a major retracement. There is a lot of good out there that kind of gets ignored. The US has essentially full employment. On the other hand, people are not making as much money and there is no upward wage pressure at all. We are seeing terrific corporate earnings, but on the other hand the US is having difficulty boosting its GDP anywhere north of 2%-2.25%.

Marijuana. Right now, clearly some of the medical marijuana companies are making money selling a demand. Once marijuana becomes legal, what is the barrier to entry? What is the moat that keeps everybody from growing their own marijuana in their backyard? He doesn’t know what is possibly going to keep the price of marijuana up. If he owned stocks, he would sell his shares before marijuana became legal.

Market. Now that we are in a rising rate environment, the Fed governors are projecting that the Fed funds rate will be increased from 1% today to 3%, 3 years from now. That takes us back to normalcy. If the short-term rate goes to 3%, it implies that 5 and 10 year bond yields are back to 4%-6%, and that will potentially have a huge impact on valuations. You can expect that stocks like utilities, pipelines, REITs will be the most prone to decline. Also, you should expect the P/E ratio of the market to kind of retreat to a more reversion to the mean.

High-yield bonds as part of a fixed income portfolio for a retiree? He manages both regular and high-yield bonds, but in a rising rate environment, regular bonds go down. High-yield bonds actually tend to go up in a rising rate environment, because they tend to be short duration bonds with a wide spread. He always cautions investors not to try and pick high-yield bonds. Buy a high-quality, high-yield fund, which is widely diversified. Do not buy a high yield fund which only owns Canadian high-yield bonds, because you are going to end up with a bunch of mining and energy bonds.