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

What makes Government of Canada 5-year bond yield rates, go up or down? When the economy is doing poorly, there is often a sense that the Bank of Canada will not raise rates, and may even drop short term rates. That would have an impact of investors running to buy 5 year bonds for a little bit of yield, which would cause the bond yield to go down. If inflation were picking up, investors would ask why they would buy a 1% bond when inflation is going to be at 2%, so they would demand a higher yield. A stronger economy tends to lead to rising rates.

Market. Thinks earnings are starting to catch up with valuations now. The S&P 500 is up 12% since the US November election. Expectations are that we’re in a more growth friendly environment even though Trump’s policies have not all come through. We need to see the earnings come through. It looks like year-over-year 1^st quarter earnings are going to be up at around 14%-15%, the 1^st double digit pace since 2011. We’ve done better than expected. Also, comments on conference calls have been encouraging. Europe and emerging markets are stabilizing.

Energy. Thinks oil prices will remain quite volatile. She is not committing capital to this sector yet. She was encouraged by what OPEC and Russia said yesterday, and thinks they want to maintain a price level of around $50. However, US shale production is ramping up which is offsetting the benefits of the production cuts. Until they see a sustainable draw down in inventories, that is when she will get more positive.

Gold? She has a very low weighting in gold in her clients’ accounts. The reason to hold gold is usually because of uncertainty, and that really isn’t in the cards right now. Inflation is another reason and the pressures are not that strong.

Oil. There has been a big run up in oil because of the agreement between Russia and OPEC, to prolong a series of oil production cuts. The question always is, can they do it and what do the non-OPEC people do. Libya and Nigeria are exempt from caps and have been pumping like mad. The US has been pumping like crazy, and the higher the prices go, the more they are going to continue to pump. He’s not sure there will be the long-term resolution that they would like to see. $50, plus or minus $10 is likely our trading range for the next few years. A few weeks ago, when oil was summing off, that is when he was buying because the prices were a lot cheaper. If we go 4%-5% higher, he will be selling the oil stocks again. Range trading is what he thinks is going to happen.

Market. Now that earning season is now over, we go back to global macro again. Oil prices are coming back, which is good for the market, so it should go higher off and on over the next 6 weeks, until we get to the next earnings period. Right now, he thinks the OPEC meeting is going to pull the market into focus. As we get into June, what is the Fed going to do with interest rates. If markets are stable, we are going to see another rate hike.

Educational Segment. He gets a lot of questions on hedging, and this is to show you his favourite indicators, and what are quite popular on the street for figuring out where the Cdn$ might go. A upper part of the chart showed the traded value of the Cdn$ over a two-year span. When it was going up, it indicated the dollar was weakening. The bottom part showed the interest rate differential 2-year US and 2-year Canada. As the differential was rising, the spread to US interest rates, the US yields more than Canada. Money tends to flow towards the higher yielding currency on average. With that in mind, the Fed is likely going to keep raising rates, which is a bit of a negative. However, compared to where the spread was when we were back at the extremes, we are now at the same level spread wise. The chart also showed the correlation of oil to the Cdn$, which pretty much followed. The chart also showed the speculative position in the futures market. Currently, we are at the highest level in terms of net speculative Shorts in the last couple of weeks. That tells him that there is an imbalance in the market. The loonie might be close to a bottom for at least the next 6-12 months. Going out to the end of 2020 on the futures curve on a crude oil chart, we are looking at pretty stable oil prices in and around $50 looking out 4 years.

Market. The US market is in record territory and oil is up sharply as well. They are moving together. There is a rebound in all the risk-on trades today, and a marginal increase to new highs, in New York. The dollar related commodities have been laggards in the last couple of months. Pres. Trump’s tax stuff has got to the back burner. We had always heard it was going to be August or September, etc., so maybe it is not too surprising. Earnings were good in the quarter in the S&P, which has also helped. We are going to run out of steam unless Pres. Trump comes up with something, sometime soon. If you are a good fundamental stock picker, you can do well from here.

Auto parts suppliers? Hasn’t owned anything in this group for a while. The sector is the statistically cheap, but there is nervousness that new car sales have peaked. Magna (MG-T) and Martinrea (MRE-T) would be 2 possibilities where they are 40% Europe and you could get decent growth, offsetting slowness in North America. Still not quite attractive enough for him.

Cannabis stocks such as Aurora (ACB-X) or Aphria (APH-T)? We know that there is growth coming. There is a medical side and a personal side, and still over a year until we get there. The stocks ran to the moon, but then that gets messed up with fundamentals. They have now all had a pullback. Wait for a little more certainty. Also, bigger is better, so Canopy (WEED-T) or Aurora (ACB-X) would be the 2 to look at, because they have revenue and a little bit of profit.

Market. The 3 US government houses are aligned, which is a big deal. That is good for the economy, and we have already seen a pickup in business in consumer confidence. We are starting to see a pickup in economic growth in the US. When the US gets better, that is great for Canada as its biggest trading partner, and that will be positive for stock markets. The corporate tax cut plan of 35% to 15% could probably be brought down to 20%. The direction is the important part. Probably most important from a tax perspective is some movement on the repatriation of capital from foreign subsidiaries.

Cannabis. If this were a baseball game, he would say we were in the 6^th inning of a bear market in cannabis stocks. They made all-time highs on November 16, so we have a few more months of downside. Thinks purchase prices for consumers are going to be high, as the government will want to protect the youth. Expects we are going to have a bad day for these stocks coming up.

Gold. This seems to trade more conversely with the US$, than it does in the context of geopolitical events. While people think about gold when they are nervous, pricing in gold really has to do more with the real interest rate of the 10-year treasury than anything else.

Markets. He is overweight in the States recently. He still sees value in the US market. If Trump is able to do the kind of things he says he will do, like lower corporate rates and so on, he is optimistic. He is not going into the US hand over fist. It is advisable to do a covered call strategy. It has been a pretty flat market in the US. People are not making a lot of money on the low VIX. The technical stuff counts but it is not a major issue to him. His first thought was to go into VGK-N but it is not hedged against currency. The UK could have issue with their currency also and may have to lower it. The ZWE-T is what he likes and it pays a good dividend.

Deep in the money options. They have a lot of intrinsic value as well as time value. Buying deep in the money is squeezing out time value. If it drops, the option can go to zero.