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

Railways – Canada or US? CNR-T and CP-T are very expensive. The US rails are pretty much there two. CSX-Q is interesting. New management may weave his magic. You should play in this one if you want to go into this expensive group.

Market – A lot of people swear by “Sell in May and go away”. Essentially, on average, you buy the market on October 27 and sell it on May 5, making all your gains from October to May and miss losing money in the summer. That is not completely accurate. Data shows that from May to October, markets generally go up a little. On the S&P 500, it goes up 62% of the time. However, there is a grain of truth to the expression. For the last 20 years, US and Canadian equity markets have gone down and have had greater volatility from May to October, and it is probably going to happen again this year. Every year there is a different reason. Last year was BREXIT. Previous to that it was China. You want to avoid this period of time when you do get a correction in the summer. Also, sometimes equity markets reach a very important low during that period. That gives you an opportunity. The 2 things to watch when you are cautious is volatility. When the VIX spikes, you don’t want to be there. Today it hit a 24-year low. Also, look at the 50-day moving average for major equities like the S&P 500, Dow and the TSE composites. If the index is above the 50-day moving average, there is no problem. If he gets below that level, you have to be careful because that is when you are going to get the correction. Currently everyone of the indexes are above the 50-day moving averages.

Gold? Gold has very, very strong seasonality. Historically, the best times for gold is from around December right through until the end of February. There is another period of seasonal strength runs from July right through until October each year. Gold prices are very closely connected to volatility. If we are expecting to have a stronger period of volatility this summer, look for the opportunity to go back into gold.

REITs? REITs and utilities have very similar kinds of seasonality. They tend to do very well in the summer at a time when people look for places to hide in conservative, high yielding investments. Technically it is testing all-time highs.

Market. There are a lot of things going on in politics, and we are going to have to wait and see how this goes as we move into the summer. Thinks we are going to grind to a more normalized market in Canada. The banks are going to tighten credit restrictions on new housing. This is healthy for a market and will make us more secure than what we are right now.

Markets. We are at a pretty big turning point on economic policy in the US and in Europe. We live in interesting times. Every 80 years the stress in the global economy causes it to start to break. We have a rise in populism in the middle class around the world. People are not happy with chronic slow growth. We have always resorted to war to get rid of excess capacity in the economy. Over production is the catalyst for the oil price. Shale production is here to stay. Low $40s to high $50s is where we will stay. Lots of oil stocks will be value traps, and then there is the possibility of a real estate bubble. Why would you want to invest in Canada? Oil is going to flat line. People will realize that some of these oil stocks are overpriced. It is a big slug to the Canadian economy. He has no Canadian exposure. Investors have to start looking outside of Canada. People probably have an over allocation of resources in their portfolios. People don’t realize the threat there is in real estate.

Auto Sector. He does not have a pick. Autos are now your classic value trap. There are issues with inventory as well as financing issues. It is dead money here. He is concerned about the economic growth in China. It is an overcrowded trade. There is no catalyst to get this thing going. The activist investor that wants to split the stock into two classes does not impress him.

Healthcare. [Should caller hang on?] He typically does not invest in healthcare because it is hard to do fundamental analysis on it. GILD-Q’s block buster drugs are coming off patent. TEVA-N is very cheap, but with health care reform coming on, he is stepping away. Stay away from the sector. The theme of the aging Western demographic has always been there, but he feels there are better opportunities elsewhere.

Portfolios. Bonds may be the highest risk asset in a portfolio. We have had a very high interest rate environment for so many years, and as interest rates come down, bonds do very well. We are at the bottom end of the interest rate cycle. The federal reserve is being very adamant they are going to raise rates. We’ve seen some of that bump already take place on the mid to long end of the curve. Rates going up means bond prices are going to go lower. Thinks the Fed is going to have to start reducing their balance sheet. They are still carrying about $4 trillion on their balance sheet, which was just new money printed by the Fed and put into the system. When you don’t have inflation, that doesn’t necessarily disrupt the currency. But, as you continue to print lots of extra dollars, which is still going on in Europe and Japan, and as the world continues to get flooded with new dollars, it reduces the value of the currency, and you see it going into the value of harder assets.

Preferred shares. Prior to the financial crisis, they traded at roughly the yield and would be roughly 80% of the yield you would get on a corporate bond of the same company. That was because of the dividend tax credit on nonregistered accounts which, when grossed up, gave a little better return on the dividend, after tax. During the financial crisis, a lot of preferred shares got hit hard, particularly in the US. That caused a huge reaction in financial markets, and investors started to realize that companies don’t have to pay a preferred dividend, and not worry about bankruptcy if they don’t. Good quality preferred shares today are yielding about 120% of the yield of corporate bonds on the same company. Thinks they are vastly undervalued and you are getting a better yield that will give you some cushion as interest rates rise and as investors start to gain some comfort with preferred shares. A good way to play the income component of a portfolio.

Cdn All Cap, US All Cap, Int’l All Cap for a portfolio. Is there a theoretical reason for doing this, or just get the World All Cap instead? The argument for using the 3 different ones is how you feel about weighting geographic regions around the world. There is some argument that the European Union markets are probably undervalued compared to the US markets. The argument for having 3 is whether or not you want to overweight a particular segment of the world. If you are just going for an “all world”, you are not getting that. He would argue for having 50% of your ETF equity exposure in the US. That will give you a lot of global economy, because a lot of their major companies are going to be represented in the global companies anyways. He might then overweight US a little and underweight Canada.

How many ETF’s in “an all ETF” portfolio, which geographic areas would you choose, and what would be percentages be? He would have a bond ETF, half of his money would be in a Canadian ETF. As a balanced investor, you would have 50% in the bonds, 10% in cash and 25% in the TSX 60 and 10% in the S&P 500 and 15% in EAFE. These have been 1^st or 2^nd quartile performers since the turn-of-the-century.

Split shares or preferred shares? On a split share, all you are really doing is taking a stock and writing a deep in the money covered call, giving you some downside protection, which allows the dividend to be increased to the point where it is attractive as a preferred. It depends on the underlying security. This is fine if it is a bank. If he were doing it on an oil stock or a broad sector, he would have some concern.

Canadian Dollar? Trying to forecast where currency goes is like trying to predict Wayne Gretzky’s next move based on his past one. It is better than a blind guess, but not much. We have a weaker dollar on the back of US grandstanding regarding NAFTA. Trump’s bark is probably 100 times greater than his bite. He doesn’t want out of NAFTA. We are probably going to have some choppiness in the Cdn$ while we go through that. The dollar is going to perform based on how the US economy strengthens.

ETF for a moderate investor? He would make it simple by putting 60% into the TSX 60 iShares (XIU-T) and 40% into the Government Bond Index (XBB-T), and just rebalance it once a year.