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

In an RSP, rotate 2 or 3 high beta when the market turns. Good philosophy? This is called market timing, by going to a lower risk model when the market is turning, and to a higher risk model when the market is rising. You can’t tell when the market is going to turn. A combination of high beta and low beta would probably put you in the position you would be if you just had a well-balanced ETF.

Market. He is invested and has 5% cash and 5% gold, so about 10% of his portfolio is hedged, or could go into equities if there was a sharp pullback. If there was a real meaningful pullback, he would underweight his bond allocation by around 10%, and go into equities for the short term.

Breakdown of a portfolio in terms of Canada, USA, Europe, Asia and emerging markets? He is 2/3 US and 1/3 Canada since January 2012. Doesn’t like to invest outside of developed markets. Although there is lots of opportunity he feels they lack regulation, and also many of them use different accounting standards making it difficult to analyse financial statements. Prefers to capture the upside in international markets through multinationals that trade in the US.

Market. One concern is the shift out of sectors that traditionally led the market up after an election. One of those is US banks. On a larger scale, you want market leaders to continue being leaders. If they start rounding over, it can be a sign of sector rotation, but if they are not performing at the time of the year they typically do perform, that could be a sign that the markets are running out of gas. Also, energy is a prime sector that tends to almost work like clockwork and typically gets a little bit of a bump into the spring. It didn’t do that this year, in fact fell back from about $54-$55 to $48-$49. He is building up cash and is at about 25%-26% as he feels the market is a little more bearish than normal. Expects to be 30% cash within the next month.

US banks. He just took profits today. The sector has been underperforming for the past quarter or so, which is unusual for this time of the year. Seasonally, they should be on fire.

Energy. This tends to almost work like clockwork and peak out around the end of April/early May. This year it didn’t at all. It should be having a last-minute bump, but instead it has fallen back to $48-$49.

Sell in May and go away? Although he is a base technical person, he always takes this into account. He is pulling out a little at a time, not bailing out. He has a cardinal rule that his portfolio must have at least 15% cash by May 5. This is because 72% of the time the markets tend to underperform between May and November. He starts to focus on lower beta stuff.

Market. The long-awaited recovery from 2008 started to take place some months before the election results were in, but the Trump victory, and more importantly the double win by the Republicans in the Congress and Senate, were the catalysts to accelerate the market’s confidence that things would change and that we would get more of a pro-growth, pro-cyclical type of market. The S&P 500 has been flirting with the record high of $2400, and wouldn’t be surprised to see a break out above that by year-end. We went 5 quarters in a row from middle to late 2015 to 2016, with falling earnings year-over-year. That has changed with this quarter looking at 12.5% growth in earnings in the US, probably 10% for the full year, and there is still that confidence that the regulation and the long-awaited tax reform will be a boost for earnings. He sees a pretty good economic outlook for the US.

Market. He is seeing a divergence between hard and soft data. Soft data often reflects sentiment or intentions, rather than action. For example, people are interested in purchasing things, but they are not purchasing things. Just because earnings are coming in line or potentially beating expectations, that doesn’t necessarily mean that stocks are cheap, it just means companies are setting analysts up properly to beat their earnings. Oil is an area where the hard data suggests that the market is tightening much more than some industrialists are suggesting. If interest rates were to continue much higher, that will put the brakes on equities, specifically overnight rates in the US. The greatest opportunities lie in companies that are free cash flow focused. Free cash is what can sustain a company over business cycles.

The difference between dividend stocks and growth stocks? There is a very big difference, and usually a very big difference in the type of investor. Dividend stocks are often favoured by retirees or tax-sheltered accounts. Implicit in growth stocks would be higher risks, so you are looking for higher reward/higher risk situations. Dividend names are usually larger blue-chip stocks.

Markets. There is not a lot of money in the US budget for a wall – it is a dumb idea. It is a metaphoric example. Congress is not willing to work with Trump on a bipartisan basis on anything he wants to do. When he wants to launch his budget it will be either the fourth quarter this year or Q1 next year, but the market is excited about it. Going into the summer months there is high risks in the markets as it is priced for perfection. We are basically at full employment in the US. He is fully hedged all his portfolios. 73 cents is the low end of the range for him and we hit that last week, although that is not to say it could not go down a little further.

Some of the most effective charts are the double tops. In the S&P 500 we have not had the confirmation when it takes out the low of the middle of the pattern. We will know sometime this summer. He is about a quarter short in his long/short strategy.

Structured Notes. Through options they can structure a product that preserves capital and gives you some upside. The cost of these products is huge. There is no free lunch. If it makes sense to you then go for it. You have to know what you are paying. It could be 5% a year.

ETF with Monthly Income. There are suites of them. He likes XTR-T and FIE-T because they give you diversification. FIE-T pays out a fixed kind of return, but there is nothing in there that pay outs that much so you are getting some of your capital back. Both products are fine. FIE-T has a big concentration in Canadian financials, so there is some concentration risk. There is no international exposure. He uses ZWE-T and ZWH-T and ZPW-T to compliment Canadian holdings in registered accounts.

Educational Segment. The Fed in their meeting will debate this week how to reduce the debt. He thinks we are in a liquidity trap. He does not think we can get back to 3% growth and they can’t raise interest rates much. Looking at quarterly GDP going back 20 years, the chart has been falling constantly for decades. The 34 quarters since the Lehman moment have seen us running at 1.5%. Interest rates first fell dramatically in 2000. The fed is thinking 3% is what we can get back to. He does not think so. The US yield curve 10 years compared to 2 years. The curve is not saying there will be a recession. Since they started raising rates the curve has been flattening, so the economy is not handling it. Look at the fed balance sheet. It has been flat since QE3 ended in 2014. The annual GDP was last growing without deficits in 2000. So the economy is very, very weak.