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

Oil. There has been a big shift to the downside in crude on the supply side, and there was confirmation that OPEC was pumping more oil than expected. He was stepping in on oil because today’s headlines read a lot worse than it really is. Saudi Arabia is still producing below where they need to be. The OPEC agreement is to be respected, and is very difficult to Short into it. It is the demand side of the equation that is really going to save this market. Demand numbers have been extraordinarily strong.

Banks or Lifecos? These have done incredibly well, particularly since the election and the whole reflation trade that rates are going to be moving higher. If he were forced to commit capital to one or the other, it would be banks. Lifecos are a little too sensitive to the yield curve, and the result could be that at some point we would get an inversion of the yield curve if the Fed continues to raise rates while long rates don’t necessarily go up. US banks are also quite a bit cheaper. He personally would not commit new capital to either at this time.

Interest rates. The Fed will raise interest rates this week. Friday’s payroll was pretty decent, so there is no room for them not to go. Three rate hikes are pretty much priced in to the Fed Fund’s curve out to the end of the year. If we go into Europe and European elections, Netherlands actually starts this week, but we are really looking at the French election as the key one, April 23-May 7. If Marie Le Pen wins the election, that is going to be very destabilizing globally, far more than BREXIT, far more than the US election, and far more than the Italian election. We haven’t seen any impact from British breaking trade agreements with the EU, other than the weakening of the British pound. If France decides to leave the EU, and it goes back to the French franc, the whole European project begins to come apart. BREXIT was a warning shot across the bow, and this would be breaking it apart. If it is not this one, maybe it is the Italian election, sometime within the next year. If one of these goes extreme right wing it is going to start falling apart. That is what he is really worried about. The US economy, for all its ills, is still the strongest economy in the world. The restructuring that Trump is trying to put into place should be very, very good in the long run. There is lots of execution risk. We are now hearing Congress may not go for these trade deals, it has to be revenue neutral for tax cuts, etc., thus execution risk for the next couple of quarters We just have to be cautious on the markets.

Oil. Hedge funds may be a bit too long on oil. Tom McClellan points out that the “net short” position of the commercials, the opposite side of the speculators, are very net short; in fact, the most “net short” since oil was over $100, and they are the smart money. The speculators are on the other side of this trade. There is probably some more downside to go here. It could push oil down to the low $40s, as those positions unwind. $40-$60 is probably the range for the next couple of years.

Why would bank stocks lose value when interest rates are increased? This isn’t necessarily so. The general perception is that if interest rates go up, their revenues are going to rise which would make them more profitable. It really has to do with interest rate differentials. Banks tend to borrow Short and lend Long. It’s the shape of the yield curve that matters. Typically, the bulk of the lending is going to be in the 5-year range, the home equity lines of credit, the corporate mortgages, commercial mortgages. So it’s Short term rates versus Long-term rates, and if that curve is actually flattening, that means margins get compressed by the Banks. It depends on why interest rates are rising. Are they rising because the economy is taking off and inflation expectations are growing, in which case your yield curve steepening; or is it rising because the Fed is tightening and maybe too much, causing a perception that the economy is going to slow down, and therefore your yield curve is flattening, which would affect bank profits negatively.

Gold? He was buying gold mid December, and sold out at the beginning of January and February. Last week, for the 1^st time, he started nibbling again. He’s been buying pullbacks as a general rule. Doesn’t think gold stocks are going to see the major resistance of last summer of $1350-$1400 any more, so he is inclined to range trade it. What is going to force gold up are bits and pieces of inflation, flight to safety, supply and demand. When it dips below $1200 you Buy, and up above $1300-$1350, you Sell.

Canadian dollar in 3-6 months? A big factor is what oil prices are going to do. What is the spread between interest rates between Canada and the US going to do? Those of the 2 biggest factors. If you look at positioning right now, it is very similar to the oil story. Speculators and the futures market, are long the Cdn$ because they believe oil is going to do well, so there is room here for the Cdn$ to sell off.

Educational Segment: Market Drawdowns. What he calls “market noise” is a 5% correction or less. He looked at the peaks and the lowest lows in a 4-year business cycle since 1920. Looking at the drawdowns over the years, you can see the great depression, where 86% was the drawdown in US large caps. We’ve had several in the 50% range. However, the average surprisingly was 13.4%, and the average was only 10 months long. You tend to get a 5%-13% correction at least once a year, so it is pretty normal to get volatility in the markets. Drawing down a little further, he has a one-year version, which shows that we get more frequent declines. The interesting thing is, if we are down 13.4% from the previous peak, and we look out one year knowing that the bear decline is about 10 months, this is the time to start investing, to get aggressive once the markets are down. Your forward returns go up exponentially from a low point, compared to putting money to work at a high point. We are probably due for a downturn that is going to be about 24% at some point in the next year or 2, so he is playing defence because of that. Once we are down 13.4%, he’ll be thinking about buying.

Market. He is not too concerned about higher rates right now. Everybody is well aware it is coming and it is all priced in. We don’t know if any of Trump’s proposals are going to happen. It’s speculation which makes him nervous. He is not sure Trump’s policies are going to help in the long run. Protectionism and border tax scares him. A lower corporate tax is good. However, he is still fully invested. He is in the fortunate position of doing recommendations and doesn’t manage portfolios. Managing a portfolio would be harder because it would be difficult to unwind a big position. If you have to unwind bigger positions, he would recommend lightening up and going to more conservative, less cyclical type names.

Market. The elections are going on right now in Europe. We have Trump, and we don’t know what kind of legislation is going to go through. We have the debt ceiling coming up at the end of April, so Trump is going to try to push through a $1 trillion budget. Earnings are starting to grow nicely for many companies, and they are generating free cash flow, but overall the market is still looking pretty rich. There has been a lot of money moving from bond ETF’s back into the market and that is usually not a good indication.

Defence stocks? Defence stocks have had a big run since the election. You really have to drill down through each individual company, because each of them provides a different type of defence. A couple of companies he owns do have defence in their businesses. The biggest one would be Heico (HEI-N) which does aerospace parts as well as electronic equipment. In this environment, his recommendation would be, if a 1^st time purchase, to buy half a position in the event that there is a market correction and you can step in at a better price.

Market. From an economic standpoint everything is looking quite strong. He looks at a number of different indicators, such as short, intermediate and long-term. The intermediate and long-term look fantastic. Short term looks like it could be a little extended. Sentiment is seen as pushed to an extreme, certainly on the retail side and on the fund manager side. As well, valuation is up there, so he wouldn’t be surprised if we saw a little bit of chop and volatility. That would represent a pretty good opportunity to get into the market or add to your favourite positions of the selloff.

Cannabis. There was a big shut down yesterday of some of the cannabis culture shops across the country. This may be laying the groundwork for legislation, which most people are anticipating will be proposed and tabled around April. He has always felt legislation would be tabled in 2017, and probably early on, and will probably take the better part of a year to get approved, and will take about a year after approval before being implemented.

Tonight's program is on taxes, not stocks.

Market. The Investors Intelligence Survey is at the highest it has been in terms of bullishness in 30 years. The policies of the Trump administration including tax reform, regulatory reform and infrastructure, are all bullish for the market, but the tax and infrastructure ideas are probably going to take longer to play out than most people think. Also, since 1951, whenever January and February were up for the 1^st 2 months of the year, 23 out of 25 times, the market was up for the balance of the year by an average of 11.75%.