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

Mining. He is pretty positive on the metal sector, gold prices, etc. Generally speaking, gold prices are inversely correlated with the US$, and the world’s confidence in America. We are seeing a slowly improving economy in the US and are probably going to see interest rates bumped up again. Those are both negative for gold. But the flip side of that is Trump and his administration. We are dealing with someone unstable, and the team behind him is certainly inexperienced. He is concerned that they are not going to be able to react and deal with a major global crisis, or black swan of some sort. Feels that is what is holding up gold prices even though other things would suggest that it goes down. On a more positive note, major mining companies are not finding enough gold to replace what they are mining, their reserves are depleting. They’ve cut exploration dramatically and are not finding new deposits. The place to be right now is in the very junior exploration sector with good people and legitimate projects, and that is going to do really well this coming year.

Mining. Most of the big companies are setting their gold reserve prices at $1250. A lot of the financings is happening for a lot of companies, but some of them have very marginal projects. Those kinds of projects don’t work in this environment, because a lot of big companies have been writing down their reserves to $1250. If gold goes up to $1500 for example, they could already add maybe 10 million ounces from their own assets, rather than go out and acquire them. They need to replace assets of quality, that work at the gold price that the reserves are set at, and generate some kind of double digit return. It’s also about the team. There are not very many teams with the relevant experience, not only in the jurisdiction, but also in the deposit type that they are looking for that can marry all that. Lately there have been a lot of private placements by majors in these kinds of companies with those kinds of assets and those kinds of management teams. That is basically what he is looking for.

Market. He is waiting for the US Congress to get moving on some of the proposals. What will impress people the most is how fast or how slow things are going to happen. That will be the main thing that markets are looking at. If Congress comes through with a broad border tax, that will be a problem. He can’t see them doing that on the commodity side. However, it is a risk on the manufacturing side.

(Feels the Federal Reserve is going to increase rates by 25 basis points.)

Gold? An area of the market that he is definitely not very active in. You have to be very fleet of foot, and operating with relatively small amounts of money. With the looming Fed rate that will probably bring the US$ up more, your gold prospects diminish. He really wants to see inflation come alive before he steps into gold.

Tonight's program is on taxes, not stocks.

Markets. In 2017 it will be a replay of 1975 and 2001 with the US dollar and gold rising over the course for the year in tandem. The US dollar strength has more to do with the weakness in other currencies and gold strength has to do with a flight to quality. In the past the dollar has eventually rolled over. Gold is closer to the beginning than to the end of a bull market. The real interest rate yield is actually negative as the purchasing power of the dollar is declining especially when you take tax into account. Interest rates have to go up. In the near term the copper price will trade lower because it is ahead of itself. Within three years it will trade higher due to supply declines. He is investing in predevelopment stage copper projects.

Gold Bullion. He buys it as a form of insurance. Traditionally gold has been a form of insurance when there is a lack of faith in social and political institutions.

Market. Everyone wants to pin market value on the recent pro-business agenda of Donald Trump, but we can’t discount the fundamental data that is actually supporting the market right now. We have seen phenomenal economic data, including a Philly Fed index, a gauge of manufacturing conditions, the highest since 1984. Jobless claims are the lowest since 1970. The Small Business Optimist Index is the highest since 2004. Consumer confidence is the highest in 15 years. All these suggest there is a lot of optimism in the market. That is going to spill over into equity markets. Donald Trump is fuelling a lot of that optimism, but he doesn’t get all the credit. The economy is recovering from the manufacturing recession we have seen over the past couple of years. Factory shipments last year, were the highest in 6 years. Even the global PMI are inching up well into expansionary territory, some of them at multiyear highs themselves. Markets are feeling a little pricey now and are overbought. The S&P 500 hit the 300-point range when it broke out above 2100. You project that range above 2100 and it gives you 2400. 2400 was hit just yesterday. All the momentum from that bullish pattern has being exhausted, so you can’t say that the market is going to go much further, because it has reached the calculated target. Right now, we are at the most overbought level in over 20 years. It is now reasonable to expect a consolidation. Seasonally, we are still in a strong period for equity markets. March and April are 2 of the better months, and tend to gain about 60%-70% of the time each of those months. We are on a trend of higher highs and higher lows, so any weakness warrants to be purchased. It is a little difficult to put new money to work, so you want to pick your points, and perhaps wait for that pullback to the 20 or 50 day moving averages, which would be ideal entry points for this market.

How do you tell if a stock is overbought or oversold? He uses 3 indicators; Stochastics, Relative Strength Indicator (RSI) and MACD (Moving Average Convergence Divergence). He is looking for divergences, for selling exhaustion or buying exhaustion. That is more interesting than if something is overbought or oversold. If something is overbought, that just suggests strength. You want to be in things that people are aggressively buying, to the extent that it pushes them to extremes that are at nosebleed levels. (StockCharts.com has an entire learning school.)

US Market. The market is at or near record highs. The Dow is breaking through 19,000 for the 1^st time. Didn’t feel there was any substance or news in Donald Trump’s speech to Congress, so it was surprising to see the market up so much. He doesn’t think interest rates are going to go up a lot. Thinks the rally in banks has a little room to go, but you have to remember that the financials are the most leveraged sector of the economy. When you buy financials, you are getting a lot of risk for that leverage. He is looking at retail, but not the brick-and-mortar retailers, with the possible exception of Wal-Mart (WMT-N) and Home Depot (HD-N) which are expanding into the online ordering of things.

Effect of the budget on the US stock market? The market has priced in that there will be at least 2 things that will be good for stocks. One is that US companies from overseas will be able to repatriate earnings allowing them to buy more shares and reinvest in themselves. The market has also priced in a cut in the US corporate tax rate to make them more competitive globally. If we don’t get those 2 things, the market is going to correct.

Market. The market is at all-time highs, which is concerning from a valuation standpoint, but he is still finding lots of opportunities. Low interest rates, low inflation and pretty darn good profits in an economy that is starting to accelerate, maybe the market deserves to be at these levels, and even deserves to be a lot higher. In the past year, he has been allocating a lot more clients money to the US, where he is finding more opportunities. Believes the Cdn$ is going to get weaker and the US is probably going to raise interest rates 2 or 3 times.

Market. The market is almost flat year to date. We had a big move at the end of the year after the US election. He has seen a lot of good earnings come through that has just reported, so there is good visibility on a lot of companies. You have to be more of a stock picker in this environment. Good correlations have broken down, but that is the type of manager he is and where he has historically been able to perform.

Stocks that will do well in US defence spending? He doesn’t follow the US market closely, but for Canada there is CAE (CAE-T) that will benefit from larger defence spending. Also, Top Picks will include a stock that has a portion of their business in US defence spending. Sometimes these stocks move ahead of the news, so sometimes it is good to sell into the news and wait for a pullback. The spending doesn’t happen for a while, so it will take a while for you to see it in earnings.

Market. Looking at market valuations, PE ratios in both the TSX and the S&P 500, the market has gotten a little overextended. As a value investor, he is looking to buy equities on the cheap. With the market as a whole being expensive, it means he needs to focus on stock picking, individual security selection to derive returns this year as opposed to just blindly buying the market and hoping it goes up. Hopefully we are entering a period of earnings recovery, but it is all relative to what price you are paying for equities. Maybe the S&P 500 is growing by 4%, but you are also paying close to 20X earnings for that growth. Part of the reason the market has been so strong is that bond yields were very low, so people didn’t have any other place to go. Now that bond yields have started to creep up, that argument is going to get weaker. Thinks there is still more upside to energy stocks. Utilities and REITs are overvalued, and in a rising interest rate environment, those are not great sectors to be in.