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

Markets. Slowing global growth is an opportunity for Canadians. We are famous for resources, but it is not a good time to be in many of those sectors. The good news is that if you are in industrials or technologies you can do well in this market and in this economy. Food will be under constant demand. If you are just going to buy the index, you are better in the US. The CAD$ has been under huge pressure rallying just below $0.69 and has probably bottomed here. Canada is probably the only tradable petro-currency in the world.

Gold. In the US, Gold is no better than a hold. In Canada, gold has held its value well compared to the currency. Our dollar will be under pressure for a long time.

Bonds. A lot of things are going on in the bond space considering the action and inaction we have seen from Central Banks globally. The Fed looks like they are out on a limb all by themselves at the moment, and thinks they are done for the moment now, especially with the Bank of Japan’s last manoeuvre. He is in the camp where he feels the US economy is fine and bubbling along at about 3%. The consumer is in great shape, housing market is good and auto sales are good. The manufacturing side is suffering from the strong dollar, but the economy itself is in very good shape. This is a market of lows; low inflation, low commodity prices, low interest rates, and it is going to stay that way for a while. Thinks there is a real opportunity in the high yield market right now. The Cdn$ is undervalued by a good 10%-15%, so the US$ coming off the boil will help alleviate the downward pressure that we have seen. There is a lot of attractive risk/reward possibilities in the high-yield bond market. There are equity type returns available, in a market where the volatility is less than the stock market, and that deserves close scrutiny.

Reset preferreds? Better off holding an old preferred reset for 4 or 5 years, ignoring its market price until interest rates rise, or Sell and take the loss and buy into one of the new preferred resets, with the minimum guarantee? What conditions would be required for the old resets to get back anywhere near their par value? There would have to be a substantial increase in 5 year Canada bond yields for that to happen, or a substantial increase in treasury bill yields. That is not going to happen this year. Anyone owning a preferred resets this year is going to be out of luck. Just hold on to these.

Have investment-grade corporate bond yields increased? Yes. There has been a lot of dislocation for credit markets, particularly in the 2^nd half of the year when the Government bonds outperformed corporate bonds substantially. With government yields rallying, it is natural for corporate spreads to widen, as the corporate bond market is not as liquid. There is also not as many market makers.

Bank perpetual shares? These are like long-term bonds, very long duration with fixed dividend rates. If interest rates don’t go anywhere over time, then these shouldn’t go anywhere either. However, if a bear market in bonds develops, perpetual preferreds will hit the floor pretty fast. If interest rates in the next year go from 2% to 3%, that will put a big dent in the perpetual preferred market.

Regular GICs versus Market-linked GICs? Doesn’t think anybody should buy Market-linked GICs. The selling feature of a GIC is that you get your money back, and the negative return on the equity component. That is not necessarily the case. You don’t get the full return of the index that it is linked to, you don’t get the dividend income from it because they took it away to just buy futures with the money. You can do better yourself by buying a GIC and an ETF.

A good investment vehicle for an 89-year-old other than GICs? The only thing he would recommend would be Government of Canada treasury bills. They are the safest investment in Canada. Yield almost nothing, but you get your money back every 30 days if you buy a 30-day treasury bill. This is the ultimate in safety, liquidity and safety of principal.

Money Market Funds? Like all mutual funds, these never mature. They are typically invested in commercial paper, not entirely risk free. He would rather see individuals buy treasury bills, GICs and bonds. You never get your money back.

Bank Rate Reset Preferreds resetting in 3 to 5 years? He has bad news for anybody having only preferreds with the reset happening this year. Already they had resent spreads that were narrower than ones that were issued later on. Was the last drop in 5-year bond yields, that pretty well sells the fate for any of the 2016 resets. It changes in 2017, 2018 and 2019. The resets start to get wider. Hopes that interest rates will be higher a couple years from now, but there is no guarantee they will. Buying the new ones that have come out with a 5.5% annual dividend plus the massive reset spread, pretty well guarantees that you get a chance to have your money back in 5 years.

Markets. History has shown that if there is one thing the market doesn’t like it is uncertainty. Volatility has been mostly attributed to how wacky oil prices have been. There are a lot of rumours and a lot of chat, but until we see production cut, everything else is just noise. Saudi’s have come this far, and he doesn’t see them changing their tune at this point. It is not just an oil issue, it is a geopolitical issue, so you are taking a matter that is already complicated and adding a few layers to it, just to add more volatility to the market. He has been underweight energy because he had thought it was overvalued by $15-$20 a barrel when it was $80-$90. There was a lot of geopolitical uncertainty and a risk of supply disruption, but had no idea $30 oil was in the cards. Thinks this is year when there are going to be fewer players remaining online, because it just doesn’t make sense anymore. This is what OPEC and Saudi Arabia are waiting for, and until we get that, oil prices are going to remain volatile.

Oil Sands. Alberta just announced they are going to leave the oil sands royalties unchanged, but are going to implement a 5% flat rate for non-oil sands output, until their costs reach payout status. Then it will become a sliding scale. They are also going to simplify the payments and incentives. New drilling completion costs will be based in Cdn$ rather than volume or time, which will recognize the cost of producing crude and natural gas, and make it consistent across the board, so that it is easier for everyone to understand. If and when the oil price does go up, then the effect of the increased drilling programs will start to benefit all of Alberta. They are set to increase royalties in Alberta by 50% by 2023, which is when they will start to really reap the reward.

Oil Sands. Very pleased about the decision on royalties. There were all sorts of rumours that they were going to stick it to the guys. His only complaint was that they took a long time to do nothing. Considering Alberta has been in the royalty business for a long time, he can’t imagine that it would be too much out of line with most other countries. It’s going to get tougher before it gets better. We are going to lose some smaller companies. It should have been obvious to the Saudis that their strategy was wrong months ago. They haven’t accomplished anything. The moment the price does go back up, and it is going to have to go back up as some point, those producers in Texas will be right back in there producing.

Markets. Commodities have been in a relentless decline. A small number of stable companies are leading the way and everything else is under a lot of pressure. We are down over 35% from a year and a half ago. He goes for the liquid names. They need very stable underlying business characteristic. He is not interested in volatile, speculative companies. The FANG stocks have been leading the US market. Breadth has been declining. A lot of bad news and volatility is baked into the prices of stocks. He thinks it will be very volatile for the next 6 to 12 months. He does not think the Fed will raise rates again soon, just one or two small hikes over the next 12 months.

Markets. This is a silly market. In the last 4 days we have been up 200 and down 200. Hasn’t seen this type of volatility since 2011 when we were nervous about every single European country going bankrupt. Volatility makes you lose sight of what investing is all about. He is a long-term investor and he plans, when buying companies, to hold them for several years. Remember to keep your focus on the long-term. Sees a lot of opportunities with this volatility. To make sense of the market and to rationalize it on a day-to-day basis, is a complete waste of time. He is not doing a lot of trading. For the most part, there is no reason to make any dramatic moves. Fully invested and does not believe in sitting on cash.