Smart Money

So far in December, investors have harnessed memories of childhood as they eagerly anticipate the Santa Claus rally that has so often come to pass over the past ten years. However, so far it seems that St. Nick may be lost in the clouds as global indices hint towards another down month and if things hold, a negative 2018. The MSCI World and TSX Total Return indices led the way to the downside, both posting 1.6% one-month decreases from 20-Nov-18, while the S&P 500 fared slightly better, down 1.4%. YTD on a total return basis, the S&P 500 is down 0.9%, while the TSX and MSCI World will have a tough time eking out a gain for the year, down 7.4% and 5.9%, respectively. To make matters worse, bonds have failed to provide the diversification benefit investors have come to rely on, with the Barclays Aggregate Bond Index registering a 0.9% drop for the year. The Canadian investor relying on a 60/40 portfolio and who failed to diversify globally has certainly taken a hit in 2018, as this portfolio would be down 4.1%. At this point cash may end up being the 2018 investment of the year which is interesting considering the pressure some of our managers were getting a year ago for holding cash. It is always interesting to see how sentiment shifts with the direction of the stock market arrow. This time is no different as the consensus has swung from global synchronized growth to an all-but-guaranteed recession early in 2019. Analyzing ETF fund flows helps put some context to the impact that these headlines have on investors. As markets took a dive in the last week, ETFs focused on industrials and energy reported large outflows while utilities and staples attracted new investors, which is to be expected. Gold and silver continue to be strong, up 1.6% and 2.0%, respectively. Support for precious metals is derived from weak equity markets and the Federal Reserve positioning shift. Despite positive headlines, Cannabis-related stocks have been weak, signaling either a tapped-out retail investor or overly ambitious hopes.

We commented in November on the turnaround that was surfacing in Emerging Market equities. Interestingly, December was another strong month, as measured by EEM, which was up 0.9%. The gains oddly came on the back of a rising USD (+0.7% for the month) and despite the trade talk impasse. The improvement could be related to Fed Chair Powell’s disclosure that the path for any further rate increases is uncertain. During the November meeting, language changed from the benchmark rate being “far from neutral” to “just below neutral”. The commentary pushed short-term rates lower; the 2-year yield slipped 20bps to 2.65%. And, it impacted longer-term rates, the 10-year yield dropped 25bps to 2.83%. Many intelligent pundits were citing 3.25% as the yield which if crossed, would trigger a long-term breakout in rates but this has not come to pass. For the time being, macro fundamentals have directed the ship as the global growth narrative has shifted to one of slowing growth.

Oil has been a consistent area of focus for both this newsletter and Canadian market participants for some time, particularly the price and discount of Canadian Western Select. During December however, Canadian oil came roaring back, up 116% as Alberta Premier Notley announced an 8.7% oil production cut, reducing oil output by 375K barrels per day beginning 01-Jan-19. These cuts will remain in force until the 35MM barrels currently sitting in storage are shipped to the market, likely until the spring. In addition, by year-end 2019, the government plans to purchase railcars capable of transporting 120K barrels per day.
Despite the development, Canadian oil companies continue to languish. The BMO Equal Weighted Oil & Gas ETF fell 8.6% during the month. The absence of a rebound in equities indicates that the bounce may be unsustainable – probably due to the lack of pipeline and export capacity. Elsewhere, WTI oil was down 3.9% during the month, despite the announcement of a 1.2MM barrel per day cut from OPEC. It seems that many are skeptical of OPEC’s ability to follow-through on the announcement or the prospect of increasing supply of US Shale.

With their visible salaries and powerful social platforms, it is not surprising to learn that professional hockey players are prime candidates for early-stage businesses that are seeking direct investments. Accordingly, as the Hockey Wealth Specialists, significant resources and time are dedicated to evaluating opportunities. Whether the opportunity is brought to the player from a family member, friend or teammate, a rigorous due diligence process is needed before any investment is made. Check out the brief summary for some fundamental considerations for those who are curious about private investment.

October weakness continued through to Thanksgiving in the United States. The S&P 500, MSCI World and TSX fell 2.4%, 2.1% and 0.9%, respectively, during the first few weeks of November. The large market cap names who piloted the rally were also the drivers on the downside; Apple (-19.2%), Netflix (-17.9%), Amazon (- 15.4%) and Facebook (-12.2%). Digging deeper into the eleven sectors of the S&P 500, only Health Care (+0.8%), Materials (+2.5%), Real Estate (2.8%) and Utilities (0.2%) were positive.

It seems that Emerging Market equities may have turned a corner despite the challenges in global developed equity markets. During November, iShares MSCI Emerging Markets Index ETF (EEM) gained 0.8% despite the heavy weighting in Technology. Elsewhere, gold and US Treasuries both exhibited strength, with bullion rising 0.6% and US 10-year yield dropping 8bps to 3.06%, marking two consecutive months of strength following the 3.20% 5-Oct 2018 peak in yield. Despite gold’s performance, most commodities were down. The slowing global growth narrative was stoked by dim hard data measures such as the Purchasing Managers’ Index and Durable Goods purchases.

Fears of slowing global growth spilled over into oil markets as WTI followed a 12% drop in October with an 18% plunge. There have been no shortages of headlines to justify the decline.

• President Trump’s support for Saudi Arabia has reduced anxiety in the Middle East.
• OPEC’s ability and/or willingness to cut production has diminished.
• Forced liquidation of long oil/short natural gas positions by large investment funds.

We remarked in past commentaries that most investors seemed to be on the bullish side of the oil trade. Certainly, timing a reversal is rarely successful, but recognizing the risk of a shift helps protect wealth over time. Sentiment was such that any of the above headlines could have caused a setback for oil, while few upside surprises remained.

Fundamentally, it is interesting to observe the chart of oil consumption vs. production from 1970 to 2017, and contrast it with global growth’s impact on overall demand for oil. Despite almost 50 years and six recessions, consumption of oil has been fairly consistent – only the 1973-75 OPEC production cut-driven recession had a material impact. We understand the potential long-term impact of alternative energy and electric vehicles, but in the near term, we still anticipate consistent demand being met by production that runs slightly below the consumption line. As the chart on the left demonstrates, there would have been an oil shortfall without the ramp in US production originating in 2008. Most of the advancement in US oil production has come from shale. Any hiccup with extraction of shale oil could become a catalyst for a sharp price move to the upside. Further, there are unappreciated cost-sensitivities in the shale industry. The highly indebted sector is beginning to experience a rising interest rate environment; and, the land in the Permian has appreciated from $2,000 per acre in the early 2000s to $95,000 per acre in November 2018.

Speaking of indebtedness, the market has finally acknowledged the massive corporate debt load that escalated thanks to easy borrowing terms and an unquenchable thirst from investors. Without an extension in the unprecedented low interest rate environment or the cash flow to pay off existing balance sheet debt, companies such as General Electric, Ford Motor Company, or Anheuser Busch have become candidates for downgrades. Current interest rate coverage ratios support stability and the economy remains strong but rising borrowing costs or a slowdown in business can quickly become problematic for over-levered organizations.

For those with the means, most parents prioritize saving for their children’s education. Many families accomplish this by opening a non-registered investment account (or bank account). These accounts have the benefit of simplicity and flexibility, but are not structured optimally for tax efficiency or asset protection. Alternative strategies include establishing formal trusts, investing in permanent life insurance policies or taking advantage of income splitting through family businesses. However, governments in Canada and the United States have established prescribed programs for promoting post-secondary education savings. The infograph below provides a cheat sheet for persons on both sides of the border.

“Markets take the stairs up and the elevator down.” While many were starting to believe that the upward sloping stairs may last forever, October brought a harsh reality to market participants, with the S&P 500, MSCI World, and TSX down 9.6%, 9.6% and 8.2%, respectively. Rising rates, trade wars, and emerging market narratives contributed to the downside momentum. But the concerns expressed by management teams in third quarter earnings calls accelerated the slide. A constant drumbeat of increased cost pressure has tempered expectations for earnings growth, despite approximately 77% of companies beating expectations thus far. Earnings have been lifted by tax cuts and cost cutting – many firms have reduced expenses to year 2008-levels. As a result, options for earnings growth come down to good, old-fashioned revenue growth. Consequently, the true strength of the economy will have to come to the forefront.

Offsetting equity weakness, traditional protection mechanisms acted as-expected during the month, as the US 10-year bonds strengthened, and gold finally caught a bid. Gold was up 3.4% during the month, while the US 10-year yield has come back from 3.25% to 3.08%. Also pressuring longer-term yields was a weaker-than-expected US GDP print. It was revealed that government spending and inventory building was responsible for growth, rather than strong consumer demand.

Oil stumbled during the month, with WTI oil prices leaking by 11.5%. We commented previously on the incredible long bias in oil markets over the past few months. Though it is impossible to time when market positioning can reverse, the sensitivity to downside moves was witnessed in October. The backdrop for bullish sentiments was the combination of US sanctions on Iranian exports (effective 04-Nov-18) and persistent turmoil in Saudi Arabia. However, worries about slowing global GDP growth and Russian comments regarding maintaining production, were the catalysts for the recent selloff. Whether its oil or any other market, this month’s move shows that while timing a reversal is often futile, reducing exposure is ever-important when a good run becomes tired.

Beyond long-term rates, Central Bank maneuvers on both sides of the North American border had large implications on the short-end of the yield curve. Following the US Federal Reserve’s 25bp increase on 26-Sep-18, Canada followed-suit in October. Governor Poloz signaled confidence in the economy with a 25bp increase in the benchmark rate, which now rests at 1.75%. The removal of uncertainty around the revised trade agreement with the US and Mexico was also declared as a reason for rates to rise towards the stated neutral rate of 2.5% to 3.5%. Even though rates remain at historically low levels, the consumers’ capacity to withstand sequential rate increases is questionable due to household debt levels in Canada. A recent Bloomberg article cited that Canadian household credit growth was 3.6% in September year-over-year, the slowest since 1983 and below the 8.1% historical average. While the data is only representative of one month, it could indicate that Canadians are unable to add incremental leverage at higher interest rates. Now more than ever, credit growth acts as a primary indicator of GDP strength so it will be interesting to observe the data point’s impact on the Canadian economy and the prospects for further rate increases.

The Bank of Canada and its Governor, Stephen Poloz, carry out monetary policy by raising and lowering the target for the overnight rate. In the US, the Federal Open Market Committee has similar responsibility. However, there is a growing impasse between President Trump, Fed Members such as Neel Kashkari of Minneapolis and the Federal Reserve. Those who oppose the Federal Reserve are lobbying for a pause in rate hikes and less monetary tightening. Low borrowing costs are needed to help prolong the growth cycle, especially since the Trump administration has already used its primary bullets (tax cuts and relaxed regulations) in the middle of midterm elections. This internal conflict will be an extra source of volatility as the world economy plateaus.

The 2018-19 NHL regular season schedule will commence on 03-Oct-18. To make certain players are fiscally prepared for the upcoming campaign, GAVIN Hockey Wealth Specialists have once again updated The Preseason Primer. The infographic below provides current and relevant financial data for the 2018-19 season; including the highest paid players after-tax, pay periods, escrow history, currency forecasts and players’ group benefits.  Feel free to share The Preseason Primer!

Interest Rates Rise Amid Geopolitical Risks – Markets had a lot to digest over the past three months as trade tensions grew, NAFTA negotiations reached a resolution and European stability was again tested in Italy. Global growth remained solid as the U.S. economy forged ahead posting 4.2% real GDP growth. As a result, the yield curve in the U.S. shifted over 20 basis points (0.2%) higher and the 2-year note touched its highest level since 2008.

New rounds of tariffs between the U.S. and China did little to impact the S&P 500 which set new highs over the third quarter, appreciating 7.7% . The Canadian stock market, measured by the S&P/TSX, under-performed its peers in the third quarter falling nearly 1.5% due to flat oil prices and a widening discount to Western Canadian Crude.

Technology Stocks Are Breaking Down – The US equity market has fallen nearly 10%, twice in 2018. While these types of pullbacks, labelled as corrections, happen on an annual basis, the market leaders are now beginning to show some weakness. Seven big technology leaders – Amazon, Nvidia, Apple, Microsoft, Facebook, Alphabet and Netflix – have contributed more than half of the 60% increase in the S&P 500 since the end of 2013. The parabolic advance that began, ironically during the taper tantrum, appears to have been broken. If this sell-off continues there is a high probability that it manifests into greater losses for the broader market.

Over the last six to eight months there has been growing backlash against data collection and privacy violations by the technology giants. Mainstream media sounded off about the violations following news that Facebook shared user data with Cambridge Analytica. This data was then allegedly used to influence voters in the US presidential election. Lawmakers summoned Facebook CEO, Mark Zuckerburg to appear before congress for questioning. However, the hearing turned into a side-show as Senator’s displayed a clear lack of understanding of Facebook’s operating model.

The Facebook business model, which centers around data collection, has allowed the company to capture nearly 20% of US digital ad spending. Meanwhile its main competitor, Alphabet, garners nearly 40%. The duopolistic nature of the digital add industry is not a one-off. Alphabet and Apple provide 99% of mobile operating systems while Apple and Microsoft supply 95% of desktop operating systems. This has formed a far different fundamental environment for technology shares than the market’s experience during the dot-com bust (2000-2003).

Historically low interest rates combined with dominant market positions have propelled technology earnings. Unlike the dot-com era, technology firms today possess strong fundamentals, revenues and earnings rather than speculation. Going forward, analysts project the five biggest US tech companies—Apple, Alphabet, Microsoft, Amazon and Facebook, which account for 44% of the Nasdaq index—will see their profits grow to $170 billion and cash holdings reach $680 billion by 2020. This implies an average forward P/E ratio of 20x, which is reasonable given their growth especially when considering that Amazon is an outlier.

However, antitrust has also become one of the major focal points. And, Europe appears to be leading the charge on the regulatory side. Alphabet was hit with a record-breaking $5 billion fine by European Union (EU) regulators for alleged anti-competitive Android bundling. The EU is also addressing data and privacy with its General Data Protection Regulation (GDPR) rules. The antitrust backlash has led to numerous calls to beak-up the likes of Facebook, Google and mostly Amazon. Amazon is the most unique case as the company has essentially disrupted every industry in which it has become involved.

Jumping into large technology names following their massive price ascent should be approached with position sizing and timeframe top of mind. The firms are currently generating strong growth and have solid earnings however the environment appears to be changing. More importantly perhaps, these market generals have become increasingly important to the broad market indexes. Therefore, it stands to reason that further weakness here could make for a more difficult equity environment in general.

The MSCI World and S&P 500 recorded solid gains in September, rising 0.8% and 0.6%, respectively, while the TSX lagged with a 0.7% drop for the month. Financials performed well in Canada following strong third quarter earnings, but weak gold (down 1.0%), NAFTA trade concerns and relative underperformance of Canadian Western Select Oil hurt the energy sector. Commodities in general were positive during the month as the Bloomberg Commodity Index rose 2.0%. Emerging Markets, reflected by iShares MSCI Emerging Markets Index (EEM) on the NYSE, caught a bid and stabilized after a 3.4% drop in August.

Oil continues to be a tale of two tapes – the main indices (Brent or WTI) versus Canadian Western Select. WTI and Brent were boosted during the month when OPEC commented that production would not increase to offset reductions from Iranian sanctions and Venezuelan turmoil. The decision came despite Trump’s Twitter plea for OPEC to expand supply. Given the military protection that the US provides to the Middle East, Trump declared that lower oil prices should be the implicit compensation. It is questionable whether civilians residing in Yemen, Iran, Iraq or Syria are enthusiastic about the US presence in their country. But politics aside, the US is expected to maintain hostile oil price rhetoric as the economic expansion enters the final innings. Western Select continues to lag as no progress is made on pipelines to move the product. Western Select registered a 14.1% drop in September as WTI prices were boosted by 3.8%. These movements brought the price differential between the two to $35.50, a 49% discount. Correspondingly, Canadian producers are being clobbered and a major factor in the TSX’s weakness during the month.

The 30-year US Treasury Bond yield matched the May 2018 highs and moved decisively above 3% to 3.25% in September. The US Federal reserve not only increased the discount rate at their scheduled meeting, but they ratcheted-up the target range of the Federal Funds Rate to 2-2.5%, signaled one more hike in December and three lifts in 2019. The 2 and 10-year yields also continue to rise, with the 2-year at 2.8% (up 89bps from Jan-19) and the 10-year at 3.1%. Yields ticked up into and on the news of the Federal Reserve decision but have since moderated. Beyond the news flow, it is interesting to monitor Treasury pricing in the context of the Federal Reserve’s initiative to shrink their balance sheet. The third quarter marked a planned increase in the amount of securities the Fed planned to roll off their balance sheet, up to $50 billion per month. The yield on the 30-year Treasury has risen considerably since this time, and a similar move can be observed in the 10-year. Uncertainty about the future is often an explanation for rising yields. The anticipation of large budget deficits, over supply of Treasuries, trade wars and tariffs promote uncertainty.

We will reference President Trump to summarize the current impasse in NAFTA negotiations. The President’s recent comments include the country’s displeasure with the Canadian negotiating style and a claim that he refused a one-on-one meeting with Prime Minister Trudeau.  As negotiations are extended, concerns linger around issues such as trade dispute mechanisms and dairy, casting doubt on the Canadian dollar and certain sectors within the country, particularly auto parts manufacturers and lumber producers. Producers have repeatedly used the World Trade Organization trade dispute process to address anti-dumping complaints from the US and if the mechanism is altered, this could impact exports into the US, especially without a new Softwood Lumber Agreement in place.

eSports are organized video game competitions where the participants are professional gamers. And, the sport is booming. Forecasts suggest that revenue will exceed US$1 billion as early as 2019. While that figure may not approach the US$14 billion that was generated by the NFL in 2017, the global eSports audience is expected to reach 380 million in 2018. The audience consists of 165 million enthusiasts and 215 million occasional viewers. To put that into perspective, Super Bowl LI broadcasted by NBC in February 2018 had a viewership of 103.4 million. The popularity of eSports has even garnered the attention of the IOC, who is openly considering adding the competition as a demonstration sport for the 2024 Olympic Games in Paris. Click the link below to view more eSports facts and figures.

Tariff talk once again helped boost the S&P 500’s relative performance versus global equity benchmarks. With a 3.1% gain in August, the S&P 500 outpaced both the MSCI World (1.0%) and TSX (0.8%). The MSCI World Index was affected by relative weakness in emerging markets and Europe; excluding the US, the index was down 1.1%. Softness in foreign markets was driven by US dollar (USD) strength to begin the month, as the DXY was up 2.2% and MSCI World down 3.7% through 15-Aug-18.

The USD has been buoyed by several factors; (1) rising interest rates in the US are diverging from the rest of the world, (2) tariff and protectionist policies, (3) shortage of USD overseas. The robust USD environment affects emerging market economies who have large US dollar debt service obligations and those that need to import USD-priced inputs and services. Europe also weakened due to Turkey’s political spat with the US that led to worries about sanctions and the impact on the country’s banking system. In addition, concerns in Italy continue to mount. Moody’s extended its review of the country’s bond rating and rumours suggested that Italy would seek additional ECB support to purchase its bonds. In Canada, a relatively benign commodity environment helped to suppress the TSX. Within commodities, oil registered positive results, rising 3.1% following a weak July, while gold and silver both were down. Gold’s woes have lingered for more than 6 months, dropping 11% from its high of $1,345 in February 2018. The US 10-year Treasury yield took a step back during the month, dropping 9bps to 2.87%, while the spread between it and the 2-year narrowed to 21bps.

NAFTA has been prominent in Canadian headlines. President Trump announced his intention to enter into a new bilateral US-Mexico trade agreement, which indirectly applies political pressure on Canada to succumb to US trade demands. Canada’s Minister of Foreign Affairs, Chrystia Freeland, has been in lengthy discussions with US representative, Robert Lighthizer, despite Trump’s posturing. Ms. Freeland’s history opposing Russian oligarchs helps provide some insight into her ability to withstand political pressure and bullying tactics.

After a slow first half in 2018 and many cutting their losses in cannabis, a mid-August announcement from Constellation Brands suddenly sparked a rally that helped lift the sector 24% for the month. Constellation Brands (NYSE:STZ), sporting such brands as Corona and Modelo, followed an earlier $200 million investment in Canopy Growth Company (TSE: CGC) with a follow-on $3.8 billion investment. As part of the transaction, STZ will nominate four directors of the seven-member board, which allows the company control over CGC. Later, news broke that global spirit powerhouse Diageo (NYSE: DEO) was evaluating a potential investment in the space, helping to add fuel to the speculative fire. Many are now identifying names such as Pepsi, to Big Tobacco as potential acquirers in the future. The potential for M&A has, for the time being, caused prices and volumes to spike across the space and BNN Bloomberg to focus much of their attention on the topic. A constantly changing regulatory environment and greater disclosure on the medical benefit will inspire Big Pharma to enter the market. A joint research project between a Washington, DC based data analytics firm and London UK biotech firm reported that 7 of Canada’s top 10 cannabis patent holders are major multi-national pharmaceutical companies. With valuations in Canada already sky-high, either fundamental performance, or additional M&A will be needed to keep things moving.

The role of family, and particularly the spouse, is often overlooked when a player achieves success. Truthfully, a strong and supportive partner is essential for an athlete to achieve their on and off-ice dreams. Similar to the player themselves, the better-half needs to be disciplined, persistent, diligent and organized … not to mention patient and selfless. GAVIN spoke with Shannon Tucker and Lauren Giordano to gather some insights on their experience as the wife of an NHL hockey player. Click below to read what they have to say!

Sustained strength in equities was offset by overall commodity weakness in July. The S&P 500 led the way, up 3.3% for the month, with Consumer Staples finally catching a bid. Technology shares were the frontrunners, as early gains compensated for company-specific weakness later in the month. The MSCI World Index only slightly trailed with a 2.9% gain, while the TSX was dragged down by weak oil to finish the month up 1.2%.

While earnings season started very strongly, some unlikely names changed the narrative in the final two weeks of trading. First, Netflix reported less than expected subscriber growth, ending the month down 16% in the final two weeks. Next, Facebook was down a cumulative 21% since it reported its lowest quarter-over-quarter user growth since 2011. Some shrugged off recent negative press related to such events as Cambridge Analytica or advertisers looking to reduce social media spending. However, with stalled user growth for four consecutive quarters, fears of a growth plateau are building. It remains questionable that the company reports that half of all Americans and Canadians, including infants and seniors, use Facebook on a daily basis. But, assuming this is correct, Facebook and its investors may need to start adjusting assumptions of continued growth in its userbase. The company’s ability to innovate is second-to-none; so, by no means is this story complete. Twitter, although less of a darling, also reported slower user growth than the market expected, losing over 25% of their market cap since 26-Jul-18. Despite these large misses, overall earnings have been positive. Nevertheless, the negative reaction to quarterly earnings misses by tech leaders causes one to reflect on the proximity of a bear market.

We would be remiss if we did not at least mention tariffs during a 2018 monthly commentary. As the US pursues the America First policy, some countries caught on the other end of President Trump’s tweets have decided to work together to try to offset some of the impact. Most important to Canadians, is the nation’s union with Mexico, Japan, South Korea and the EU to address tariffs on vehicles and vehicle parts exported to the US. The US has cited threats to National Security as reasons to justify tariffs on these goods. Warning of tariffs up to 25% will surely add a significant amount to the price of vehicles. We continue to question the impact this would have on the American consumer, but it seems like voters are supportive of an aggressive President who will continue to beat the drum to encourage the momentum.

2018 has not been good to either silver or gold, with both losing their luster through the first half of the year. It is clear that the popular US Dollar and the prospects for rate increases have produced much of the weakness. A rising Federal Funds Rate makes the relative attractiveness of yield-bearing instruments greater than that of gold. However, an absence of movement on longer-term yields reflects the bond market’s feelings towards the Fed’s ability to continue to raise rates. Further, an uneasy European political situation and the steady drumbeat of the inflation narrative all point to a potential opportunity for precious metals. While the USD, as measured by the DXY, takes a pause on its year-to-date uptrend, it seems gold and silver have both stabilized at their current levels. Certainly based on current correlations the US Dollar Index (DXY) should be the primary determinant of the next move for bullion prices, but opportunities are brewing for outside influences to start providing a tailwind.

GAVIN Hockey Wealth Specialists, a wealth management and advisory firm for NHL athletes is teaming up with CB1 Capital Management LLC. CB1 invests in the supply chain of cannabinoid-based wellness solutions, products and therapies that address a wide range of unmet medical conditions and use-cases.

“Professional athletes understand the conundrum of modern-medicine,” stated Todd Harrison, Founding Partner and Chief Investment Officer of CB1 Capital Management. “Cannabinoid wellness has shown tremendous promise in addressing indications ranging from pain relief to traumatic brain injury (TBI) without the adverse effect profile of conventional treatments.”

GAVIN’s first-hand knowledge of professional sports creates a strong alignment with the focus of CB1 Capital Management.

“As a former player, I am very familiar with the solutions that are used to address aches, pains and injuries. Accordingly, we also understand the need for novel and progressive medical treatments.” said Stew Gavin, President of GAVIN Hockey Wealth Specialists, “We believe this is an opportunity to support the research and development for these therapies and to align the best interests of our clients and investors with potentially safer and more efficacious solutions for professional hockey players.”

A seven-year study published in 2011 by the Canadian Medical Association Journal tallied a total of 559 concussions over seven NHL regular seasons; that’s 4.6 to 7.7 concussions per 100 NHL players per season. Those numbers are tame compared to American football; a 2017 study found that 99% of studied NFL brains were diagnosed with CTE.

CB1 Capital Management does not touch the cannabis plant. Investment verticals include cultivation & dispensaries, biopharmaceutical applications, GMP compliant labs, industrial hemp & farming, extraction & nutraceuticals, pet foods & supplements, and more.

About GAVIN Hockey Wealth Specialists
Based in Toronto, Gavin Management Group, Inc. (“GAVIN”) is an SEC registered investment adviser. Through its planned-approach to financial independence, GAVIN has been working to create and sustain long-term financial success for professional hockey players since 2003. Please visit www.gavingroup.ca for more information.

About CB1 Capital Management, LLC
Based in Port Washington, NY, CB1 Capital Management, LLC is an investment adviser that invests in securities of public companies in the cannabinoid-wellness space.

Important Note
This material is provided for informational purposes only and does not constitute a personal recommendation by GAVIN and/or CB1 to you. Nothing contained in this release is intended as a solicitation to invest.

Over the past year, we endeavoured to partner with two industry leading investment managers to provide a unique opportunity for our clients. The primary motivations that inspired us to undertake this mission were as follows.

1. To provide return enhancement potential when the historic equity bull market falters; and,
2. To participate in the economic benefits that will arise from the application of cannabinoid-based drugs to treat epilepsy, brain cancer, dementia and a host of other diseases.

Accordingly, in July 2018, we launched GAVIN Special Opportunities Fund and made our initial investments in Horseman Global Fund and CB1 Wellness Fund LP.

CB1 Wellness Fund is a cannabis-focused hedge fund operating from New York. Portfolio holdings are focused on cannabinoid-based solutions and biopharmaceutical applications and therapies. Prior to his work with CB1 Capital, founding partner and chief investment officer, Todd Harrison spent almost three decades on Wall Street managing risk and researching financial market strategies. He was also the founder and CEO of Minyanville Media Inc., an Emmy-winning financial media company covering global markets in real time.

Based in London, England, Russell Clark has been managing Horseman Global Fund since February 2001 with a distinct and unparalleled strategy. Uncommon investment opportunities are identified by focusing on breakdowns in correlations. Historically, this approach has delivered results that are not synchronized with broad equity markets. For example, during the financial crisis from October 2007 to March 2009, when the S&P lost more than 50%, Horseman Global returned over 35% to its unitholders. Since the fund’s inception, investors have earned an annualized return of 10.75% (as of 30-Apr-18).

For more information on this exciting investment opportunity, please click the link below to view profile page.

Important Note
This material is provided for informational purposes only and does not constitute a personal recommendation by GAVIN. Nothing contained in this release is intended as a solicitation to invest.

Markets Make Their Comeback – After a volatile 1Q18, developed markets regained their upward trajectory in the second quarter. Although, headlines related to trade wars and weakness in emerging market caused brief pullbacks, every selloff seemed to create a bid. Entering the third quarter, markets may find more momentum in corporate earnings or become vulnerable to tariffs and rising interest rates.

Following the most recent Fed interest hike in March, Fed Chair Powell indicated to Congress in July that they would continue to raise rates. In addition, the Bank of Canada raised its benchmark by 25bps to 1.5% and are expected to follow-suit with the US. Short-term yields have risen accordingly, but the 10- and 30-year yields continue to hold steady. This has the potential to invert the yield curve, often seen as a harbinger of recession. However, with the continuation of quantitative tightening and the increased issuance of longer-dated bonds in 2H18, eventually the US government will be forced to pay higher interest on its tragic debt piles. Accordingly, higher long-term yields needed to keep a positive curve are conceivable.

Cannabis Prepared to Enter the Limelight – The impending Canadian Federal recreational legalization on 17-Oct-18 represents a sea change in governmental attitudes towards cannabis. Numerous studies are broadening the momentum as the efficacy of cannabis’s abundant active ingredients are being emphasised. The plant’s benefits are being proposed as therapy for epilepsy, cancer, autism, schizophrenia, concussions, Alzheimer’s, Crohns, depression and more.

During 2Q18, GW Pharmaceuticals (NYSE: GWPH) announced FDA approval for their childhood epilepsy drug, Epidiolex, the first such approval of its kind. The next step to availability in the US will be rescheduling of Cannabidiol (CBD), the active ingredient. Currently cannabis carries Schedule I classification under the Controlled Substances Act, indicating high potential for abuse and no medical purpose.

Rescheduling carries with it many potential medical implications. First and foremost, lifting restrictions on the supply of cannabis will allow researchers to pursue medical testing. With the ability to test and discover new medical benefits, the opportunities for medical applications grows exponentially, and with it the investment thesis. Second, it should help increase public support for cannabis which continues to grow, as evidenced in the political universe. Cannabis’s popularity among groups as varied as military veterans and parents with sick children provides significant political motivation with US mid-term elections in November. Further, its prospective economic impact is difficult to ignore, as is its potential as an offset to the opioid epidemic.

Of course, it is important to evaluate both sides of an investment argument, and no doubt supply and demand will eventually rule out. Estimates for Canadian cannabis consumption seem overextended, which has helped extend the valuations for Canadian-listed equities. In addition, increased research will not exclusively focus on the benefits of cannabis. New and potential negative side effects will also become uncovered.

As always, it is critical to understand the industry and the competitive landscape of a targeted investment. Moreover, determining a valuation that provides a suitable margin of safety at which to invest requires complex financial models. Even small changes in a few variables can alter an outcome enormously. For a new sector, where regulations are evolving, and forecasts for demand are largely promoted by persons with a vested interest – the uncertainty for fundamentally predicting results is immense.

In summary, we have no doubt that opportunities in this budding sector are incredibly promising. But, we are very cognizant of the optimistic assumptions currently being used to justify some company’s valuations. The Horizons Marijuana Life Sciences ETF (TSE: HMMJ) has fallen 33% since its peak in January 2018. Investing is not for the impatient, and this story should be no different.

[1] “It’s About Getting Well”, Todd Harrison, Chief Investment Officer of CB1 Capital Management

June mirrored May as far as equity markets were concerned with the TSX again leading (+2.5%) the way on the back of oil strength. The S&P 500 and MSCI World Index registered gains of 0.1% and 0.4% as we enter Q2 reporting season.

More than 200 domestic Chinese stocks were included in the MSCI World Index beginning in June. However, it wasn’t a promising start, as both the Shanghai and Shenzen stock exchanges officially entered a bear market during the month, falling over 20% from their January highs. Trade tariffs and the slide in yuan have been popular reasons to justify the decline, but it is hard to overlook Chinese banking regulator’s clampdown on Rmb 13.8Tr (USD 2.13Tr) of entrusted lending business. These loans are often made by shadow banks and the restriction specifically prevents them from being used to buy equities, bonds, or derivatives by the borrowing company.

Oil once again experienced increased volatility. The 22-Jun-18 OPEC announcement provided a tailwind to the commodity, rising 11.2% in the final five trading days prior to 27-Jun-18, ending the period with a 6.8% gain. Energy’s weight in the TSX is almost 20%; as such, the benchmark’s outperformance is largely attributed to the sector. The main catalysts for oil were the anticipated sanctions on Iran (cut off supply) and the announcement of a lower-than-anticipated combined production increases from OPEC and Russia. Fundamentals were further confirmed when the 27-Jun-18 inventory report revealed a higher-than-expected drawdown. All this comes at a time when US oil exports reached a record 3 million barrels per days and production achieved 10.9 million barrels per day – more than any country, except Russia.

The USD continued to strengthen in June, with the US Dollar index (DXY) rising 1.3%, bringing its performance from its February low up to 7.7%. Some have cited the relative monetary policy positioning (tightening vs. loosening in EU and Japan) as the primary driver as US dollar supply shrinks. However, it may be a short-term break in a long-term downtrend. Certainly the US fiscal position should continue to weaken with Trump’s tax policy and the possibility of a massive infrastructure spend if the Republicans are successful in the November mid-term elections. Either way, Emerging Market equities have been impacted due to their reliance on USD-denominated debt. The iShares Emerging Markets ETF dropped 7.6% in June and 13.7% since the DXY hit its February low.

In Canada, a historic bill was passed on 20-Jun-18 to legalize the recreational use of cannabis as of 17-Oct-18, representing a sea-change in government attitudes toward the plant. Beyond the recreational side, another historic milestone was achieved with the FDA’s approval of Epidiolex, GW Pharmaceuticals’ (NYSE: GWPH) drug derived from cannabis which provides children with two rare and serious forms of epilepsy a new treatment for the disease. However, the major development will occur when the Drug Enforcement Administration’s reschedules Cannabidiol (CBD), which is anticipated within 90 days. CBD is the active ingredient in cannabis and it is currently a Schedule 1 drug, which indicates that it has no therapeutic value. Rescheduling will open the door for the ongoing testing and potential availability of treatments to address a variety of ailments, with indications ranging from epilepsy to cancer, autism, MS and schizophrenia, among others.

spe·cial·ist

A person who concentrates primarily on a particular subject or activity; a person highly skilled in a specific and restricted field.

When it comes to managing the financial affairs for professional hockey players, we are the Hockey Wealth Specialists. We are steadfast in our belief that financial success is achieved through a comprehensive plan. We customize these strategies for players to make certain that their cash flow is balanced, their taxes are minimized and their families are protected. We professionally manage investment accounts in Canada and the United States to make sure your savings are working for you. And, we have the expertise, the experience and integrity that you would expect from people who have been around and in the game their whole lives. Click on the links below to learn more about GAVIN Hockey Wealth Specialists.

Markets continued to grind higher in May, led by North America. The S&P 500 recorded a 1.5% gain, while the TSX advanced 2.2%, buoyed by continued strength in commodity companies despite relatively flat performance of their underlying commodities. The MSCI World Index lagged, albeit with a 0.3% gain. Political turmoil and the market’s next “Exit” story stole the headlines in Europe. Gold’s price movement was benign throughout the month, recording a 1% move on only one day, and ending the period down 0.5%.

Oil’s 0.3% price change concealed a volatile month, as the price plunged 7% over the final four trading days. Market participants who were long oil were spooked by Saudi Energy Minister Khalid Al-Falih’s speech in Russia, when he announced that supply caps could be scaled back and the possibility of supply increases. However, it will take a unilateral decision to enact any official supply increase out of OPEC and we anticipate continued volatility as news leaks. Markets will eagerly anticipate the results of the OPEC meeting on 22-Jun-18, while closely monitoring inventory numbers to determine whether the recent price above $60 has served to quell demand.

Volatility in equity and fixed income markets ramped up as political turmoil in Italy resurfaced another Euro-exit scenario. The Italian 10-year yield has been consistently below the US benchmark since crossing in early 2014. However, yields rose rapidly above 3% on 29-May-18 when populist Italian political parties failed to produce a new coalition government. At the same time, the US 10-year completed a 30bp retreat from its recent 3.1% high to 2.8%. While Italian credit is questionable at best, it is fairly easy to reconcile the yield differential given the European Central Bank (ECB) has purchased €341Bn of Italian bonds since 2012 and it continues to buy an additional €4Bn each month. One can also visualize the potential damage that an Italian exit could produce. We realize the risk is likely overblown, and there are constitutional hurdles present that make the result unlikely. However, we also understand the risk-reward tradeoff and continue to question whether the current 3% rate, or the 1.6% average rate since 2015 is anywhere close the reward required to compensate for the low likelihood event of potential default. With €2.3Tr of outstanding debt, a debt-to-GDP ratio of 132% and persistent political turmoil, investors are relying first on the ECB, and second on a political turnaround, to provide returns that still lag US government bonds.

Closer to home, the Liberal government’s decision to purchase Kinder Morgan Canada Ltd.’s Trans Mountain Pipeline expansion for $4.5Bn was a last-ditch effort to save the proposal. The pipeline will extend from the oil sands of Alberta to a port in British Columbia. It would allow Canadian crude to gain greater access to foreign markets and higher prices. The project adds a much-needed 590K barrels per day of capacity from the current 300K, which will ease some of the backlog in Canadian oil markets. Canada will retain key personnel from Kinder Morgan and begin the undertaking this summer, but will actively seek a buyer for the project.

For those competing every other night during the NHL’s second season, the total prize money for the playoff marathon has been increased by $1,000,000. The NHLPA has set aside a bonus pot of $16-million for the Stanley Cup Playoffs. Unlike other professional sports in North America, the truly unique feature is that NHL players and management decide how a club’s share is divided among the team members. Click the link below to learn more about playoff bonuses along with other interesting financial considerations surrounding the 2018 Stanley Cup Playoffs.

The market turnaround that started in March continued into April with global markets rising in tandem. The TSX led the way again in April, up 2.0% on strong commodity performance, particularly oil, with WTI recording a 4.7% gain to follow the 5.4% gain seen in March. The MSCI World (USD) gained 1.4% and the S&P 500 1.0% as earnings season kicks off. So far, the season has been a positive one, with 79.4% of companies that have reported exceeding estimates, according to FactSet. Oil’s move helped drive the 1.8% increase on the Bloomberg Commodity Index for the month, offsetting weakness from soft commodities dragged lower by an appreciated USD. As measured by DXY, the USD was up over 2% during the month, stemming some of the weakness that began in late 2016. Aluminum was locked into the centre of Russian-related sanction headlines. The US imposed sanctions on Russian billionaire Oleg Deripaska and several companies which he has influence on, including Rusal, the world’s second largest aluminum company by output. The prospect of such a large volume of US imports coming offline initially forced aluminum prices to their highest level in six years. However, Mr. Deripaska agreed in principal to relinquish control by selling his stake below 50%, allowing prices of aluminum to drop over 10% on 27-Apr on hopes of reduced sanctions.

Rates continue to make headlines, and this month’s breach of 3% on the US 10-year was the first time crossing of the 3% threshold since 2014 where it briefly hit 3.0% before dropping back below 1.5% in Jul-16. However, in 2014 the Fed was still actively pursuing QE and many are watching closely to see what direction it takes in the coming weeks. On the short-end, the 2-year yield adjusted sharply higher during the month to 2.5%, up 56 bps year-to-date as recent inflation and GDP data have increased investors expectations for Fed rate hikes in 2018 (up to 4). While the short- and intermediate-term rates continue to see large moves, the 30-year’s move has been more muted. At 3.1% to end the month, fixed income markets may not be convinced of the long-term growth thesis.

An interesting divergence continues to take place in Canadian oil names. While intuitively, and historically, moves in Canadian oil stocks have followed WTI fairly closely, oil’s rally to end 2017 and into 2018 has not been reflected in the stock prices of Canadian companies in that market. We wrote in Dec-17 about the widened spread between Canadian and US traded oil contracts. However, even after the spread stabilized, it was not until April that Canadian companies started to perform in line with oil, often seeing gains on days that oil saw weakness. Looking at recent price movement and the long-term trend, there may be an opportunity in Canadian oil and gas names that could benefit even if oil stabilizes here.

The Return of Volatility – Equities began the year by extending their 2017 gains. But, in late January, accumulating uncertainties and rapidly rising yields eventually pushed equity volatility up and drove prices down. Nearly all major stock and bond categories finished the period in negative territory. Following an unprecedented streak of 19 consecutive months without a 5% correction for the S&P 500, the US equity benchmark fell nearly 10% in just 10 trading days in February. A brief recovery in stocks in the latter part of February was interrupted again in March by concerns over a potential trade war between the US and China.

In March, the Federal Reserve raised rates for a sixth time since the end of 2005. Nevertheless, developed-market sovereign bond yields have remained stubbornly low until recently. As inflation began surfacing in US consumer reports, yields started to climb. The 10-year US Treasury Yield hit 2.95% in March, a level it hasn’t reached in almost 3-years, which followed the original “taper tantrum” sell-off.

Displacing Deflation from Investors’ Mindset – Inflation trends have been declining for the better part of three decades. However, the millennial year marked the flatlining of the core consumer price index. As a result, central bankers have become obsessed with raising the level of inflation beyond the 2% trend rate experienced since the turn of the century. The great financial crisis of 2009 served to intensify the fixation.

High inflation can be harmful to an economy when it is not accompanied by rising wages. Equally, low inflation can hamper corporate pricing power which restrains earnings. Accordingly, the Federal Reserve attempts to boost the long-run growth rate by exercising control over inflation, as it is transparent and linked to the health of the economy. The problem is that inflation cannot be measured by an increase in the price of one product or service, or even several products or services. Rising costs are not spread evenly between businesses and industries, which contributes to the absence of inflation in government data.

Since the early 1980s, inflation has slowed in developed economies for a variety of reasons including demographics, technological advances, M2 money supply declines and higher corporate concentration. Further, given the swath of retirees over the next decade as well as the likely displacement of jobs due to robotics and artificial intelligence, runaway inflation is an unlikely concern in the foreseeable future. It is no wonder inflation fears have become so subdued. As a result, relative to financial assets, hard assets and commodities have only been this cheap twice in the past 50 years – 1970-1972 and 1998- 2000.

So, why are we doubtful about the disregard for an inflation surprise?

• Over the last few quarters, corporate earnings reports have stated concerns about tight labor markets and emerging inflationary pressures. This is a decisive shift from the deflationary tones of 2015 and 2016. Management strategy discussions frequently involve methods to pass on price increases from materials and labour.
• China is contributing to global inflation due to increasing factory prices. Historically, China exported deflationary forces to the world with lower labour costs. Looking forward, the country is also set to deliver on right-sizing industrial capacity in sectors that were previously oversupplied; such as aluminum, coal and steel.
• A wide range of reflation-markets and related-indicators have been breaking from long-term patterns. After declining over 60% from peak-to-trough from 2014 to 2016, oil prices stabilized and are now up over 100% from the January 2016 low. Oil is a key input not only for transportation but also feed stock and plastics.
• On 02-Feb-18, the Bureau of Labor Statistics reported a 2.9% increase in average hourly earnings.

With government data now picking up the inflationary signals, bond yields quickly moved higher causing a bond sell-off. The impact was also felt in equity markets, given the potential shock higher costs would have on corporate profits. As such, investors should remain nimble and cognizant of inflation’s impact on both asset classes.

As April approaches, the on-ice focus of most professional hockey players remains on their upcoming playoff push. In the player advisory world, the April tax deadlines are our version of a playoff push. Many fail to consider the complexity involved in filing taxes for a professional athlete. While some complain of federal and provincial filing requirements, an NHL athlete often has a filing requirement in each jurisdiction in which they play. This means a typical NHL player can file upwards of fifteen tax returns! Check the link below to learn some quick facts about how an NHL athlete files their taxes.

Global markets had mixed returns for the month ending 22-Mar-18. The TSX lead the way with a 1.6% gain spurred by commodities.  The S&P 500 index was up 0.5% while the MSCI fared worse with a 1.4% loss as Asian markets experienced weakness.  Korean automobile manufacturers were particularly impacted on trade war worries, while Japanese equities experienced Yen strength as a headwind during the month.  On the commodity front, Oil reversed a 2.5% slide to gain 5.1% on the back of strong inventory data, while gold strengthened by 1%.  As stock market volatility increased, the price of gold climbed.  Gold is notoriously known as a safety asset.  Accordingly, it tends to rise when there is a meaningful slump in the market. Investors often take shelter in non-yield-bearing gold as a buffer against risk.  The US 10-year Treasury Yield appreciated 5bps, bouncing back over 2.90%.

Trade wars have been a constant theme weighing on markets in 2018.  On 1-Mar-18, Trump announced a 25% tariff on steel imports and a 10% tariff on aluminum to help shore-up weakening domestic  industries.  Though Trump walked-back part of these measures as they relate to Canada and Mexico, pending final NAFTA negotiations, some have hinted at the move being a direct message to China.  Chinese steel production has been curtailed dramatically for environmental reasons.  This has contributed to steel exports into the US falling from 400K metric tons/month in 2014 to 60K.  However, many are looking beyond this announcement to potential follow-on effects, including the announcement of an estimated US$50Bn in tariffs against China over intellectual property violations.  The amount was based on estimates of economic damage caused by China through the theft of US technology and intellectual property. China has not yet made any counter-announcements, but they have hinted at retaliation.  China is not the only country affected by the tariffs either, as leaders from other countries such as those in Europe have also hinted at retaliatory measures.  Inflation, which has already shown signs of strength, is a notable consequence of trade wars.

We have previously commented on increased market liquidity (QE-driven) and its positive affect on markets.  With the Fed embarking on a QE unwind and potential impacts of USD repatriation starting to take hold, signs of USD shortages are beginning to show.  This can be seen in the US LIBOR-OIS spread, or the differential between the rate banks charge to each other to lend (LIBOR) vs. the overnight risk-free rate (OIS).  With the majority of loans priced off LIBOR, a rising rate may reveal reduced USD liquidity. In turn, the willingness for banks  to lend into the market may be diminished.  The 55bps spread hit on 21-Mar-18 reflects the highest spread seen since the Global Financial Crisis in 2007, which is material, though the cause can only be approximated.  Either way, it is something to monitor as any liquidity shortage could have pronounced implications on asset prices and credit risk/borrowing capacity in general.

During this period, market participants were reminded that the stock market and the economy are not the same thing. The US Labor Department’s January jobs report showed that 200,000 new jobs were added in the first month of 2018.  Meanwhile, the historic rise in global equities came to an abrupt halt.  An unprecedented streak of 19 consecutive months without a 5% correction was finally broken.   Following the Labor Department’s report, which also showed that wage growth jumped 2.9% year-over-year, global benchmarks fell over 7% during the next six trading days. The fear that wage growth will lead to higher inflation, and higher inflation will lead to the US Federal Reserve raising rates more quickly resulted in the S&P 500 giving back all of 2018’s gains as it entered a correction. A correction, which is a 10% pullback from a market peak, occurred on 26-Jan-18.  Market corrections typically occur every other year, on average.  However, the last correction for the S&P 500 was almost two years ago. Interestingly, the correction occurred less than a week after investors poured record amounts into exchange-traded funds in January.

Despite raising rates five times since late 2015, developed-market sovereign bond yields have remained stubbornly low until recently. As inflation began showing up in US consumer reports, yields started its ascent. Adding fuel to the inflation narrative, US President Donald Trump unveiled his $1.7 trillion infrastructure spending plan that will take place over the next 10-years and the US dollar depreciated nearly 15% against a basket of its key trading partners. As a result, the 10-year US Treasury Yield hit 2.92%, a level it hasn’t reached in almost 3-years, which followed the original “taper tantrum” sell-off. More significant perhaps, the equity market correction was not accompanied by rising bond prices – bonds did not act as the “hedge” that many strategies and allocation models assume.

Over the course of the last few years, many investors have abandoned traditional hedging strategies as the cost of insurance made it difficult to outperform a constantly rising benchmark. Rather, many investors tried to exploit the rising trend by selling volatility or buying inverse volatility strategies through exchange traded funds/notes (XIV Index). As a result, participants were caught off-guard and on the opposite end of the violent unwind that ensued in February. The sell-off resulted in the largest single-day point drop (not largest percentage drop) for the Dow Jones Industrial Average and wiped out nearly six years’ worth of gains for the XIV Index. More concerning for long-term investors is the outcome for these rules-based or “smart-beta” strategies, which include styles like risk parity. These strategies incorporate volatility to define the allocation of capital to different assets and rely on liquidity.  A dangerous feedback loop may arise as the underlying securities can’t provide the liquidity promised by the exchange traded notes/funds as investors stampede out of the strategies.

The NHL trade deadline has grown to become one of the most exciting days of the NHL season. While teams in the playoff race look to bulk-up for a late season push, teams waving their white flags seek to unload salary and acquire young assets. What many on the outside fail to consider is the immediate lifestyle changes faced by the players who are traded. To assist with this change, check out our Traded Player Checklist below!

This weekend, the NHL’s best players will gather in Tampa, Florida for the 63rd NHL All-Star Game. The fan-frenzied weekend will end with the popular 3-on-3 tournament, displaying teams from each of the four divisions all competing for a $1 million prize. As the 44 selected players prepare for the exciting event, check out our infographic providing some interesting numbers surrounding the annual All-Star Game.

A Synchronized Global Recovery – Global equities experienced a near-perfect backdrop of steady global growth, low inflation and continued accommodative monetary policy in 2017, leading to strong performance. For the year, all major equity categories and sectors ended the year with double-digit gains; shaking off nuclear threats, populist uprisings and a stalled Trump Administration agenda.

Commodities closed higher on the year, led by gains in crude oil, with WTI rising 12.5%. Precious metals and copper also posted gains, while agricultural commodities were mixed. The US dollar index, which compares the greenback to a basket of global currencies, slid about 10% last year after rising for nearly three years.

Despite fears of US Federal Reserve tightening and fiscal reform leading to higher growth, most US bond indexes closed the year higher. The US yield curve, which has historically been an important indicator of recessions by inverting prior to the previous seven recessions, flattened by about 100 basis points.

Approaching Levels of Significance – The equity bull market is now deep into its ninth year, the second-longest on record. The third (and perhaps final) phase of the bull market kicked off in 2016 as global economic momentum strengthened to include more sectors and countries. The improvements were broad based as nearly every major global economy expanded in 2017. Lower corporate taxes in the US and a continuing rally in commodities bolstered the outlook for 2018.

Strategist forecast S&P 500 earnings to be between $139-$150 per share, an approximate 10.3% increase from 2017 forecasts. Similarly, the earnings multiple has increased, to nearly 18x the next four quarters’ expected earnings.  The long-term average multiple is 16.5x; moreover, the multiple was 17.1x one-year ago.  Statistically, a 10% setback is plausible if the Price-to-Earnings multiple backs up to 16.5x, even with a $150 earnings figure. However, at this point it appears that any pullback will be merely corrective as the emergence of a recession in 2018 is doubtful.

The ISM Manufacturing Index is often used as a guide for the business cycle.  In the US, the ISM is currently experiencing the third-longest expansion in history and its reading is at the second-most elevated level in the last thirty years. Meanwhile, the Conference Board Leading Economic Indicator Index continues to increase while the US Treasury curve remains upward sloping – despite recent flattening. Given the strong economic backdrop and the need for governments to “inflate-away” their debt, we believe commodity-linked equities, including precious metals and agriculture, will outperform.  Additionally, this sector is exhibiting favourable valuations.

Volatility may be resurrected in 2018. Possible triggers for spontaneous instability include;

• Failure for capital expenditures and hiring/wage increases to underpin growth.
• Excessive debt levels.
• Accelerated interest rate increases.
• Defiance to the “America First” rhetoric.

The first signs of erraticism may surface in the currency markets. A surge in the US Dollar index is likely in the near-term as tax repatriation increases demand. However, net-investment positions may trigger a USD sell-off while many countries are already seeking alternatives to the dollar system. China and Russia continue to stockpile physical gold while hinting at problems with the Eurodollar system. Meanwhile, the two countries are negotiating with Saudi Arabia for a Yuan-backed oil contract.

In the near-term, bonds are somewhat attractively priced. Originally, economic growth forecasts caused prices to slide and yields to rise. More recently, yields rose when the U.S. Senate reached a short-term compromise to end the government shutdown. The 10-year bond now sports its highest rate in over one year. Longer term, we do not anticipate traditional fixed income to benefit the portfolio from a total return perspective. Yields remain near historic lows and an increase in supply will pressure prices. Deflationary pressures have been prominent recently, as millions of baby boomers leave the workforce; but, a recent IMF research report anticipates that population aging will become very inflationary due higher health care costs. Nevertheless, bonds provide a reliable stream of income, uncorrelated performance and low-cost portfolio insurance.