2018 3rd Quarter IN THIS ISSUE. Sentiment Crisis or Financial Crisis? Oct 10th, Sentiment Crisis?

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1 2018 3rd Quarter Oct 10th, 2018 Sentiment Crisis or Financial Crisis? It appears that we are going through a regular correction in a bull market but time will tell. IN THIS ISSUE Sentiment Crisis? Year End Checklist Page 2-5 Page 6 YTD Index Performance TSX -3.75% YTD S&P % YTD in US Dollars S&P % YTD in Canadian Dollars Index quotes live as of 11:45 a.m. 10/10/2018, source: Thomson One Terminal. Nick Steele, CFP, CIM Portfolio Manager 1

2 Sentiment Crisis or Financial Crisis? I want to try and add some clarity or rationality to some of the fears in the market right now. I hear a lot of headlines around slowing housing market in the U.S. Seeing as how this is one of the largest contributors to GDP, I am going to spend a considerable amount of time on this issue. The other worries are the increase in interest rates and of course, the tariffs. I spent some time this month listening to earnings calls and reading the quarterly reports from two of the largest homebuilders in the U.S., KB Homes and Toll Brothers. This is because housing makes up almost 15% of GDP in the U.S. So it pays to watch this part of the market. It is funny when you hear the media, they report how there is such a slowdown in the home sales in the U.S. The mention that prices are coming down and that the pace of sales growth are slowing. While this is true, this is normal because we were coming off such a low base due to the record low home sales since the credit crisis that started in If you look closely at the chart below you will see that we are currently just above the low end of previous recessionary housing starts. You will also notice many little dips in the chart while in an uptrend. It is not unusual to have periodic month over month or quarter over quarter declines in a expanding economic cycle. US Export of goods in billions of Dollars 2

3 Sentiment Crisis or Financial Crisis? Continued We are approaching record unemployment in the U.S. of 3.5%. Wages are starting to go up and household financial strength is improving in the U.S. When people are in a better financial position they can afford to go buy a house or get a new car. After listening to both KB Home and Toll Brothers conference calls they both echoed strong demand for new houses. The one area that is soft is in the higher priced homes, because prices have gotten a little expensive. If you want you can check out KB Home Investor presentation at: In the presentation they cited a shortage of houses due to supply remaining at near record low levels. Apparently there has been an issue in getting new building permits released fast enough to meet the demand. KB homes is expecting to make more money this year than last. If you just listened to the media and looked at the sell-off in the U.S. homebuilders stocks on the stock market, you would think we were heading into a 2008 scenario. Have a look at Toll Brother s stock chart below from Thomson One. The stock is down from a high of $52 now trading at $33 range. This is a 33% drop in the stock price, yet the earnings are at an all time high. The numbers on the left side of the chart are for the stock and the numbers on the right side are the earnings per share. 3

4 Sentiment Crisis or Financial Crisis? Continued You might be asking why is the Toll Brother s stock down so much if the earnings are at record highs? One reason could be that the stock market is forward looking. This means that a stock will sell-off far in advance of the earnings actually turning lower. I could be wrong, but I do not think this is what is happening when you look at the strength of the U.S. right now. I think that what is happening more and more in the markets has to do with computer trading and an overuse of technical analysis. Quants is what this type of trading is called. It is a very large and growing way to invest which is called quantitative trading. These are algorithms that are programmed to sell interest rate sensitive stocks if interest rates are rising as an example. So this includes, REITS, Telecom and Utilities to name a few. Or if charts are negative they will not buy until the charts stop going down and then move above certain moving averages. So with the Fed projected to raise rates these computers just sell the stocks no matter what the fundamentals are. For me as a fundamental investor, which means I like to look at what the actual earnings are, this is very frustrating to hear that people are trading in this way. As an active investor which means you are picking individual stocks versus just buying and index blindly, this creates great opportunities. Toll Brothers is trading at 6.76 times next years earnings, while the S&P 500 is trading at an average of 16 times earnings. I could talk about American Airlines trading at 6.99 times next years earnings or Micron trading at 3.99 times next years earnings. To me, if these estimates prove to be even 80% accurate, these companies are way too cheap. I think this has to do with what I was saying earlier. Many people just trade based on the charts now. So if the stock is going down they just keep on selling until the charts start going up without any weight being given to the fundamentals. This is called herd mentality. For the patient investor the earnings will eventual outweigh any technical analysis and the ultimate value will be recognized, over time as the coming quarters are reported and people realize that these companies are still making lots of money. 4

5 Sentiment Crisis or Financial Crisis? Continued You might be wondering why I am mentioning individual stocks when we predominantly use money managers to buy and sell for us. The reason is, I want to try and show you what types of opportunities are out there in the markets if you are willing to get in to the weeds and do the research which is exactly what our managers do. I also want to show that good investments can go down for now good reasons sometimes, so it pays to be patient and let the fundamentals play out. 5

6 Year End Checklist Debbie and I will be going through accounts to look for the following items before year end: Tax loss selling opportunities. We will also be checking RRIF accounts to make sure that any year end payments are set to go out. TFSA top ups. For anyone who has still not contributed this year. 6

7 As always, I am here to discuss your accounts and any questions you may have regarding financial or estate planning. If any changes take place in your life that might affect your finances, please don t hesitate to give us a call to discuss. Sincerely, Nick Steele, CFP, CIM Portfolio Manager CIBC Wood Gundy CWM INVESTMENT GROUP 123 COMMERCE VALLEY DRIVE EAST, SUITE 100 THORNHILL, ONTARIO L3T 7W Nick Steele is a Portfolio Manager with CIBC Wood Gundy. Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor. Portfolio Partner is a registered trademark of CIBC World Markets Inc. There are a maximum number of commission-free trades allowed each year, based on the value of your account. Trades and annual fees are pro rated on an annualized basis. A standard trade fee applies to excess trades. A minimum household account balance of $100,000 is required. There are ongoing fees and expenses associated with owning an Exchange-Traded Fund (ETF). An ETF must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed. Their values change frequently, and past performance may not be repeated Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy Client, please contact your Investment Advisor. CIBC Wood Gundy Investment Consulting Service is a trademark of CIBC World Markets Inc. CIBC Wood Gundy will be responsible to CIBC Wood Gundy Investment Consulting Service clients for the advice provided by any Investment Manager. The ICS Program Manager, CIBC Asset Management Inc., is a subsidiary of CIBC. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a 78