The markets can be interesting with the Canadian TSX and US S&P500 both up around 3.4% in October, the US index was up 25.3% and the Canadian index was up 18.97% for the year until Nov. 30,2019 not including dividends.

It is important to look both at the short and long term performance.

In this newsletter I will get into:

  • Market commentary
  • Use of Intelligent Debt

Things are looking better with some momentum into year-end however price appreciation may already be mostly baked in. With a potential changing of guard in January we will wait to see what comes in the new year and look to add to positions in February if there is a sell-off between now and then.

Sometimes investment managers realign their portfolio for the December 31 financial statements there can be some changes in January as they realign again for the expectations. This could help the previous momentum however caution should be given to the trade rhetoric coming out of Washington and Beijing.

Given that 2019 has been a solid year of rebound from the 2018 fourth quarter sell-off and we’ve hit new highs, with an increase in trade rhetoric I could see January being a little soft and a good buying opportunity.

At the time of writing my January feeling of softness could turn into December.

Overall the markets will continue to move around as the trade news continues to develop. The morning of Dec 3. Trump told reporters:

“In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right,”

Personally, I think this could be an attempt to push back at China as there is the perception that if China delays any final deals until after the election then they may have a democrat in office who may be easier to deal with.

Trump is likely playing hard ball and is willing to forgoe the political ammunition of being able to say that he renegotiated NAFTA and trade deals with other countries including China.

China is likely the biggest political ammunition and a win there would be beneficial to his reelection campaign efforts.


Likely to have already passed the peak of building houses in this economic cycle. The knock on effects are to have slower growth as new home owners buy a lot of products for their new homes. Prices may continue to go up but this will depend on other factors such as regional markets and employment. There was a big miss in full time employment in October.

Manufacturing sales were soft but beat expectations. Inflation remains in the desired range but on the softer side. Retail sales continue to be soft and have been this way since May 2019. Q3 GDP growth was much softer than Q2 and isn’t expected to pick up much.

My expectation is that the central bank may have to decrease interest rates even though they would prefer not to and as a result the Canadian dollar will weaken which will help our exports and support the economy. Currently I don’t see an imminent threat to the Canadian market but I don’t see the upside potential either.

Valuation in the TSX index seems reasonable at this level but not a bargain with a price/earnings ratio of around 17.


Manufacturing PMI improved but is still in contraction. Even with the contraction this is a step in the right direction. Factory orders were decent and beat expectations. Construction picked up in October and is in expansion territory and getting stronger. Inflation is still muted with producer prices seen to be continually contracting. GDP appears to be stabilizing. I’m optimistic on German stocks and with my expectation of a weaker Canadian dollar this will bode well for an unhedged currency.

At a PE ratio of around 24 it definitely is more expensive however a turnaround in earning would put it more in line. It also commands a higher PE than other Euro countries given its fiscal conservatism and ability to stimulate the economy should the economics weaken.

United States

In the US, the soft spot is manufacturing and industrial production which makes sense as the uncertainty brought on by trade wars and the desire to remain mostly on the sidelines for capital investment I would expect these areas to lag. Housing has rebounded from the first half of 2018 slide and retail spending has done well. Jobs data and inflation are also in a healthy range and I don’t expect the US Fed to change much in the way of interest rates over the next year.

I believe the talk of negative interest rates in the US is overblown and interest rates are likely to remain in a range of +/- 50bps from where we are today.

Factory orders slipped. Retail sales year over year did very well. Jobless claims remain well except we did have two weeks which were on the higher end but well within a solid job number. Housing activity is picking up due to lower mortgage rates over the past year. Housing starts and building permits were up handsomely. Inflation is healthy around the desired 2% range. Industrial and manufacturing production contracted YoY.

Valuation in the S&P 500 index seems high at this level with a price/earnings ratio of around 21 but not a unreasonable given the lack of places to go. 


Vehicle sales were negative along with wholesale prices however industrial production continued to grow with retail sales being solid. The home price index continues to slow but is still growing at 7.8% year over year. China continues to have large loan growth and credit has been a concern for years. Manufacturing improved and is in expansion territory.

Overall we avoid investing directly in China and use it as a bellwether for the global economy.

At a PE ratio of around 14 it seems incredibly cheap and perhaps rightfully so with only a 15% return year to date and the weighing of trade battles.

Transparency and corporate governance are a risk in our eyes from a structural perspective.

Intelligent Debt

Intelligent debt is a concept that acknowledges that most people have debt and are comfortable using it.

The conversation then moves to how can we use debt to make more money.

The most conservative method of investing is to earn money and then invest that cash while simultaneously reducing debt.

We turn the conversation of intelligent debt to unlocking trapped capital inside your principal residence.

Note: These methods are only for people who are willing to buy and hold even in down markets and they must recognize that leverage will amplify both gains and losses. Further that if someone sells invested funds while at a loss that they are still liable for the debt that they used to fund those investments.

Having said that, the concept of buying a house is using leverage however most people accept it as a norm and is customary.

 Many people will use equity from their primary home and buy an investment property such as a rental property. This has become socially acceptable yet not popular.

Buying a rental property requires a large sum of money and can be an active investment with managing the property and tenants.

Is there another method that uses debt to create cash flows and then that can be used to pay down non tax deductible debt?

We would like to introduct the Smith Manuever aka Tax Deductible Mortgage Plan.

This is a process of using your paid down equity in your home to invest in something that provides cash flow such as stocks, mutual funds or ETF’s. 

The cash flow from those investments is withdrawn from the investment account, applied to the primary residence debt that is not tax deductible and then withdrawn from a segmented line of credit on the same property so that those funds can be reinvested.

This is a method whereby one cycles cash flow through a non tax deductible debt and drawn against a separate line of credit in order to buy more investments which should increase the cash flow.

Again this needs to be done by someone who understands the risks of leverage and is willing to stay the course on investing as the person is dollar cost averaging in and as prices for stocks go down they are buying at lower prices and usually higher yields. Further this will likely need to be done with a diversified portfolio. Check with a licensed professional prior to using this information.

For more information please go to

Until next time,

Trevor Dale, CFA