January 2, 2018

Legalized recreational Marijuana is coming to Canada sometime soon. July 1st 2018 or summer of 2018 whatever comes first! Today is the first day in California for legal recreational use of “pot”.

Canopy is the largest producer of Cannabis in Canada, and recently had a $200 Million plus investment from Constellation Brands, lending legitimacy to the industry and potential infusion of cannabis into drinks. There is already a company called Canntrust which is infusing single serving coffee containers with Cannabis and shipping to states in The U.S.

Valuations are extreme, and make no sense to value investors or investors seeking income. Companies are being valued on a multiple of Enterprise Value compared to sales, in the range of 20X.

The Canadian Government recently announced it would be granting more licenses for companies to produce. I have read reports that suggest demand will be so great when recreational use is legalized that demand will exceed supply for 3 to 4 years.

On a daily basis it seems to me that Cannabis companies are raising money, as they burn through their cash reserves and try to ramp up their production. As if for every dollar in sales they lose more money.

This is not an investment that meets our criteria and I am sure one day there will be a painful reckoning with reality.

If you wanted to make an investment in this space, the 2 safest ways to do so in my opinion would be to either buy Canopy as the largest player, or buy the Horizons ETF.

Another frothy investment that seems to be in the news daily is “Bitcoin” “Blockchain” and “Crypto currency”

Blockchain is a virtual ledger, which is impenetrable to being hacked. Microsoft is using their own private Blockchain ledger for all their Treasury functions globally. This speeds up transactions and reduces costs as they don’t need Banks.

Bitcoin is the leading crypto currency in the world, and I think it is currently better referred to as an alternate asset class and store of wealth. There are alternate cryptocurrencies being developed such as Eretheum, Litecoin, Zcash, Dash, Ripple and Monero.

A mystery man or group of individuals called Satoshi Nakatmoto invented Bitcoin in 2008.

Bitcoin futures are now being traded on public exchanges, and you may be following the wild gyrations in price, lately ranging from $10,000 to $20,000.

As the basic premise of Bitcoin and other crypto currencies is to circumvent Banks, it is possibly most popular with criminals. Imagine a scenario where a Corporation’s or Individual’s computer system is hacked, and the bad guys demand to be paid in Bitcoins to give you your network back. Off you go to Yorkdale to line up at a Bitcoin station to pay your ransom!

I don’t know if there is a safe way to invest in this space. I do know one sure fire way to make a client unhappy with me: Recommend buying something and it goes down in value 50% or more!

2016 saw quite a divergence in returns between the U.S and Canadian Stock Markets. The Canadian Market was up 6% in Calendar 2017, while the S&P 500 was up 19% and DJIA up 25%.

As Canadian Investors we faced another challenge because we are investing with Loonies and buying U.S. equities which are valued in U.S. dollars. From May through September we saw the Loonie go from 72 cents to 82 cents U.S. This increase in value would have translated directly into a loss on our U.S. Equities. Lately the Canadian dollar has dropped to the 79 cent range.

Yet, almost every one of our Investment Managers produced a rate of return equal to or higher than the TSX in 2017.

We are now entering a period of rising interest rates, which will make it very painful for Bond and other Fixed Income Investors. As you may remember, there is an inverse relationship between interest rates and the value of Bonds. As rates go up, Bond values go down and vice versa.

With 10 year Bond rates in the 2% range, money market at 1% or less and the imminent threat to capital as interest rates rise, I think there will be an exodus of Capital from Fixed Income Markets to Equity Markets. Quite simply, there are not a lot of alternatives.

Higher interest rates bode well for Financial Services Companies such as Banks and Life Insurance Companies. Higher rates mean they make more money on their float.

U.S. Financial Services Companies should also benefit from less onerous regulations that Trump has begun to implement.

When you add to this a decrease in the tax rate from 35% to 21%, corporate profits just got a 14% bump up. By applying the same P/E multiple today, stock prices should go higher. Also, Trump has made it attractive for U.S. companies to repatriate money that has been offshore. Companies that have left money offshore to avoid paying U.S. tax, now will pay 15% tax on this money. Goldman Sachs just took a $5 Billion charge, and there will be many more announcements like this.

This additional capital will be used to buy back stock, and/or reinvest in their businesses. These are good things for shareholders.

I am optimistic that 2018 will a good year for us as investors, and expect U.S. markets will once again outperform Canada.

It is important to remember that stock markets do not go up in a straight line, but rather a series of ups and downs. There will be another Global or Domestic crisis that will cause the markets to do down. It takes discipline and strength to stay the course.

My job is to build a plan for us to achieve our investment goals and objectives. We target an annual rate of return of 6% to 8% per year, while aspiring to over achieve which we do quite often. There will be times when we under perform, and then it important that we stick to the plan.

As our business is built on delivering consistent returns and providing a superior level of client service, you can call us at any time, and meet with us at your convenience to make sure we are addressing all of your needs and concerns.

Thank you for the privilege of working with you and helping you achieve your Financial Goals and Objectives. Please call if you need anything at all, and I wish you and your Family a Brilliant 2018!

Sincerely yours,

Fred Banwell


The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.Richardson GMP Limited, Member Canadian Investor Protection Fund.Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.