Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

A SHINDER-TREMBLAY NEWSLETTERA Wealthy Insight

Volume 5

October 2019

Hello friends, “A Wealthy Insight” is a newsletter produced quarterly by the Shinder-Tremblay group to help investors understand investment, theory and strategies, markets movements, leading economic indicators and macroeconomic topics that can affect your investments. We also produce a blog, case studies, white papers and videos to help enrich your investment experience with us.

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

CONTENTS:

The Macro ViewMonetary Policies

Summary

Financial PlanningSR&ED Tax Credits

Social CornerSpinning our wheels for a good cause

Entertainment CornerInteresting Reading

2

13

14

16

17

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

The Macro View

ShinderTremblay.caVolume 5 | October, 2019

Monetary Policies

2 of 18

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

Powell mentioned that there are factors outside the Fed's power that are putting pressure on the economy for example, higher geopolitical risks and the trade war. The market is pricing-in another rate cut this year. What's dangerous here is the Fed becoming a prisoner of market expectations just like the European Central Bank (ECB). Of course, the market wants lower rates, and it is bullying central banks to meet this demand.

But what if the Fed doesn't abide? Will we experience another sell-off of risk assets like the one we saw in the fall of 2018? On the graph below, from Bianco Research, shows two interesting pieces of information. The first, on the lower panel, is that no other country has a tighter monetary policy than the US, and the second, on the top panel, which is actually more important, is that, when the world's largest economy is among those with the tightest monetary policy, something painful is usually bound to occur.

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

The Fed is stuck between a rock and a hard place. On one hand, they are trying to adjust monetary policy to help cushion a global slowdown by lowering rates. On July 31, the FOMC lowered the Fed Funds Rate for the first time since the end of the financial crisis of 2008 and lowered it again on September 18, bringing it to 2%.On the other hand, they could be forced to reverse course due to the recent upward trend in inflation.

The recent rise in the CPI is mostly due to higher medical care costs. During the latest FOMC meeting, Chairman Powell mentioned that this easing was merely a mid-cycle adjustment, and that this was not the beginning of a new cutting cycle. Come on. Mid-cycle. Really? As if this cycle could last another 10 years.

The dynamics in the market certainly do not feel like mid-cycle but late-cycle dynamics.

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

ShinderTremblay.ca

3 of 18

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

Graph 1: Thigh rates

Source: Organization for Economic Cooperation and Development

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 5 | October 2019

HELP FROM THE FISCAL SIDEDuring his latest post-rate announcement, ECB President Mario Draghi hinted that there is so much that monetary policies can do and that more than ever governments will need to step up to the plate with fiscal help. On September 12, the ECB reduced its deposit rate from negative 0.40 basis points to negative 0.50 and announced that the bank will restart its Quantitative Easing (QE) program by buying €20 billion a month basically forever.

The market is speculating that Germany has the room needed for a €50 billion fiscal plan, but its finance minister said that conditions are not dire enough for the German government to consider such support. In the US, there are also talks being held on a plan which could alter the way capital gains are taxed by adjusting those gains for inflation. We are not sure how Congress will react to such a plan, however, since it is now in the hands of the Democrats.

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

ShinderTremblay.ca

4 of 18

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

Graph 2: CEO confidence index

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 5 | October 2019

We tend to get a lot of pushback on the importance of the manufacturing PMI numbers because the US economy is more service-oriented than manufacturing-oriented. Although it's true that the US is more service-centric, the manufacturing sector is more correlated to GDP growth and also has what we call a multiplier effect. A manufacturer will need goods from multiple sources, some local, which produces jobs locally; those employees transport those goods to clients and those same employees could stop at a diner for a meal or a coffee along the way.

A manufacturing slowdown is affecting the service PMI directly because, in our example above, the transportation business and the restaurant business are both part of the service PMI. Addendum: On October 1, the ISM manufacturing gauge came out at a shocking 10-year low of 47.8 and the service sector dropped more than expected.

TRADEThere seems to be somewhat of thawing of relations between the US and China. First, President Trump delayed extra tariffs on specific goods to avert a disastrous Christmas shopping season.Then, China announced that it would be buying more agricultural products from the US. As for us, we will believe in a trade deal once we see one. There was a lot of fits and starts over the past year only to have talks end up in the same place. Trump is starting to feel the impact of his hardline stance on China. The latest CEO confidence survey (graph 2) is down from 7.62 to 6.18, and the same holds true for the PMI data (see graph 3).As you can see, not only is the manufacturing US PMI down to 51.0, from the beginning of the year until now, but the service sector is also falling.

Source: Bloomberg

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

ShinderTremblay.ca

5 of 18

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

Graph 3: PMIs survey

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 5 | October, 2019

Source: Bloomberg

In other trade news, the World Trade Organization (WTO) announced that Airbus benefited from illegal subsidies from the European Union (EU). Trump will most likely hit Euroland with retaliatory tariffs that range anywhere from €5 billion to north of €10 billion. This news will certainly put more pressure on the negotiations between the US and the EU that are set to start later this year.

Addendum: On September 3 the US announced a range of duties on $7.5 billion of European goods, with tariffs ranging from 10 to 25%.

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

ShinderTremblay.ca

6 of 18

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

Graph 4: Non-farm jobs growth

Are we about to see a long-term trend reversing? Graph 5 shows the trend of unemployment 30 months after the Fed started raising rates. It could take longer, but since the Fed started raising rates in this cycle in December 2015, it’s already been 44 months and counting.

Volume 5| October, 2019

Source: Bloomberg

EMPLOYMENT

While the unemployment rate remains at 3.7%, we are seeing some signs of a cooling job market. The US added 130,000 jobs during the month of August down from an average of 143,000 this year, which itself is down from an average of 192,000 in 2018. It always amazes us to read or hear the financial media and, more worryingly, the Fed stating that the economy is strong by stating the current unemployment rate. Every economist should know that this data is a lagging indicator and should not be used to predict the future. If you look under the hood, you will find two important issues. First, this figure includes some important part-time employees related to the 2020 census. Second, jobs related to trade such as transportation and mining jobs are down over 10,000 in the last report. As at the beginning of September, the year-over-year job growth rate is at 1.4% (graph 4), the lowest in the last 8 years. What's more worrisome is that these figures all tend to be revised downward later.

Graph 5: Are unemployment claims about to rise?

Source: Bloomberg

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

ShinderTremblay.ca

7 of 18

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

One datum which we are paying attention to comes from the Bureau of Labor Statistics, which tracks the average weekly hours worked in the manufacturing sector (graph 6).

As you can see, this figure has been decreasing since late 2017. This data is very important for two reasons. First, it is an essential part of the GDP calculation; second, it tends to drop prior to a recession. Currently, it is marginally higher. July's reading was the lowest of the cycle.

Source: Bureau of labor statistics

Volume 5 | October, 2019

Graph 6: Average Hours Worked

Another positive and interesting datum is the recent quits rate, which tracks workers moving from one job to another: it has only been higher on two other occasions.

This shows us that workers are confident that they can find higher-paying jobs somewhere else if they are unhappy with their current employment situation.

Graph 7: Quits Rate

Not to rain on anybody’s parade, but if you look at the National Federation of Independent Business (NFIB) compensation plan below, which leads average hourly earnings, it is pointing lower.

We could see that points are lower when compared to those from the quits rate graph on the left.

Source: Haver Analytics

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

CONSUMER AND BUSINESS CONFIDENCEThere are a few indicators that seem to show weak business confidence. First, the latest NFIB current conditions seem good, but sentiment and expectations are softening. Yet credit conditions remain loose as per the latest Senior Loan Officer Survey, but demand for loans remains weak (graph 9).

One question asked during the latest survey was whether a 100 basis-point reduction in borrowing costs would change their CAPEX plans in the foreseeable future. Only 12% of executives said “yes,” while the rest were split between “no” and “not planning to borrow.”

Volume 5 | October, 2019

Graph 8: NFIB Compensation & Average Hourly Earnings

Graph 9: US Senior Loan Officer survey: % of banks reporting stronger demand to borrow and % of banks tightening borrowing standards (inverted)

Sources: Refinitiv, Capital Economics

Source: St-Louis FRED

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

The Conference Board Measure of CEO confidence remains moderately pessimistic. The mood is largely driven by the impact of protectionism and tariffs, which is leading to uncertainty regarding global economic outlook. In addition to these issues, the strength of the US dollar is putting a lot of pressure on emerging markets making US goods/services more expensive.The relative weakness stemming from corporations is trickling down to consumers. This is not good news. Every media outlet and every major bank is somewhat positive on the US economy because the basis of their analysis relies on the healthy consumer supporting the economy. We are not so sure about this premise. If you look at the most recent University of Michigan survey (graph 10), consumer sentiment took a nosedive from July to August. The Index of Consumer Sentiment is down from a high of 98.4 in July to 89.8 in August.

Source: University of Michigan

Volume 5| October 2019

Graph 10: U of M Consumer Confidence Survey

RECESSION SIGNALS?Without going again into the debate on the yield curve and whether its slope is distorted or not, one probability model used by the Fed (graph 11) to predict the next recession just broke 30%.

Its track record has been pretty accurate. Since 1960, every time it has broken the 30% line it has predicted every recession.

Graph 11: NY Federal Reserve Recession Model

Source: New York Federal Reserve

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line). Source: Real Investment advice

Volume 5| October 2019

ISM SURVEY AND EARNINGS REVISIONS One of our favorite leading indicators is the Institute of Supply Management (ISM) PMI Survey. It tends to lead and correlate well with corporate earnings. On the graph below, the red line (PMI) is still falling and the earnings-per-share (EPS) line is likely to continue its slide.

Graph 12: PMI & EPS

Sources: Hexavest, Datastream, August 31, 2019

AN EVER-GROWING PILE OF DEBTWith the market and Trump bullying the Fed to lower rates and start QE again, one can look at the graph 13 and easily answer the following question: will more debt result in higher economic growth? From the first quarter of 2009 until now, total US federal debt rose to 105% of total GDP (light bars) while total GDP grew by approximately $3.75 trillion.

In a nutshell, the US needs three dollars of debt to generate one dollar of growth (dark bars). Watch out for an even higher debt-to-GDP ratio in the future, and God only knows where that ratio will actually be in the next recession.

Graph 13: More debt anyone?

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INSIDER SELLING AND SHARE BUYBACKSThere are some signs that insiders are feeling nervous by looking at the latest data of their transactions. August is the fifth month this year where total insider selling topped $10 billion. The last time this happened was in 2006 and 2007. When insiders are selling, it means one of two things or sometimes both. Either they are selling because valuations are sky-high or because they are not optimistic about the future.

Our hunch is that it's probably both now. Insiders are benefiting from a rise in corporate buybacks (graph 15), which is providing liquidity for them to sell.

Addendum: As at September 26 an estimate from Trim Tabs puts insider selling at $14.2 billion for the month of September alone, the highest in ten years!!

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

Volume 5 | October, 2019

intervention known as quantitative easing or QE. The term premium (the extra yield demanded by investors for holding a longermaturity than rolling over one year paper over the same time frame) has beensubdued, and hence yield curve has loweredwith regard to longer-term maturities. Well,my view is that we ought to look back at history and see just how unique a situation we are in. In 2007, the distorted message was due to foreign buyers of treasuries, in 2000 it was due to a government savings glut, and in the late 1980s it was due to low inflation. Well, during these three periods the yield curve was an accurate predictor of a recession. So let’s be careful before calling the current period “different.”

PMIS The latest PMI (Purchasing Managers’ Index) prints are somewhat disappointing. We are tracking those closely, especially the new orders and price paid components. Recently, Europe dropped below 50, which is where Japan and China are, while the US is hanging by a thread at a touch over 50. On graph 15 below, the green line shows the current level of global manufacturing, which is a touch over the expandatory 50 line, and the yellow line shows the percentage of the country where the indicator is not contracting. This number is falling quickly.

Graph 14 :Insiders are cashing in

Source: CBC News

Graph 15: Corporate buybacks peaking?

Source: Standard & Poor's

BONDS VERSUS EQUITIES The old saying on Wall Street is that the “bondmoney is the smart money and the equity money is the dumb money.” While bondyields have been going down (and prices going up), especially in the US treasury market, mostly due to fears of an impendingslowdown, the equity markets have been going up. So, what are we to make of all this?Who’s right? Well, there is a possibility that both indicators are right. Let me give you my hot take: the bond market could be rightbecause of its fear that another policy mistake will accelerate an impendingeconomic slowdown and that rate cuts that are made too late could prove them right. Onthe other hand, the equity markets could beright (I’m talking about the US here). They could be experiencing large monetary flows because the growth in the US, even while slowing, is actually better than it is abroad, and because US indices are made up of more growth-based companies that tend to do well at the end of the business cycle relative to other markets.

YIELD CURVE There is a lot of talk about an imminent recession because of the inversion of US ten-year versus US three-month treasuries (Graph 14) combined with the fact that the yield on the ten-year T-bill is lower than the current FFR. And these two factors are in turn combined with the recent breakdown in trade talks with China. All these factors could push the Fed to turn dovish. The time between inversion and recession isapproximately 15 months (see our previousnewsletter for more on the topic). But so faronly 10-year treasuries and the 3-month is inverted and not the 10s/2s, and thisinversion is very small.

THIS TIME IS DIFFERENTWe tend to look at different parts of thecurve in order to make an informed decision.There is a lot of debate on the efficacy of this predictor today. The biggest factor underlying the curve is the Fed’s monetary

ShinderTremblay.ca

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

Have you visited our website lately?

Did you know we produce almost weekly content discussing the current market, investment trends, investor education in short articles, videos, white papers and case studies! Make better investment decisions.

12 of 18

Volume 5 | October, 2019

GEOPOLITICAL RISKSIn a period where geopolitical risks are elevated, on September 15 there was a drone attack on Saudi Arabia’s oil complex (the culprit is suspected to be Iran, though it has not been proven). As you can see on graph 16, the disruption to oil production is the highest it's ever been. The total disruption in terms of output is a reduction of 5.7 million barrels a day of oil from the supply side. This strike will no doubt escalate tensions in the region. While the likelihood of military intervention is rising, the market is not pricing it in for now.

Graph 16: Big Impact on Oil production

Source: Blomberg

GOLD

Gold prices and gold stocks have had a wonderful run year to date. Reasons for the yellow metal's rise are plentiful. To start, the strong US dollar is creating disruption in global trade, there is fear that central banks will run out of ammunition to support their economies, there is the protectionism between major allies that will impede cooperation between them in the next downturn, and deficits and government debt are ballooning: these are the most likely culprits. Given this scenario, the opportunity cost of owning gold is dropping like a rock. What we mean by this is that the cost of owning gold right now, which does not pay either interest or a dividend, is shrinking relative to bond yield. With global yields in free fall, this opportunity cost is dwindling. Moreover, portfolios are underweight with regard to the yellow metal, and central banks are stepping up their gold reserves. This set-up is creating a great opportunity for gold for the next few years.

ShinderTremblay.ca

GROWTH VERSUS VALUE

Late August until mid-September growth/momentum/defensive stocks (white line on graph 17) got hammered in favor of value/cyclical stocks. We agree that the valuation differential can’t remain this high forever, but we just don’t see the case, short-term trading notwithstanding, to move away from late-cycle positioning.

Cyclicals, or “risk-on stocks” in our parlance, tend to do quite well if growth is back on, which is not the case, or if risks are abating, which is also not the case, and inflation is moving up, which may or may not be the case. The jury is still out on this one. Also, there is an important shift in business models with companies being created that are asset-light and a global economy that is more tilted towards services driven mostly by demographics and technology. Moreover, as yields on bonds fall, bond proxies such as dividend-paying and defensive equities should continue to attract capital. All these attributes favor growth/defensive equities. Being invested in the market, you will experience moments of underperformance and sometimes, as Trump would say, HUUUGE underperformance, but using top-down late-cycle portfolio construction factors, we believe, will provide less volatility and better outcomes. Our view is that investors should focus on the defensive part of their game instead of the offensive part of their game in the current slowdown.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

Volume 5 | October, 2019

Graph 17: White: Growth Index; Green: Value Index

Source: Blomberg

SUMMARY

Central banks will save the world. Huh? We don't think so. While central banks are doing what they can to try to kick start the economic machine, they are advocating for a reduction in trade tensions and help from fiscal authorities. The recent Fed Senior Loan Officer Survey (discussed above) shows that credit is available and conditions loose, but corporations are not borrowing more. Economies are slowing and corporations’ earnings are decelerating, leaving optimism in the hands of consumers. Global negative mood is reducing CEO confidence, which trickles down to lower CAPEX plans, slower hiring, and no real gains in hours worked, which in turn could lead to higher unemployment. Consumers, as the last hope, could curtail their appetite to spend. Finally, on average, approximately 30 months after the Fed’s first hike, unemployment ticks higher.

13 of 18

ShinderTremblay.ca

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We would love for you to visit, share, like and comment at:

shindertremblay.ca

/NickShinder

/ThierryTremblay

/Shindertremblaygroup

@Shindertremblay

Have you signed up for our Wealthy Insights Newsletter and other content by email?

Do not be left out when our newest insights are posted on the website. Simply go to ShinderTremblay.ca and sign up for the our newsletter on our 'Wealthy Insights' page to start receiving periodic updates on our latest content.

14 of 18

Volume 5 | October, 2019

FINANCIAL PLANNING - SR&ED Tax Credits

The federal government encourages health professionals to conduct research through clinical trials or the development of new medical devices and tools. This encouragement comes in the form of an income tax deduction, an investment tax credit (ITC) and, in some cases, a tax credit refund. If you are a doctor or dentist, you may be eligible for a federal and provincial tax credit of up to 64.3% of your income.

Scientific research and experimental development (SR&ED) is defined for tax purposes as follows: “Scientific research and experimental development activities” refers to systematic investigation or research of a scientific or technological nature, carried out by means of experimentation or analysis, that is:(a) Pure research, i.e. for the advancement of scientific knowledge without a specific practicalapplication in view. Usually conducted in the laboratory and published in scientific journals;(b) Applied research, for the advancement of scientific knowledge but with a practical application inmind;(c) Experimental development, which represents work undertaken in the interest of technologicalprogress for the creation of new materials, devices, products or processes or the improvement,even minor, of existing ones.To benefit from SR&ED tax incentives, a company must be able to demonstrate that it has invested in any of the following research activities:• Conducting clinical trials• Engaging in biomedical research• Applying research to Canadian Institutes of Health Research, Alberta Innovate Health Solutions orother agencies• Publishing research articles in peer-reviewed scientific journals• Supervising technicians, graduate students, or postdoctoral fellows• Developing or improving medical devices or surgical tools• Developing and verifying a diagnostic procedure• Any other research activity approved by the Canada Revenue Agency

This tax strategy is highly specialized and must meet both scientific and accounting requirements. If you believe that you may be eligible for a tax credit or deduction under Canada Revenue Agency rules, we invite you to contact us. We would be pleased to discuss this with you.

Volume 5 | October, 2019 ShinderTremblay.ca

FINANCIAL PLANNING - SR&ED Tax Credits

You may be able to deduct the following expenses from your income:• The cost of materials consumed or transformed• Equipment• Salaries• Cost of maintaining the premises, installation, or equipment• Contract with a third party to carry out the work (80% deductible)

Work relating to the following activities does not constitute scientific research and experimental development activities:• Market research and sales promotion• Quality control or normal testing of materials, devices, products, or processes• Research in the social sciences or humanities• Exploration, exploration, and drilling for and production of minerals, oil, or natural gas• The commercial production of a new or improved material, device, or product, and thecommercial use of a new or improved process• Stylistic changes• Normal data collection

This tax strategy is highly specialized and must meet both scientific and accounting requirements. If you believe that you may be eligible for a tax credit or deduction under Canada Revenue Agency rules, we invite you to contact us. We would be pleased to discuss this with you.

15 of 18

ShinderTremblay.ca

SOCIAL CORNER

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

Volume 5 | October, 2019

SPINNING OUR WHEELS FOR A GOOD CAUSE The Shinder-Tremblay Group has “put their ride where

their mouth is”!

They decided to join a team of cyclists and pedalled for a cure to help raise money towards the advancement of T1D (type 1 diabetes). Their dedication and leadership are allowing this momentum to continue with the goal to find a cure and give freedom to people affected by this disease. Nice work team!– Nina Chatelain

We are pleased to see that our commitment does not go unnoticed. Our team understands the importance of giving back, and we strive to unite for causes that affect our community, the younger generation, and the world.– Caroline Paquier

SPINNING OUR WHEELS FOR A GOOD CAUSE

Next month, members of our team will Walk 4 Friendship. Stay tuned for more details!

Feel free to visit our page and donate along with us: https://www.walk4friendship.ca/

16 of 18

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.This newsletter is solely the work of Nick Shinder and Thierry Tremblay for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an o�icial publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone and are not necessarily those of, Echelon. Every e�ort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may di�er materially from what is expressed, implied or projected in such forward-looking statements.The opinions expressed in this report are the opinions of the authors and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its a�iliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

17 of 18

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

ShinderTremblay.ca

ENTERTAINMENT CORNER

A great read for entrepreneurs and investors. Are there common traits and behaviors among successful business managers? Yes, there are!

Thierry just finished reading a great book highlighting certain similarities among outstanding CEOs. Capital allocation, fearless divesting of underperforming assets/divisions, and a laser focus on shareholder value creation are just some of those similarities.

You may not know all their names, but you will recognize their companies: General Cinema, Ralston Purina, The Washington Post Company, Berkshire Hathaway, General Dynamics, Capital Cities Broadcasting, TCI, and Teledyne. Let's learn from some of those outstanding leaders.

We hope you will enjoy this book as much as Thierry did!

Volume 5| October 2019

Nick ShinderVice President,

Portfolio Manager(514) 905 3619

nshinder@echelonpartners.com

Thierry TremblayVice President,

Portfolio Manager(514) 905 3620

ttremblay@echelonpartners.com

Caroline PaquierAdministrative Assistant

(514) 905 3617cpaquier@echelonpartners.com

Louis GazailleJunior Data Analyst

(514) 395 0290lgazaille@echelonpartners.com

Julie QuennevilleFinancial Planner

(514) 396 0379jquenneville@echelonpartners.com

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

Thierry Tremblayshindertremblay.ca shindertremblaygroup

@shindertremblay

Nick Shinder