Where to Invest During a Bull Market


The markets in North America were strong in the last quarter – this was enough to lift the indices up 2 percent for the year, and the economy ended the first half of the year on a high note.

The unemployment rate is the lowest it has been in years. The US trade deficit declined sharply in March and April, retail sales are coming in well above forecasts for May, and business investment and inventory building are strong. Add in generally tame consumer inflation, and you have a very favourable economic environment. The US economy is currently growing at a robust 3.8 percent rate.

The trend in Canada is similar. Our economy shrugged off the effects of bad weather to post unexpected growth in April, pushing up the dollar. GDP rose by 0.1 percent from March and has expanded in 7 of the last 8 months. The strength led to an interest rate hike on July 11. The Bank of Canada has now raised interest rates 4 times in the past 12 months. Stephen Poloz, the Governor of the Bank of Canada, said the economic “big picture” supports a withdrawal of stimulus given interest rates remain at historically low levels.

After years of near stagnation, the Euro zone was the surprise economic success story of 2017. While growth slowed in the opening half of this year, the aggressive actions of the European Central Bank are playing a decisive role in bringing inflation back on track to reach a level close to 2 percent and economic growth looks like it too will approach 2 percent. This is very good news for the global economy as well.

There are reasons to be cautious, however. First, the US president. His capricious nature could create a problem, without any warning signs. The trade situation that he has created is increasingly worrisome, US tariffs on $34 billion worth of Chinese imports went into effect on July 6th and threats of automotive tariffs have Canada, Mexico, and the EU responding with threats of counter duties. We would be surprised if Trump will allow the trade situation to get too negative as the November elections approach, but we will just have to wait and see.

Second, the Federal Reserve has stated that it expects to raise interest rates at least twice more in 2018, with 3 hikes to follow next year. That will take short term interest rates over 3 percent sometime next year. Unimaginable only a short while ago! It is not clear whether these increases will dampen the economic situation. Were that to happen, it could lead to a deceleration of economic growth in 2020.

Third, while tame now, there may be some inflation in front of us. Oil prices look like they can continue to move higher. Higher prices may result from the Trump instigated trade dispute with Mexico, Canada, Europe, and China. If higher inflation does come about, it may weigh on economic growth.

Considering all this, the consensus is still for growth of close to 3 percent for the balance of 2018. High levels of business and consumer confidence should persist into next year with growth expected to continue throughout 2019 at a 3 percent rate.

In this environment, the stock market should do pretty well. Stock prices are not expensive now. The median price-earnings ratio is well below the level of 6 months ago, at a reasonable 16.6 times earnings, due to strong earnings growth over the period and the US corporate tax cut.

There is one caveat. We are nearing the longest market expansion on record. It is aging, but still a bull market. How long it can continue? It may be a delicate balancing act going forward suggesting we err on the side of caution.


As of July 1, Bombardier is only a minority owner of the C series (now renamed A220), the development of which has cost the company so much. Airbus, the new majority partner, has taken no time to make its presence felt. On July 8th, Airbus announced a massive order from JetBlue Airways for 60 new planes with an option on an additional 60. JetBlue will replace its current fleet of Embraer A190 regional jets with the A220. As we have maintained, this is an exciting new plane with substantial cost advantages.

Atmosphere Research Group fleet analyst Henry Harteveldt said that this is a “completely new airplane” with a fuel efficiency that would allow JetBlue to carry “20 to 30 more passengers for free.” The airplane is a big leap forward and we expect more major orders to follow.

Bombardier stock, which we have suffered with for a few years, has been one of the best performers in the portfolio this year and we are confident that the outlook is still rosy.

NorthWest Healthcare Properties REIT

NorthWest (NWH) owns a high quality portfolio of 149 medical office and hospital properties comprising 10.1 million square feet of gross leasable area located throughout major markets in Canada, Brazil, Germany, Australia and New Zealand. The portfolio is characterized by particularly long leases (average expiry 12.7 years) making income highly predictable and high occupancy (96.3 percent overall, 99 percent in international operations). In international operations, rent increases are annual and based on inflation, and contractual in Canada.

Our economy is characterized by both an aging population and rapidly rising expenditures on healthcare. NorthWest is well suited to take advantage of both of these trends by participating in the highly predictable real estate segment of the market. The company is expanding its portfolio in Australia both by adding to existing properties or building new facilities already leased at very favourable terms, and in Germany and Brazil by acquiring new properties with favourable, long term leases to credit worthy tenants.

Furthermore, NorthWest is redeploying its capital by selling mature assets at very favourable prices and redeploying that capital in higher yielding newer properties. NorthWest has developed a very experienced organization led by Paul Dalla Lana who started the business. The shares offer a dividend yield of 7 percent and a growing stream of dividends.

NorthWest is up quite a bit since we first bought it and the outlook continues to be very bright.

Newell Brands

Newell Brands is new to the portfolio. Newell Brands is a US based manufacturer of a large portfolio of over 200 well known consumer brands, like Sharpie, Elmer’s Glue, Graco, Papermate, Sunbeam, and Oster with $15 billion in annual sales. On its own, Newell could practically stock an entire Canadian Tire store. Newell operates in over 200 countries.

Newell Brands is reshaping its portfolio and improving operations by slashing employment and streamlining manufacturing and distribution centres in order to cut costs and widen margins. They expect to realize $10 billion after tax from divestitures. In May, Newell announced the initial two divestitures at prices above what were initially expected. The company agreed to sell the Waddington Group for $2.3 billion. A few weeks later, they announced the sale of Rawlings Sporting Goods for $395 million. Management plans to use the proceeds to boost investments in innovation and technology, reduce debt, and buy back shares.

This investment is the work of our newest portfolio manager, Douglas Schein. Douglas is already making important contributions to both our firm and to the portfolio.

KKR & Co

KKR is a leading global investment firm that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit and hedge funds.

On July 1, KKR converted from a partnership to a corporation with a fixed $0.50 per share dividend. By converting, KKR has removed a significant obstacle to its stock price. Few institutions can buy partnership units and partnerships are not included in the Indices. These factors have hampered the stock price performance of all of the alternative investment firms (we own KKR and Blackstone Group).

Both of these companies sell at valuations that are 30 percent cheaper than comparable mutual fund companies even though they are growing their assets rapidly while the mutual fund company assets are standing still or shrinking. Furthermore, their assets are sticky, as they are committed for 10 years or more in most cases, whereas mutual fund assets can be liquidated at any time.

In the last few weeks, the shares of both KKR and Blackstone have moved up much more rapidly than the market. While KKR is up over 30 percent from our initial purchase, we think that this is the beginning of the correcting of these share price valuations. We will wait and see.

To summarize, the economic and market cycles are getting long in the tooth, and we are tightening our investment criteria even more. Nevertheless, we are still finding interesting opportunities. The economy looks like it will stay strong through next year. Therefore, we are optimistic but proceeding with caution.

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