Deregulation Under Trump: Perils and Profits

Watching the Super Bowl last Sunday made me think of “the fiduciary rule.” Let me explain.

During a third-quarter punt return, a side judge missed it when Julian Edelman of the New England Patriots stepped out of bounds. The Patriots were awarded seven bonus yards, but Atlanta Falcons coach Dan Quinn threw a challenge flag. A quick check of the monitors put the ball where it belonged and New England would punt three plays later.

The side judge’s mistake could have been a game-changer in the only overtime Super Bowl in NFL history. And as I nursed my Sam Adams (okay, I’m from Boston and my team won), it got me to thinking: what would happen to your portfolio if there were no rules and referees?

No one likes unnecessary bureaucracy and red tape, but games — financial or otherwise — need rules. That’s why this under-reported news event bears your close attention: On Friday, February 3, President Trump signed an executive order that calls for a rollback of regulations governing the financial services industry, including the Dodd-Frank law and more.

One of those regulations is the so-called fiduciary rule that compels financial advisers to work in the best interests of their clients. Set to take effect in April and promulgated by the Department of Labor under President Obama, the rule is supposed to prevent conflicts-of-interest among financial professionals who advise people enrolled in Individual Retirement Accounts (IRAs) and other qualified retirement plans.

The fiduciary rule probably wasn’t a topic of conversation in your house while you were munching on nachos and watching Lady Gaga’s half-time show, but the rule’s removal could have a huge effect on your financial future.

The rule prohibits advisors from recommending investment products that give kickbacks over others that would better serve investors’ long-term returns, as well as other shady practices that enrich investment professionals at the expense of clients.

The fiduciary rule does this by classifying any advisor who receives compensation of any sort for retirement account investment advice as a fiduciary and thus under legal and ethical obligations.

Wall Street hates the rule. These critics argue that it would curtail the variety and amount of advice advisors could give, adversely affecting investors as well as the advisory industry.

Regardless of Trump’s executive order, it must be said that many advisory and brokerage firms have already announced new compensation and sales policies. What’s more, competitive forces have pushed fees and commissions lower industry-wide.

The trend toward lower fees, fuller disclosure, greater transparency, and the removal of conflicts of interest in retail investment advice appears to be an unstoppable trend at this point — and that’s a good thing. But in the current mania toward deregulation, try to imagine a game without referees and the chaos that would ensue on the field. In today’s rule-slashing environment, buyer beware. And remember that you can always count on our investment team to put your interests first.

O, Canada!

Which brings me to Canada, a prosperous democracy that often serves as a comedic punch line. (At a Boston Bruins-Toronto Maple Leafs game, I once saw a fellow Bruins fan wearing a t-shirt that read: “Canada: America’s Hat.”)

Fact is, Canadians are famously nice people. But more to the point, the Great White North is on the cusp of exceptional growth in 2017, although this vast country doesn’t always get the investor attention that it deserves.

One bank stock that certainly deserves your attention is Bank of Nova Scotia (NYSE: BNS), known as Scotiabank.

Canada survived the 2008-2009 global financial calamity better than the U.S. and Europe, largely because its banks were less risky and more prudent than their peers in other developed countries. It’s on this solid foundation that Scotiabank is poised for multi-year gains.

Canadian banks are an under-appreciated investment overall. The nation’s banks are among the world’s strongest and safest and Canada restricts domestic competition for its banks from foreign companies, while also imposing stricter regulatory controls than does the U.S. Although this reduces Canadian banks’ room for growth, it also limits the potential consequences of financial excesses, as experienced in the U.S. leading up to the Great Recession.

It brings us back to the theme of regulation: too many rules can stifle competition. But as the global financial crisis and subprime mortgage scandal amply proved, sometimes a clear set of rules is good for everyone concerned.

In a world beset by turmoil, Canada’s political stability combined with historic strength in banking make the country a solid long-term growth investment.

Deon Vernooy, chief investment strategist of Canadian Edge, explains:

“The Canadian equity market turned in a top-notch performance in 2016, with a 25% gain in U.S. dollar terms. This was the best performance of any developed market in the world.

Stock markets are often considered leading indicators of corporate profit growth and economic activity.

Based on our analysis of the Canadian market, the Toronto Stock Exchange has been a decent predictor of future economic activity about six months out. Of course, the market often gets the minor swings wrong, but last year’s strong gains certainly bode well for economic growth in 2017.”

With a market cap of $71.37 billion, Scotiabank is a proxy for the Canadian economy. It’s one of the best-run banks in the world and is positioned to thrive this year. Based in Toronto, Scotiabank is well diversified in both operations and geography and it’s expanding through organic growth and acquisitions.

In a financial services sector that’s getting overvalued, Bank of Nova Scotia is a compelling value play.

Scotiabank is highly diversified through four operating segments: Canadian banking, international banking, global wealth management, and global banking and markets. The company also is expanding through acquisitions in Latin America and Asia.

Scotiabank is scheduled to report earnings on February 28. The average analyst expectation is that earnings per share (EPS) will come in at C$1.19, compared to EPS of C$1.10 in the same quarter a year ago. (The company reports results in Canadian dollars.) EPS this year is pegged at C$4.88, versus C$4.62 in the same year-ago quarter. Next year’s EPS is projected at C$5.25. The consensus is that earnings growth over the next five years will reach 4.87% on an annualized basis.

With a dividend yield of 3.65%, Scotiabank should also appeal to income investors. What’s more, the company sports a reasonable 12-month trailing price-to-earnings ratio (P/E) of only 14, compared to the average P/E of 15.8 for its peers.

If you’re looking for a rock-solid banking play in a developed country, you don’t have to look much farther than our northern border. As Canada’s best-of-class financial institution, Scotiabank provides a trifecta of growth, income and value. And that’s no joke.

The Investing Daily Mailbag

Two investment topics that I’ve recently written about — gold and marijuana — have stirred reader interest.

“I like and own Goldcorp and a few other gold mining stocks. However, SLV is a sleeper!”  — Hans B.

Hans, I agree. The iShares Silver Trust (NYSE: SLV) is a benchmark exchange-traded fund and as such, the safest and easiest way to profit from the rise in silver prices that’s expected in 2017. Year to date, SLV has generated a total return of 10.6%.

However, returning to our theme of Canada, investors looking for a precious metals play should also consider Silver Wheaton (NYSE: SLV).

Headquartered in Vancouver, Canada, the company is by far the largest precious metals streaming company, with a market cap of about $9.85 billion. The company holds 19 long-term purchase agreements and one early deposit long-term purchase agreement associated with silver and gold relating to various 29 mining assets.

Rather than producing silver, Silver Wheaton is a “silver streaming” company that makes an upfront payment to miners in return for the right to buy a fixed percentage of their production. The company then makes smaller, incremental delivery payments as it receives the metal. Without exposure to the actual production side of the business, Silver Wheaton is more of a pure play on silver prices.

One of the attractions of Silver Wheaton is that it isn’t shouldered with the fixed operating and capital costs of traditional miners. The company’s upfront royalty payment to a silver miner can be lost if a mine fails, but that loss is minor compared to the huge costs incurred if a miner strikes out on a mine.

A reader who goes by the name “Black Arrow” sent me this email yesterday:

“This is the time of year when if you have a profit, take the moolah off the table. By the way John, the medical marijuana stock you suggested is now rising. I read on Yahoo Finance it may be over $200 a share in a year. Thanks again for that great idea sir.”

Black Arrow is referring to GW Pharmaceuticals (NSDQ: GWPH), which now trades at about $123 per share and is up 10.9% year to date. Medical marijuana stocks are on a tear these days and as I’ve written, GWPH is the highest quality investment in a “canna-business” that’s rife with volatile and risky penny stocks.

Got any questions or feedback? Drop me a line: — John Persinos


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