A Comment -- General Comments From an Expert (A Commentary)

Gold. It has broken out past $1300. In the last couple of days there has been the sabre rattling with North Korea. It may have made a bottom in early 2016. He is not convinced that a new secular bull market is underway. However, our gold does have a role in a diversified and well-balanced portfolio, as a sort of alternative to cash. Thinks the decisive level for gold is $1375.

Market. This has been lumbering along in the last year and has been somewhat difficult. The US has been a great place to be. Feels investors’ frame of reference is too short. We have been in a bull market, but not as long as people are thinking. There is a whole generation that is not investing because of the great financial crisis we just experienced. Feels it is an interesting time to be invested. Much of what is going on is based on economic finance reform and the new US tax code that we hope comes in.

Market. He is a little cautious. August/September are traditionally not the best times for equity markets. Valuations are relatively high. Complacently levels in investors is quite high. At some point something is going to rattle the markets and there will be a correction. Looking at the S&P 500 with multiples of 18-19 times earnings, a lot of that is being justified by low rates. Rates are going to go up over time. The political gridlock in Washington is also a potential concern. Some of the market staying where it is, really depends upon tax reform, etc. getting pushed through.

Market. It has been tough to make money the past few months. The Canadian market absolutely stinks. It touched 16,000 a year ago and has been dragging its feet at 15,000 this year. The US market is pretty good with NASDAQ up double digits, S&P 500 close to double digits, but in Cdn$, it is not so great. Those looking to diversify outside, are getting hurt by the Cdn$. The fear of rising rates has kind of clobbered bond prices recently. It is hard to find places to make money, but it is the market and these things happen, and you have to be patient. We’ve had double digit earnings growth for the 1^st and 2^nd quarter and we have seen revenue growth. He is quite bullish on the economies, but the stock market hasn’t done as well. He is bullish on stocks, and is finding lots of good value. The auto companies and airlines are very cheap. You still have to own technology because of the growth. Over the next 5 years, we are going to see some pretty good results for equity investors.

Markets. The hurricane has an impact on the gas refining industry. Gas prices are reacting today. We are 6.5% above average inventory levels. He does not think we will get a big shoot up like decades ago with Katrina. XLE-T is showing nothing today. He would have expected a premium, but today we are actually down. Supply and demand are more important from a market perspective. The seasonal pattern for the TSX over 30 years: We are going into the worst season of the year, from now until mid October or so. The challenge he has this year is that the TSX has not played out as it normally does year to date. He thinks the stocks have already reacted so the seasonal pullback should be muted this year. He sees gold as remaining in the trading range, rather than breaking out in a big way.

ETFs and a Securities Price Bubble. Before ETFs the money was in mutual funds. ETFs are not the cause or the issue. ETFs are an efficient vehicle for exposure. His only issue is that if you buy an index ETF you are also buy the bad companies that are in it. An active ETF is picking the good companies. Before ETFs, in a pull back, people redeemed mutual funds. In a selloff now selling ETFs is no different than redeeming mutual funds except that it does not all wait until the end of the day.

Canadian Dollar $. We are back up to the extremes at the beginning of the month. The next technical level is at $0.83, but what is the catalyst to make the CAD$ stronger? There is the price of oil, interest rate differential and sentiment around what the BOC is going to do. We are in a trading range. He is backing up the truck to own US$ in his portfolio. The trading range will continue for at least the next 6 months.

S&P Seasonality. In the US we have not seen the same divergence as Canada. Seasonality, if it comes into play, should have more down draft than in Canada.

Educational Segment. Where Equity Markets Returns have come from. Going back to 1970, real return has been 6.3%. Breaking that down, dividends have been 3.4% points. Margin and multiple expansion have been 0.5% and 0.1% percentage points. But in the last 7 years those last two factors have been the most significant. A 7-year forecast shows a loss of 3.9 on US large caps vs. a gain of 2.9% on emerging markets.

Markets. WTI and Brent are separating because Texas is about 15% of North American refining. Every day that they are down (could be weeks), the demand is going to be temporarily low for WTI to refine. If you have a favourite oil stock you should take a look because many stocks are getting hit today. This is artificially low for a while. Stocks are off 1 or 2 percent and that is not enough to get out unless you are a short term trader. Financial services are his favourite in Canada. Earnings growth is 4 to 5% plus 4% dividend. It is a nice place to be. Above $0.80, the CAD$ is a bit ahead of itself – it could correct. If US rates don’t go up it could hurt the US$.

Market. The earnings is what has been driving stock prices, and not what Trump has been doing. Doesn’t think the Fed is inclined to raise rates again this year. Thinks they will concentrate on restructuring the balance sheet. Yellin could be out of a job by the end of the year. That by itself won’t be a stimulus to the market. Interest rates don’t necessarily mean PE expansion, which you would need in order for the market to start surging again.

Calculating ROE when selling a Covered Call? ROE’s are calculated on a Covered Call based on the current price, because they are looking at it as a position that you would enter today, which would be your Rate of Return if it were exercised and it stayed the same, and your downside break even based on today’s prices.

An international dividend ETF? There are a couple of things to think about on international holdings. There are currency risks. He would look at a US ETF that pays a high dividend, such as Global X Super Dividend US (DIV-N). Not sure he would look at a pure preferred share kind of ETF, because you have the currency risk and the interest rate exposure. Look at one that has dividends that are going to grow.

A book on options? He would recommend the hand book called “Options as a Strategic Investment”, written by Lawrence McMillan. It gives very clear examples of every possible strategy you can imagine. You want to look at the strategies that are interesting to you, read through them, and understand them.

Markets. A lot of the activity you are seeing is with tax arbitrage out of Ireland. Where does the money come from you may ask. It would be very expensive. A 5% reduction in tax itself would be significant. World GDP growth is forecast to be 3% which is pretty good. Emerging economies are participating with a 4.4% annual increase in production. Accommodating policies around the world are continuing and he expects equity prices should do better in the coming year. US wages are going up, but that could bring inflation back. You are seeing a lift in a number of commodities.