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

How do you determine if an Option Bid/Ask is overpriced or not? If you have a very wide gap between the Bid and Ask price of the option, you may be better off avoiding the option, because you are going to have a challenge trying to exit the position later on.

Energy. From a technical analysis perspective, oil hit a bottom in June at $42. Despite that oil can be found for less than $40 in a lot of US oil sands locations, this is more of a general economic reflection. The stock indices of emerging market countries, have broken a six-year downtrend, a reflection of an improved economic activity. With that comes a rising demand for commodities, including energy, and he thinks oil has bottomed at $42. This is in a band of roughly $42-$56. Whether it goes to the top end of that band or not, it is a significant percentage change and would be very beneficial to a lot of energy companies on the TSX. If we get an increase in overall world demand, that should help with the overall tone and hopefully with the price of oil.

Markets. The US is expected to raise interest rates in September, and Canada follows in October. The banks should do better because the spread widens for them. The curious thing is that almost every stock going up in the past few days are reset rates preferreds, which are doomed. People are expecting rates to go higher and higher, but they won’t go that much higher. Mines and metals are beginning to glimmer a bit without anyone saying very much. Hard assets are going to go up a bit with inflation and interest rates.

Electric cars in cold weather? He wouldn’t worry about that. They’ve mastered the cold. He hasn’t heard that they don’t work in cold climates. Also, we could probably need so much energy to pump into the batteries that we will definitely be back to the coal mines. The difference between electric and internal combustion, is that in the latter the car itself makes the power. Whereas with the electric the energy from another source has to be created. There might be a crisis, but he doesn’t think it will be the cold weather.

Markets. He has a long short strategy to help him sleep better at night. He is agnostic to what the market is doing. Long has market risk, industry risk and industry specific risk. He isolates the company specific risk with pair trades. He pair trades within an industry space. A Mid cap is $200 Million to $2.5 Billion. There are about 450 mid-caps and 200 if you take out resources.

Economy. The Bank of Canada’s economic outlook is surprisingly rosy. He shares that outlook, and on a global basis as well. However, you are not going to see the kind of robust growth that you saw in previous cycles coming out of a growth period. Expects we are going to have a 2%-2.5% growth globally. Thinks we are going to have lower inflation for a period of time, so doesn’t think rates will be going up as aggressively as people think.

Banks. Banks make money on the spread, where they borrow money very cheaply and lend it out at a higher price. The steepness of the yield curve is very important to them. With the increase in interest rates, the banks can now increase lending rates, but not increase what they pay out on deposits. That means the spread gets better when rates go higher.

Economy. The numbers we are seeing are improving and broadening. The job numbers yesterday were very strong. Unemployment is back around 6.5%. The Canadian economy has probably seen the worst since energy prices started collapsing a couple of years ago. Thinks the economy has now adjusted to low oiler prices for longer on oil. A lot of energy companies have restructured their balance sheets and many have cut their dividends. Oil has probably a model of $45-$55 range. There is still a lot of uncertainty regarding what happens to OPEC. There have been some encouraging trade numbers in manufacturing for the last few months. The Cdn$ was quite weak, but has had a bit of a rally with a rate increase. Increases will be very slow and will be based on what the governor sees as data comes out. In her portfolios, she still has about 45% of equities outside of Canada. The US economy is recovering.

Economy. The Bank of Canada did a 180 back in June. It was a long time coming. The Canadian market is robust. GDP grew 3.7% in the 1^st quarter, which is more than double their normal pace of growth. 186,000 jobs created of the first 6 months this year. Corporate profits are up 12.5%.

Market. Believes equities have ignored interest rates going below something like 2.75%. If equities actually priced in interest rates where they are now, they’d be a lot higher than what they are today. The equity world is disconnected from the bond world. Interest rates moving up is actually a bullish thing. There are a lot of dynamic things happening in the US and that is where the opportunity is. Stocks are actually getting a lot cheaper in the US than they are in Canada, especially when you look at retail, consumer discretionary and financials.

How do interest rate increases helps resource companies? Interest rates are going up all over the world. We are seeing the US lead. This creates economic growth, and materials are part of that, and with the input of goods being produced, it is therefore positive for resource stocks.

Canadian Economy. He is constructive on the Canadian economy for about the 1^st time in 5 years. Has always been very overweight the US. Normally he is running around 35% of the whole portfolio as US equities, and the Canadian component is about 15%-20%. Feels Canada has been lagging the rest of the global market, and our performance this year has been abysmal. He can see where there is going to be room for growth in the Canadian economy and the Canadian markets. A criticism he has of the Canadian ETF industry is that they are all pretty much cut from the same loaf, they’ll have 30%-35% financials, 20% energy, 10% material and 10% telecom. What they should be doing is to come up with something that leaves the side of the banks and energy that we are all familiar with, and come up with an ETF that has some large caps, but mid-cap’s as well, that can take a look at the broader sectors of the Canadian economy.

High yield Bond funds? Normally he doesn’t recommend these because you are dealing with junk bonds, and his clients tend to be older. If interested, he would take a look at iShares US High-Yield Bond Index (XHY-T) and BMO HighYield Corp Bond US Hedge to US (ZHY-T). The performance on both is virtually identical. You could also look at First Trust Senior Loan (FSL-T), short-term commercial paper in the US. He would much rather have a Covered Call on a Canadian bank paying the same thing and get the tax advantage.

Covered Calls - Do you ever buy these back to resell them? Yes. Sometimes you get a situation, such as the financial crisis, where Canadian banks were holding up quite well until the end, and then collapsed. Royal (RY-T) went from $52 down to about $26. In that case he bought back the Calls he sold, rolling down and selling a fresh batch of Calls and trying to conservatively save 50% of the money, and then stops selling the calls and lets them rise back up. If the Calls get down to around $.25-$.50, he buys them back and Sells the next series.

Markets. With uncertain economic data and what Trump will do, there is a lot of uncertainty. He is becoming more defensive. He has reduced some long positions and increased some short positions. There are long opportunities, but you have to be a stock picker. It is not about sectors, but stocks. Canada is very cyclical. There are more opportunities in the US, but you will find a greater rate of return in Canada. He has about 20% in cash. He has a lot more put protection in the market now. It is very hard to use hard stops on core positions. 10-20% of his portfolio is normally shorts. He also does pairs trades.