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

Market. Expects continued directionless activity until the US election. The markets have put in a nice rally post the BREXIT vote, but since then it has just piddled sideways. Thinks the market is waiting for the eventuality and finality of the vote in the US on Nov 8. A Trump victory would be a negative shock to the market, simply because that is not discounted at this point. A Clinton win would have that uncertainty behind it and move forward, but there will be some sectors, such as pharmaceuticals, that probably won’t respond very well. On central banks, he equates it with musical chairs, just waiting for the music to stop. You don’t want to be the person without a chair. We are in an environment where one central bank says one thing and another says something else, so there is speculation on what central bankers will do. A difficult environment in which to manage money. He likes to think of stocks responding to their fundamentals, whereas now we are seeing the market as a whole responding to the whim of Central bankers. However, all signs point to continued stimulus and continued relaxed monetary conditions, which in itself has some risks and some unintended consequences that we need to be mindful of. Also, history shows that we tend to have a recession every 7-10 years, and here we are 8 years hence from the 2008 recession. His leading indicators indicate we may be looking at a recession in the US towards the middle to the end of 2018. We know that the average equity pullback in a recession is 40%, so something he wants to keep an eye on. Typically, we see equity markets predict a recession 6 months in advance, so he would start getting concerned towards the end of next year. For now, he thinks we are okay. He is not a big believer in wide diversification, simply for the reason of being diversified. The marginal level of diversification starts to drop once you reach about the 15^th to the 20^th position. He advocates and runs relatively concentrated portfolios in companies that meet his selection criteria, but he bounces off the risk and volatility with varying degrees of fixed income, but the fixed income space is not where he is going to get the big return, it just acts as a ballast for the portfolio. In a 2008 environment, those government bonds and treasuries will rise in that environment.

Gold? One of these asset classes that is responding to the whim of Central Banks. As we get closer to the possibility of a rate rise in December, he expects we will see gold come off. Wait before making a purchase, as he expects there will be weakness in gold closer to a rate rise. As we get to the next recession in the US and we see the Feds ram interest rates down to zero (even maybe negative), you would want to own gold. Whenever he has owned gold, he has done it through an ETF that has physical gold.

Market. The BREXIT vote is something that investors should pay attention to. If you are a blue-collar job and haven’t got any benefit from globalization over the last 15-20 years, the “elites” don’t have much interest in doing anything for you. Obama care can be thrown into that basket. By the end of October next year, you could have completely new leadership in the 4 largest European economies.

Energy. Oil has been interesting, because it has been breaking out. The new normal seems to be $50-$60, but thinks $60 seems high. The correlation between oil and the market has broken down over the last 2-3 months. Thinks oil is well supported here. He is still skeptical that the deal proposed by OPEC will actually hold, but for now it seems to be working. You have to be cautious on energy, because even though we are seeing strong energy prices now, oil prices are not going to be well sustained.

Markets. The US market is near highs and yet we have tepid earnings. The perception is that the Fed has the market’s back. It will be a slow, grinding process higher. The US election is something the market does not like – not knowing. The most recent example of political factors is Brexit – the market got it wrong. The British pound has come down due to economics and now after the US election, the markets will evaluate the consequences. He wants to purge these political/macro events and see what will actually drive companies over the long term. He looks at it daily. Earnings have been tepid. Consensus says they should be down 1.8% in the US this quarter. He would be surprised if that happens because of surprises and so on.

Market. There were some pre-announcements before orders started that pushed the market down a little. We are in a little bit of “no man’s land” right now. REITs are up, golds are up, utilities are up, industrials are up. Overall, the market is up. Every year he looks for tax loss selling in Canada, and could only find 26 stocks that were down this year on the TSX. Usually he has about 50. Feels that people are not over invested in the market. Expects an OK Q3, but doesn’t think it is going to be good enough that people are going to expect to get to the 134 next year. We may be a bit ahead of ourselves in terms of valuation. Thinks we are going to have the 2^nd positive/improving earnings on the TSX, but not good enough to say that we are off to the races. His portfolio has been a little more conservative. Feels people should look for a little bit of protection. Look for stocks that you like and have them on your Buy list, with some options in your portfolio to hedge against a downside correction. We have gone through an unprecedented time of asset inflation, and we might see a little bit of asset deflation as people get nervous.

Markets. Last summer in August one of the catalyst was China devaluing their currency. We are back to levels we have not seen in 6 or 7 years. Every one watches Chinese FX reserve numbers. But the market is not looking at it right now. It will come back and bite us. In the US they are having the worst economic recovery in their history. He thinks after December they will not raise rates for another year. US Banks are a lot less profitable now. He thinks this will continue to play out and a rate increase is not a reason to rush out and buy banks.

Canadian/US Currencies. Oil is not going to take off from here so there is downside short term and this is bad for the CAD$. He would be selling US$ at 74-73 cents. He thinks you can buy at 78 cents a little later in the year.

Covered Call ETF Strategies. BMO writes on only half the portfolio and one standard deviation out of the money. ZWB-T is the better way to own Canadian banks for their dividends. He would look at ZWU-T as even better than banks. Why not own some of both of them.

ETFs vs. Closed end Mutual Funds. The main difference is that ETFs are open so they create more units of the ETF as necessary. A closed end fund cannot ever get bigger. The costs involved in a closed end fund are much higher than an ETF. He does not recommend closed end funds to clients.

Gold. Fed policies are very bullish for gold. He has been nibbling on gold recently.

Markets. Buy and hold investing is no longer available. He is focused on financial analysis. He likes good fundamentals combined with a catalyst or event. This year has been a strange year so far. It is important sometimes to do nothing, but continue to validate the thesis on your stories. There are a host of Chinese online companies where their moves are not justified.

Should we still short and can he recommend a good ETF for it. For a number of years we will be in a sideways market. From time to time you will want to either hedge or make money on the down side. SH-N is a great vehicle. HIU-T and HIX-T as well as RWM-N. HDGE-N looks for worse quality companies and shorts them. In a retirement account you cannot short, but these ETFs are RRSP eligible. There can be slight tracking errors over the long term.

Educational Segment. ‘Smart’ ETFs. A Beta of 1 means ‘market’. They researched factors back to the 1950s and if you screen for these factors you can do better than market weighted portfolios. You can pay a bit more, but you get a slightly better return. Smart ETFs are rule based rather than actively managed. This is the fastest growing area in ETFs.

Market. The market came back from what was supposed to be a precipice of a recession in February. It rallied back and made a new all-time high in the S&P 500. Since the end of June, it has basically been range bound in a very tight range, which was very frustrating for people. It gets boring and they would like to see some action. However, the reality is, that is just perfect. For the market to have a big move, and then to consolidate that move, is remarkable given the news flow and the concerns around what is going on politically, etc. He sees some very clear leadership themes in this market. There are some sectors that are behaving quite poorly. That is healthy. When market correlations are low, some sectors doing well and some doing poorly, that is the market behaving like a market, not one that is obsessed with “risk on” and “risk off”. The percentage of stocks performing well globally has been remarkably stable with very little deterioration. Given that we are 2 ½ months through the 3 toughest months of the year, the market has absorbed an awful lot through the last 3 months, and it looks very good for the 4^th quarter.