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

Market. When looking at the biggest, most popular companies, their valuations and their historical valuation ranges, he is finding that a huge number of them are suffering a disconnect, well above traditional levels, and therefore offering a lot of downside risks. The last time he saw something like this, was at the top of the market in 2000, the height of the high-tech boom, followed by the bust. We are at the precipice now, but what stops you from jumping right out and saying you have to sell everything and run for the hills is the Fed. The Fed has said they are going to do whatever is necessary to keep the market up, in particular focusing on those kinds of companies that keep people having that feeling of wealth. The Fed might be prepared to go out there and Buy those kinds of stocks to help support them in the market, just as the Japanese have done. That borders on insanity. The Fed is not infallible in fighting off these kinds of things. They were not successful in 2000 or in 2008-2009.

Healthcare. The opportunity to invest in healthcare stocks right now is excellent. It is as good as he has seen in a long time. Looking at performance generally, it has been really up until September of last year. The healthcare sector was really led by Pharma and Biotech in particular, and were among the best performing parts in the market. Year-to-date, healthcare is probably the worst performing part of the market, and trades today at about 14.5X forward earnings versus about 16.5X the broader market. Biotech was even more attractive at about 11.5X, but he recognizes the value of buying companies that pay dividends, which traditional Pharma does.

Healthcare. He is really focused on pharmaceuticals at the moment, which is about 52% of the capitalization in the healthcare space. Coming into the US election, there is a lot of displacement; a lot of concern about new legislation, new regulation, and particularly the potential impact on drug pricing. If you unpack that a little and look at how these companies go from year to year creating growth and earnings, a very big percentage of it is just US-based pricing powers, the same basket of pharmaceuticals, but just inflating the underlying price. There is a fear that that capability is going to be lost, which would have a huge effect on earnings. The market has set aside the bio-pharma sector saying there is a big risk that it is going to be fundamentally altered by legislation, but he doesn’t see it happening that way. Thinks any legislative or regulatory risk will be rifle shots as opposed to a wet blanket on the whole sector. That gives us a large sector that is really fundamentally re-rated, some of whom will maintain their pricing power through this election cycle, and those are the stocks he is most interested in at the moment.

Energy. Feels the Bears are slowly throwing in the towel, in that oil inventories have been falling since May/June. The last remaining holdout is the IEA, which really destroyed sentiment prior to the OPEC announcement of the cut. Although the IEA is the gospel for many people, there ability to predict is very, very poor. We have seen the largest draw in US inventories since 1920, in the past 6 weeks. Inventory is falling because demand exceeds supply today. Looking out to 2018, 2019 and 2020, it is highly likely that we are going to have a challenged market in terms of supply. Within non-OPEC, the majority of growth is Brazil and Canada. Next year’s peak rate, Canada is falling and Brazil, at best, is flatlining. Within OPEC there have been 3 pillars of growth, Iraq, Iran and Saudi. It is believed that Saudi’s maximum capability is 10.6 million barrels, and they always bring down production this time of year. Iraq has been flat for 4 months now and are maxed out in terms of export capacity. Iran has only another 200,000 barrels a day before they are at pre-trade sanction levels, and to get above that level they need Western technology, Western money and time. OPEC largely looks tapped unless we get peace breaking out in Nigeria or Libya. He expects to see $60 oil next year and $65 in 2018. The market will continue to be short of oil unless you incentivize US activity, and that will begin at $50 oil. In order for activity to really increase meaningfully, you need it to hit at around $60 oil.

Market. There is always something, and even if it is little, it tends to get built up. The basic numbers are still good, particularly out of the US. The big problem is with their housing and that they can’t get the product out there faster, because they lost all their skilled labour in 2008-2011. That will get fixed. He hopes they increase interest rates just to get it off the table for a while. If they don’t, their credibility is going to be somewhat questionable. However, he thinks it is a non-event. A lot of individual investors are very wary of this market, because it does things that they can’t understand.

Marijuana stocks? He did a quick survey of this, and everybody seemed to be getting in the business. Some of them are quite efficient, but they are all trading with no earnings and high multiples. Too high risk at this point in time. You really want to sit back and let the dust settle.

An oil ETF? He doesn’t recommend any of the oil or gas ETF’s on the Canadian side. Pick an individual player instead.

Market. He is looking at prices, rather than the election, BREXIT, etc. Both bond and equity prices are at all-time highs, which makes him a little apprehensive. The S&P 500 is close to record territory, which makes him a little nervous. He is still very bullish on the US, but there could be a pullback. He actually likes volatility because it allows him to buy good stuff cheap, but is looking at ways of doing a little hedging on portfolios.

What is an ETF? Like a mutual fund, they are highly diversified. However, unlike a mutual fund, they are very cheap. Mutual fund fees are often 2.5%. You can buy a similar ETF with almost exactly the same number of stocks and the same weightings for 15 basis points. A disadvantage is that if you are someone who is contributing monthly to your portfolio, a discount broker will charge you a commission. For the smaller investor who is contributing on a monthly basis, he would recommend going to your local bank and buy the Canadian Index Fund or US Index Fund. Management fee should be around 90 basis points.

Medical marijuana ETF’s? There is no ETF. The reason is, a lot of these companies are little with no liquidity, and the banks don’t want to hold their money.

Canadian Venture Exchange ETF? There used to be one through iShares, but there isn’t any longer. It is just not feasible to run.

How do Binary Options work? These are inter-day options, but it is just nonsense. This is something that people should not be involved in. The risks are huge and they are very, very short term.

Move to ETF’s from mutual funds? If you have Bank owned mutual funds, there is no problem at all because you can sell them without paying a commission, as well as having lower fees than regular mutual funds. With regular mutual funds, you have the curse of deferred sales charges of about 5%. He tends to look at the overall fees of their whole portfolio. You can take a hit now, or wait for 2 years and end up paying twice that in regular fees. First, call the mutual fund to see what their DSCs are on your portfolio.

Buy options on a gold stock, or use an ETF? He is not a fan of gold, and has been negative on it for years. Gold reacts to the value of the US$. If you have a strong US$, and it looks like interest rates are going to increase slightly, which will increase the value of the US$, why would you want to be in gold? Also, if he is going to take a risk on a commodity, he would rather take the risk and not have it hedged off and have his upside limited.

Market. If you just read the headlines, you would think we are in dire straits. This market is battle weary and has had a lot of big things thrown at it. Quite surprisingly, it has actually been very resilient. Technically he thinks there is something about to resolve itself as the S&P 500 is getting into a wedge where it is either going to go one way or the other. He thinks it is going to burst up. If you follow the market fundamentals, although they are not extremely robust and exciting, they have been moving in the right direction. The recent ISM Manufacturing report was quite phenomenal, one of the best measurements he has seen in a long time. It wasn’t great on the top line “headline” number, but all the sub components, the different sectors of the market, had great readings. Something like 8 out of 9 sub sectors were in a positive mode. The sentiment in the market is very muted, and he is convinced that most people are still afraid of what happened in 2008, so every $1 that is put in the market right now, is done with trepidation, a lot of research and a lot of soul-searching. Doesn’t think anything is going to happen between now and the US elections. He has been at about 15% cash all year.