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

Telcos. If interest rates were to go up, would you sell, and repurchase them later? If interest rates were to go up, yes he would sell them, but with the Fed delaying a rate hike, you could leave this for at least 2-3 months. Maybe sell them in December, because the probability is quite high that the Fed will raise rates finally, and it will be a selloff much like it was last year. He would start selling Canadian holdings first and US holdings a little bit later.

Cdn$ short and long-term? Long-term, it is very highly correlated with oil prices, and for the first 6 months of this year, it pretty well walked in lockstep with oil. In the last month or 2, it kind of divorced from that and did its own thing. Today, there was a very big move. Overall the direction is down. It won’t be dramatically down because it had a bit of a selloff. Thinks we are looking at $1.33, maybe by year-end. It is not likely to improve as our economy is weaker.

Why are pipelines, utilities and telcos affected by interest rates? The reason is, they have very little growth and tend to pay out earnings in the form of dividends. As a result, because rates are so low, those companies, cash flows and dividends have become so prized right now that investors are trading at a premium to the market. In Canada, a 1% move typically corresponds to a 10% reduction in price on pipelines and utilities. However, that doesn’t really impact companies until you get to a certain threshold level of around 3.5% of a bank of Canada rate 10-year.

Markets. He does not know if we are climbing the wall of worry or if things are being inflated by election worries. He does not think we have seen the fallout of Brexit. That is unavoidable. There are always plenty of things to spook investors. There is a definite political trend in effect out there that is not positive for markets. A lot of money is in the stock market and it is very expensive. He is being very prudent. He is going to wait for volatility in the markets to subside before moving into his favourite names.

Market. Thinks people are overreacting to what the Fed is doing. This interest rate increase has been going on for about a year. It is constant, constant, constant. They did have one little brief uptick. He expects there is going to be a lot of volatility going forward. US elections are going to cause some. BREXIT is kind of out of the news now, but could come back in. There are a lot of other countries that are not in good shape, and if they moved back into the news, there will be more volatility again. The key to volatility is to avoid the noise. You have to look past it and through it, and not worry about it so much. Often you can get a stock at a much better price when the markets go crazy, because the stock price can dip quite a bit more. Then if things get really hot, you can get a better price when you are looking to Sell.

Gold. Doesn’t know where it is going to go. It is not cheap or expensive. He sold a lot of the companies that he had. Likes gold to a degree, but it is not as attractive as it was 1.5 years ago. Don’t be seduced by gold, but look at the companies’ balance sheets very, very carefully before investing in them.

Market. In July he registered a volume and breadth thrust, which are pretty rare events, but take up a lot of internal energy of the market. It usually takes 2-3 months for the market to regain its internal strength before moving up to the next level. He started to see some waning momentum in the last month and flattening out a little. Signs are still positive and not turning negative, but he is watching and prepared to make a move if he needs to. He also likes to watch economic indicators. Two that he really focuses on are the ISM numbers, both manufacturing and the services side. Below 50 indicates the economy is contracting, but below 46 there is a high probability, almost 100%, that we are going to enter a recession if the manufacturing gets below 46. It was very close to that number and then there was a rebound up in economic activity. In the last month the ISM Manufacturing number was pretty negative and dropped back below 50. If it gets below 46, investors would want to be positioned for a recession, which is where we typically see the biggest bear market.

Banks? This has been one of the better areas to be for longer-term, traditional low volatility. There had been a lot of concern about credit losses that could potentially come up from the oil/gas side, as well as concerns about the Canadian housing market. That did not transpire. If anything, the banks continue to perform and their provisions for credit losses has actually come in less than what the Street expected, and he expects this will continue going forward. He would initiate a partial position now, and wait for when the market gets scared to buy the other half.

Market. There was no change in the rate by the Fed, but the market clearly interpreted this as dovish, and there was a market rally. The market is very fixated on the short term, but Janet Yellin is seeing rates as staying unusually low for a long period of time. She also said that if the fund rates go to 2%, they are going to do more quantitative easing and add $4 trillion of bond purchases. He thinks the market will be comforted by that. Thinks today’s is very short term. Expects dividend paying stocks, which is his specialized area, will be particularly attractive relative to current long-term bond yields. Central Banks are beginning to realize that negative interest rates have negative consequences for banks, pension funds, insurers, etc.

Qualities to look for in companies? You are looking for a strategy that makes sense and that they can enunciate clearly. Also, looking for a strategy that is well thought out, consistent, and if the circumstances in the industry change, how adaptable are they.

Gold? Had been quite optimistic on the sector earlier in the year, and is surprised by the amount of upside it has had. In a world of negative interest rates, he thinks gold is pretty attractive. Monetary policy has not really affected GDP growth, and with currencies being volatile, he thinks gold will attract more attention over time. He can see gold going higher, and wouldn’t rule out that they could go back to previous highs by 1925.

Market. Feels secular stagnation is making a resurrection. Secular stagnation is an outgrowth of the great depression. During the Great Depression, everybody felt that economies were stuck in a slow growth mode for a long time, and would continue to weigh on the economy. However, there are different dynamics and history doesn’t really repeat itself. Central bankers and policymakers are going to fight it tooth and nail. Thinks the next wave is “helicopter money”, an important development and one that his firm is keeping an eye on for clients. This is direct spending by the central bank versus quantitative easing which is just buying government bonds that are already issued in the secondary market. Helicopter spending hasn’t been done since the 30s by the Bank of Japan.

Infrastructure? There is a lobby group called The American Society of Engineers which are forecasting that between now and 2025, if the US doesn’t get its act together and spend on infrastructure there is about to be a $4 trillion loss due to lost sales, costs, etc. due to bad infrastructure. The incoming presidential incumbents certainly have the ammo to spend on infrastructure, and he views that is moving its way into the popular psych, and over the next few years expects we will see the return of fiscal stimulus.

Emerging Markets. These have been trod on for the last 4 years, and investors have definitely been sour on that class. He tends to like the commodity importing countries such as India and China. Looking at the history of emerging markets, they tend to have big booms or big busts, either hot or they are not. Thinks emerging markets have bottomed and are tending to be a bit more resilient than developed markets.

Healthcare through an ETF? Healthcare fits in with his theme of a post crisis financial environment. After a financial crisis, all industries that tend to be inventive or creative, tend to do incredibly well. That would apply to technology and healthcare. Biotech valuations have come down a little within the healthcare ETF’s due to Hillary Clinton’s policies. Feels healthcare in general is a good overweight. It is aligned with aging demographics and the post crisis financial environment. He likes the area in general and is overweight it in client’s portfolios.