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

Long-term dividend growth sector? As a bottom up stock picker, the last thing he is going to do is to make a general recommendation about sectors. However, utilities, telecoms and REITs have dangerously high valuations, and a lot of selectivity would be necessary with stock picking. Technology is a little different in that if you are looking for some of the strongest free cash flow yields, where the best dividend growth has been, best balance sheet and best margin positions, it is broadly the technology sector. However, telecom is bundled in with technology. Even if you could buy a clean technology ETF, you are buying everything. He would buy individual stocks rather than the sector.

Market. These low interest rate policies have been a giant experiment, and we are going to see unintended consequences for years to come, some of them yet to be identified or developed. Driving interest rates to zero, or even negative, destroys interest income. As a result, investors are chasing after yield and returns, and we have asset bubbles here and there, which we need to carefully avoid. There are many, many overvalued stocks now, and only a handful that are fairly valued, and even fewer that are undervalued. If you bought an ETF or a mutual fund that looks like the whole index, you are buying the good with the bad. It is very important to have active management that only picks the good. If you look under the rocks, you will be able to find good value in Canadian stocks that have their own unique story, and that will do well regardless of what is happening globally.

What will cause oil to drop below $40 again? Wait a few months. US and Canadian economic data has been soft, a sluggish growth. The biggest producers, Russia and Saudi Arabia, both have big budget deficits. Regardless of the price they will have to keep pumping. $37 was a bottom going back to August 2015, and is a minor support. We can test $40, but give it a few months.

Market. Believes the oil market is in the very late stages of a lengthy rebalancing process. The market is fixing itself, and has taken longer than expected. Unfortunately, OPEC has been pretty aggressive in their production, but she feels they are reaching their limits. Given that we have all this supply, that is essentially being exhausted, and a situation where demand keeps growing, this is really the time to be paying attention to the oil/gas stocks. The market is going to turn. People are fighting to figure out which direction oil is going to go, and that is creating volatility. You do tend to see volatility spike at bottoms.

Markets. He prides himself on being able to derive returns from shorts. The market has been as good as it gets for bonds. Japanese or German government bonds are at zero or below in terms of yield. He thinks this is a bubble in government bonds across the globe that is just in the processes of popping.

His Short Selling Strategy. He does not use covered calls as part of his short strategy. He looks for high Cap-x businesses that are also paying a dividend. If amortization is large then it implies there is a lot of Cap-x required to keep the business going. He also looks at shorting stocks when a negative story has just broken.

Sell half your investments and buy gold? Gold is not without its risks. He would want to diversify more. And perhaps have some cash in the mix. Selling half your stocks is not such a bad idea.

Market. There are a lot of things happening over the next little while, such as the Fed meeting, the Bank of Japan meeting and more and more information is going to be coming out of the UK economy is well. The EU Banker is saying he is not going to be doing anything right now. There are a lot of issues facing the global economy, and that uncertainty has led interest rates higher. Not sure rates can go up a lot or that the Fed can increase rates here. He feels they should not increase rates until into January. Inflation expectations are actually lower than the 2% number. If they raise rates, they put themselves in an awkward situation, because if the economy really starts to stall out, they don’t have many options. Time is on their side.

Market. We are still in a long-term bull market, and everything is intact, especially technically when you look at the long charts. Looking at earnings forecasts going forward, the preponderance of stocks looks higher, not lower. We are in a transition period, and we have been in these before. We had a 2-year sideways hiatus, which is not unusual, because we have had these before in long-term bull markets. One started after the war in 1946-1947. In the mid-1950s, it went sideways for 2 years, and then more than doubled from that break out. There was the 1987 crash where we mumbled around and then cut back up, and went sideways in the early 90s. Again, we had a huge move off the back end of that. We are now almost 2 years in a sideways move. Once we get past the short term noise of the US election, it is going to be higher. With the shrinking of the breadth of investors, we are getting more volatility, and is something we are going to have to get used to. It is a trend towards individuals giving money to institutions to manage or putting it into ETF’s. He is wary of utilities and high yielding stocks, because at some point bond markets are going to reverse.

Market.The market has been really quiet during the summer, because we haven’t had a single day where the market moved up or down more than 1% since early July. We are finally getting some volatility which no one really likes. It is just getting back to normal. September/October are usually more volatile periods for the market. The US economy has really performed quite well compared to the rest of the world. Every year it seems to have a bit of a seasonal issue, stumbles out of the gate in the second half, so per se, the US economy fully justifies a rate increase, but the Fed has to also look at the global situation. Expects that by the end of the year they will have to raise the rate once, but it is still going to be a shallow cycle.

P/E ratios on gold stocks? You don’t look at P/E on gold companies. They are capital intensive businesses and have to spend money for years and years before they see gold flowing. A better measure is either a price/net asset value or a Price/cash flow if they are operating. Something between 10 and 15 times tends to be a good range. In a bull market when things are really hot, you could get up to 20 and 25 times.

Forestry stocks? The lack of an agreement with the US on softwood lumber is an overhang for all these stocks. The longer it drags on, the worse it gets. Eventually there will be an agreement and a lot of the duties may be refunded to the companies. You should look at the fundamentals of the market such as the US housing market, which he believes in, along with exports to China.

Market. Feels we have ultimately begun a bottoming process in interest rates, and that the bond market has made a turn and rates are likely to go higher. For 30 years rates have been coming down. When people get very used to an asset class doing well, they pour a lot of money into it. Over the last 10 years, that was accentuated. As rates “slowly” work their way higher, money slowly comes out of bonds and into equities. He believes we are in a long-term bull market for stocks. As those changes take place, you are going to get moments of dislocation and sloppiness, but ultimately all of the pieces are falling into place to support that, and this can go on for years.

Why should Canadians invest in Canada? As you are living in a home currency, the Cdn$, there is some reason to have assets here. However, the Canadian market is relatively small on a world basis. Canada is very attractive when you are in a commodity cycle, which he doesn’t believe we are. He would prefer to be in the US, because the economic backdrop is pretty constructive and solid, but would also look at some other countries. He is about 25% Canadian stocks in equity portfolios, and about 40% in income portfolios.

Why is there fear of a .25% increase that the Fed is supposedly going to make? Emotion comes from somewhere, in markets over the last several years have had lots of volatility. Starting in 2000 investors lived through 2001-2002, through 2007-2009, and a big correction in 2011, etc., etc., and all the while below trend growth. A body of pessimism has been built around markets that has been born out of many years. That has happened lots of times before. The obvious reason why Central Banks are careful about raising rates, is that they have felt that the economy and the economic recovery was somewhat fragile and halting, and so people want to make sure that they don’t choke that off. By the time a central bank does raise rates, no central banker wants to be blamed for derailing an economic recovery. Amongst market strategists, the supposed experts, there is almost uniform bearishness, negativity or caution on behalf of them, but if you go back over the last 30 years, and any time there was such a consensus view, the market was up 100% of the time over the following 12 months and averaged 27%. A tempest in a teapot. They should get the rate reset done.