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

Effect of a strong US$ on the price of oil? A stronger US$ makes oil more expensive for other countries, because oil is US dollar denominated. However, the real impact is the supply chain. What might be more of an impact than a stronger US$, is foreign revenues. When foreigners want to repatriate all the money they have made, the impact is going to be less. About 40% of all revenues for S&P 500 companies come outside of the US, and could create some headwinds when it comes to Company’s earnings. $40-$50 oil does not make these companies terribly profitable. They still have another year of recovery, and she would say oil should be underweighted in a portfolio until there is some true stability in the upper $40.

Gold miners? Gold is really a defensive play. You can see it do well when we are very much in a “risk off” scenario. Right now, she just doesn’t see that on the horizon. She doesn’t see any fear in the market that would propel gold too much higher levels. Unless we see a real risk in the economy, or some sort of big shock, she would prefer staying in the equity markets.

Economy. GDP figure was disappointing today, but was a little bit of a rebound from June. A lot of the GDP numbers and data points coming out, are really supportive of this “lower for longer” self-fulfilling prophecies put forth by Central bankers. Although there is hope that we can have better numbers, but the real big issue is our export numbers. They were down considerably in Q2, and he doesn’t know if we are going to have our manufacturing sector pick up the slack. He sees a series of headwinds, that have formed and continue to form, for the Canadian economy. When looking at his total return portfolios, he is compelled to look stateside for opportunities.

Market. We have had a good move in oil and oil stocks, and thinks people are waiting for the next couple of months to play themselves out to get more conviction in terms of shorter-term direction. He’s been calling for $60 oil for next year. September is usually a poor month for energy stocks and oil. Now we have the distraction of having an OPEC meeting at the end of September, whether it be a freeze or no freeze. Whether they formally agree or not to increase production, is a bit of a joke, but the market has really gotten caught up in it. We have also seen speculative net length in oil itself, increase pretty materially and at the same time there has been a huge drawdown in the Short interest in oil. The oil price must really be high enough that allows US industry to drill enough to grow production once again.

Oil or gas? This was topical earlier this year when people were bearish on oil, and then everybody piled into the natural gas names, and not inflated the multiples. He would say that natural gas names are relatively more expensive, so his predisposition would be to buy oil names. Gas is capped whereas oil you could have a pretty significant spike in the next few years. However, he prefers looking at this through individual companies.

Telecom for an income investor? He likes the telecom sector. It is interest rate sensitive, because typically they are a lower growth sector. The whole idea of whether interest rates go up or not is open to debate. He is very skeptical that rates will go up. Would be inclined to stick with US holdings, and lighten up on Canadian holdings, because valuation is cheaper in the US.

Markets. The biggest cost to the US government for the next 20 to 30 years is healthcare, but you don’t get the development of drugs from companies without the profits. We need to watch the IBB-N biotech ETF. He thinks it might re-test the lows. He sees a 40% chance of a rate hike in September and a 63% chance in December. Don’t think the fed will not raise interest rates in front of the election. They have done it before. He thinks the US$ will rise from here as we have challenges in Europe and Japan.

Educational Segment. The US$. The market changed dramatically after the Fed said the rates were to go up September and December both. The Euro is 57.6% of the US dollar index, so it matters what Europe does. The notion that currency doesn’t matter is wrong. It is the most important factor when investing. A rate hike will put downward pressure on commodities and upward pressure on the US$. He thinks we re-test the Brexit lows over the next couple of months.

Do you trim preferred or common shares when you need to lighten up on equities? Perpetual preferreds trade more like bonds. They may underperform in the next while whereas rate resets may do better. Common shares will have even more volatility. So he would sell these when rebalancing.

Sell a losing stock or a winning stock when you need to lighten up on equities? He would crystallize the loss. But it all depends on the particular situation, whether it is a taxable account and how it is diversified.

Markets. We are in the early stages of secular bull market for the US$. We are going to hike rates in the US for September and that is bullish. Unless we get the right data point between now and the third week of September the raise should happen. An increasing US$ brings earnings down when repatriated. He thinks attracted investment into the US will counteract it in valuations. Canada is SO overvalued. It is crazy – all assets – housing & markets. Canada topped out in earnings in 2011. Canada doesn’t look good.

Where to park US$ for 6 months? No equity is a safe haven. Verizon would be the closest he could find . He has a $52 model price and it has a 4% yield.

Market. We have seen the Canadian market bounce off the post BREXIT lows, but thinks there is more fuel in the tanks. The TSX Composite is not expensive right now, trading at about 1.9X BV, which is pretty modest compared to 30-year historic average of 2.1. On an earnings basis, it trades at about 19X this year’s earnings, which is pretty much exactly in line with a historic average. This is all occurring amidst the backdrop of earnings that are still cyclically depressed and about 17% below trend.

Favoured sectors if there is a rate hike? An overwhelmingly, knowledgeable choice would be the financial sector. Canadian banks have managed to mint record profits, even in the very, very low interest rate conditions. If we get rates going up, and ideally a yield curve steepening, that could be a tremendous tailwind for their net interest margins.

Market. In the very near short term, he is uncertain as to how things are going to go. September and the first part of October are usually choppy. However, in July there was a volume thrust and a breadth thrust, which are pretty unique situations, and they used up a lot of the short term energy to occur. Longer-term they have historically produced great numbers in the market. It is going to take a little while for that to build up. Once we hit that seasonally strong period of November-May, the market should make fairly good progress. One of the relative signals he looks at is growth versus value, and each of those individually versus the market. In the last 3-4 weeks, he started to see a transition where growth stocks are starting to gain a little momentum in the overall market, and value stocks are starting to lose a little momentum. At the same time, momentum on some of the yield stocks have started to wane. It’s too early to tell if this is a direction change.