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

Canadian banks? Over the past 15+ years they have grown at a rate of double the GDP, which is hard to do consistently. We have had a housing market that has run, and debt levels that have increased. His view is that banks’ growth is slowing. Dividends are very important. A lot of the banks beat was done on the cost side. If you are looking for income, they are great investments, but as a capital appreciation, he doesn’t think they are going to rise at the pace they have.

Market. On his funds, he has a risk overlay. It indicates how much risk he should be taking, which he uses as a reason to increase cash, decrease cash, buy Put options, Short stocks, etc. For the last number of months, he has had very aggressive positive signals. Also credit spreads across Canada, the US and globally, have really come in, to the tune of 50% since the beginning of the year. This tells him that we are in an environment where you can take a little more risk in a portfolio. He is about 92% exposed to the market. Feels the probability of a rate hike is increasing, and wouldn’t be surprised to see one in December.

Markets. The conventional wisdom is that oil prices have bottomed. What is not clear is what the recovery looks like. Does it reach balance next year? In the $50ish range, there is still debt stress to oil companies in the first quarter. He does not think there has been any volatility in the last few months. Markets came up and leveled off. He is not sure the volatility is there and is not sure the underwriting for the banks is going to be there. ZWB-T with a covered call overlay is the way to play the banks. Real estate could be another headwind. ATD.B-T have a great story – growth by acquisition. New highs today in the stock. He does not like the break out and so does not trade it. He likes XST-T with ATD.B-T as a major holding as a major place to play but it is not particularly cheap right now.

Volatility – A bump coming in September? He has been expecting this with the election and into November. So far it has been pretty clean. The event he sees is the Italian referendum in October. There is a huge potential for an anti-EU party running Italy and wanting to leave the EU. The US election will not cause the uncertainty that it previously looked like it would.

NASDAQ US Bank ETF? If you search you can get a whole series. XLF-N is the entire financial sector. KRE-N is regional banks. Check out ETF.COM.

Packaging Companies ETF? There is not one. It is too narrow. There is a company in the US that builds customer ETFs. He is going to get details and tweet it out. You can make out your own basket of ETFs. You have to open a US based investment account.

Educational Segment. Why rates can rise and what to do to take advantage. Bernanke has used this week’s speech in the past to change things. Last week we had the minutes from the July meeting causing the market to see no raised rates. Since then a number of Fed speakers have said it could change. There is still only a 26% chance they raise rates in September. He thinks the Fed are not considering the election in making interest rate increase decisions. He thinks there is a much higher chance that rates go up in September. He recommends sitting in US cash and make 3-4% while you wait. DLR-T and PSU.U-T and SHV-N play the US dollar as well.

Markets. Lots of investors sold in May and went away or when Brexit happened, but a lot came back in. It is all about yield. People in Europe have been forced to pay to have their money invested. These investors are investing elsewhere, buying stocks just to get yield. He is afraid central banks will pull the rug out from under us. He is not focused on a rate hike so much as the rates themselves. European buyers are coming in and buying our treasuries. Pretty well fully invested but is avoiding high beta stocks. Sees opportunities in the utilities sector although it has no growth so he would not want to own it now. Oil stocks are cheap. They've rallied, but are well below their peaks. The financial sector is cheap and he likes it although it is high beta.

Market. Nothing seems to be stopping the market, which is a quandary for a lot of people, especially for a value oriented investor like himself. It has had negative earnings over the past 6 quarters, and very low growth on the economic front, and yet the market just ignores everything and continues to march higher. Normally, when things become irrational and exuberant over some point in time, it usually ends with a bubble bursting. It is hard to say if we are in that type of mode right now, because valuations are not excessive. There is a Goldilocks’ view that the US economy can continue to grow at 2%+, with ultra low rates that stay here, virtually forever, so that the markets can go endlessly higher.

Utility stocks? Utilities in general will probably trade more off the 10 year rates, versus the short term rates, because they are considered a long-term hold in the growth of their dividends and the payout ratios.

Markets. He looks for companies that can produce consistently high returns on equities, greater than 20% for 3 years running. The number that meet that criteria are relatively small. A lot of people are attracted to high dividend players, because the alternative in the fixed income market is getting lower and lower, and interest rates are getting pushed down. Prefers companies that don’t pay a dividend. If a company has an ROE of 20%, he would rather they take that net income and reinvest it back into the business. Has been very leery of the central bank manipulation of asset prices, namely through artificially low interest rates and quantitative easing coming out of 2008. It is difficult to get a sense for what the true price of stocks, bonds, fine wines, etc. should be after all the stimulus from Central banks. At some point, when rates do rise or the quantitative easing programs are pulled, he thinks we will get a sense for what the actual prices are. The problem is, none of us know when this is going to happen. Given that rates are so low, we are forced to go further along the risk spectrum in order to generate returns.

Markets. We are not going to have a rate increase, and we are stuck in a rut. They tried to kill inflation in the 1970s, and succeeded so well that nothing will move anymore. He thinks the market will be much the same. It will be patchy and subject to revival, particularly in Canada, in its very special powerful sectors just as mining, particularly gold and silver, have gone. Oil/gas is being quite constructive in several different ways, and at some point that sector will rise again.

Precious metals. The sector is not too expensive and still has room to run. Charts indicate there is still plenty of room on the upside. The companies, through the desperate times, have reconstructed themselves. Many companies in the gold sector are seeing decent cash flows, and are able to acquire scarce assets.

Markets. There are always sectors or companies that are trading below market and offer more attractive valuations than the overall market. He looks at Canada and the US. Healthcare, small tech, and Alberta. He is finding more opportunities in the US. He looks for the promise of increasing dividends, stable cash flows, and recurring revenues that are regularly reinvested into the business. He likes oligopolies. Those and those like them tend to get higher valuations. If the market over reacts to something negative, then he can invest in it. A strong balance sheet is paramount.

Senior Living REITs – which one? These are part real estate and part operating companies. We have a growing aging population. He owns and prefers CSH.UN-T. There has been speculation that certain companies will likely be bought, and he prefers CSH.UN-T for this reason.