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

Credit Card Companies. C-N and MA-N are the two dominant networks. V-N made an acquisition of their European operations. He prefers MA-N. V-N is an excellently run company, however.

Hold Cash or invest in this high market. See his Top Picks today. Pullbacks happen all the time. They happen with regular frequency. He looks for companies that pullback too much.

Markets. We are still living on the Brexit tailwind. The VIX is exceptionally low. The S&P call numbers are pretty high. Investor sentiment is fairly high. These conditions can stay for a while. There is less experience on desks and low volumes, so events can create a big swing. We don’t have any catalysts right now. Earnings kept us muddling along. The market is slowly getting tone deaf. Investors are going to start to pay more attention to the granular level, results for individual companies.

Resistance level – recent vs. long term. There is no difference. As the price gets to some level of resistance, it is significant.

Market. He is a little cautious. Economic data has been mixed. It is likely that we are near the beginning of a rate increase cycle, and the market’s rationalization for fairly high levels of valuation, and a lot of that is predicated upon a low interest rate environment. If we start to see a change, that could be a headwind. There are a lot of macro economic data points that are neutral at best. Market valuation bubbles are high, so he is a bit more defensive and selective. An area that has been depressed for some time are financial stocks, banks in particular, so the US financial sector and banking sector is an area he is looking at. Balance sheets are in the best shape they have been in a long time. In many cases they have a very nice dividend yields, and are trading at pretty low historic valuation levels. If rates move up, some of the banks should do well. Technology is another area that is interesting, and are trading at valuation levels a little below historic averages. On the other hand, things like REITs, utilities and staples are trading at big, big premiums because of the low rates, so he would be avoiding these.

Markets. Early to mid-2015, the Fed started playing chicken with the market, in a sense that it began its attempts to raise rates. The market was pretty convinced that with global weakness it wasn’t ready for that. They finally moved in December, and in early January they talked about doing 4 hikes. The market went into free fall. Because of this, emerging markets collapsed, commodities collapsed, high-yield spreads blew out, and all the financial indicators blew apart. The game of chicken ended in late January, early February when the Fed backed off. The Fed needed to stay on the sidelines for the time being to let things start to recover and to start to heal. We had another binary event when the BREXIT came out. We needed to get past all these things, and confidence needed to be restored in global markets. The Fed is not in charge of the long end of their curve now, it is really the global markets and global central banks. When confidence comes back, the long end of the curve is going to steepen, and that will be the market’s signal that the market is ready for rate hikes finally. For investors it means a lot, because every economic recession in the modern era, has been caused by a reduction in credit. Every time the yield curve inverts, credit shuts down and the banks stop lending, and the economy goes into a recession. He is very constructive on what is going to happen going forward. At the bottom in February, commodity prices globally had terrific rebounds. High-yield spreads have narrowed right in, to the point where they where last summer. Credit growth in the US is growing at about 7%-8%. Global confidence, with the exception of BREXIT, has been on the rise. Emerging markets have been some of the best performing markets this year.

With the US$/Cdn$ exchange, is this a good time to buy US stocks? Yes. His outlook is for oil prices to recover. Anything below $55-$60 has caused US production to drop about 1 million barrels a day. When production comes off, it means prices globally are not high enough to get oil companies to reinvest and to grow production. Oil, unlike any other industry, has a natural decline curve of about 5%-7%, so it needs investment to at least stabilize production for the longer while. Oil prices should make their way higher, which provides strength to our balance of payment as we export a lot of oil. The offset is that the US economy is probably stronger than ours. He thinks you are fine to buy US stocks here.

Central bank policies on deflation? On the issue of deflation in general, there is a really good piece at www.economicprinciples.org which talks about long-term debt cycles.

Markets. Markets have been quite strong and have been going up. All global equity markets have been on an upward trend, and there does seem to be complacency, which you can see when you look at the VIX. Investors are comforted by the fact that all Central banks are going to either cut rates, or keep them very low, a positive drop back for equities. With yields being so low, for anyone that needs any sort of income, they are almost forced to be back in the market. She would much prefer the US economy to recover. Job data has been very strong. Also the US consumer is very important for the US economy, as it accounts for close to 70% of GDP. REITs have to eventually move up, and she feels it will be at a very measured pace. Inflation is not a pressure right now, so it gives some room to move very slowly. The Canadian economy is definitely lagging. There was a negative GDP number, which is not surprising given what has happened in Fort McMurray. She doesn’t think the Canadian economy goes back into recession, but we will see the positive impact of the rebuilding process in Alberta. We’ll eventually see a positive impact of export activity. Also the federal government is adopting a more fiscal stimulus policy.

Market. He separates the economy from the market. The US economy right now looks very good, and it has a lot of positive data points. On the markets, we are looking at 18X forward earnings, which is pretty pricey. He would be much more comfortable at 16X. He looks at utilities on a yield basis for the most part, and they are yielding 6%-7%, which is good. However, if rates move on you, you have to be quick to react. Has a reasonably big weight on consumer stocks. Also likes industrials, some of the telcos, and utilities.

Canadian Banks? These are trading at around 11 or 12 times earnings. Doesn’t feel that you are in jeopardy with huge price swings. You might consider using an ETF.

Markets. There is an index (Case Shiller) that tries to smooth out the earnings cycle. It is the smooth PE (10 year average). It had a peak in the 2000 tech bubble. If you draw the line back historically, anything above 22 is in the top decile. If you look at forward average earnings in the 10 years following a point in this top decile, the average real return is about 1% for US equities. If you buy when the index is high then you get 1% over 10 years real return. The average return on the market now will be lower over 10 years based on historical norms. Trump gave his economic speech last week and then went out and suggested someone shot Hillary. He cannot believe this guy is running. He thinks it is almost certainly that Hillary will win and so you start to decide what areas will do well under Hillary.

Precious Metals ETF. In the US there is a silver stock ETF (SLVP-N). For other precious metals there isn’t one. There are ones for base metals but now is not the time for them.

Educational Segment – Fewer and fewer stocks are lifting the markets and this should concern investors. Market breadth is an important concept. He looks at stocks making new 52 week highs. 100 or more stocks is a lot of stocks to make 52 week highs. The top 10 holdings in the S&P are 18% of the market and can lift it. He showed a chart of the number of stocks making new highs over time. The market is going up and the percentage of stocks making new highs is low compared to 2013-2015. This is not a broad based rally but late cycle. There are big risks for downgrades in the fourth quarter. He compared the consumer cyclical and retailing. The latter is not doing well but the big names are doing well and lifting the index. You should look at what the whole market is doing. It is not a robust trend 8 years into a bull market. It is not a broad based rally so don’t chase it.

Markets. The markets are anticipating some pretty strong earnings growth in the second half of this year. In the third quarter this year earnings are expected to be 18% higher and 38% in the fourth quarter, both compared to a year earlier. He is worried this won’t happen. We will just have to wait and see. To justify this sudden rally it has to be more than low rates. People should get concerned if we start to see estimates guided down. The safety trade has been the most popular this year. As safety gets too popular, it become somewhat dangerous. GOOGL-Q is trading at a lower multiple than a utility.