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

Markets. We have had a scare, with BREXIT having a big washout, followed by a huge snap back. That snap back occurred during the seasonal Summer rally period, from the end of June through to the earnings season. From a seasonal perspective, everything is working out quite well this year. We are now entering into the most volatile time of year for stocks. Over the next 2 months, September in particular, equity markets tend to be particularly weak. In September alone, the S&P 500 averages a decline of about .6%, and has only been positive 44% of the time. The TSX has only been positive 40% of the time, with a loss of 1.9%. It’s those declines that can really washout portfolio returns. We could see a volatility washout because volatility is exceptionally low right now and everybody is very complacent. The VIX has been hovering below 12, well below average for this time of year. The average is 20. With complacency reigning, it is probably not best to be overly aggressive in the market at this time. For investors that are wanting to hedge their portfolios, he would suggest doing it through Puts.

Natural gas? This has been interesting. Last week we saw the first draw down in natural gas inventories during the summer in the last 10 years. With consumption higher than average and production lower than average, it has drawn upon inventory levels. The chart on UNG-N shows a double top has formed, and the stock fell below its support level today, so there could be a bit of downside pressure. September all the way through to December is the period of seasonal strength for natural gas. Usually the peak is in Oct/Nov. September is an ideal time to pick this up.

Market. This has been a funny market this whole year. In the Canadian market, there has been so much of the golds and energy moving. We have also had BREXIT, which was a full macro sort of scene. Then you have the Fed which has been driving a lot of expectations. She thinks Fed expectations are going to be a big mover. There were huge rallies in yields early in the year, but the Fed backpedaled from their story of raising rates. With fear levels up, it is amazing that we are hitting new highs. Her preference is to own stories where there is a little bit of yield generation at the company level, and from that standpoint, she thinks cyclicals are a better place to be.

Markets. Macro has always been difficult, and in this environment it is the hardest it has ever been. Not only is it hard to predict what events are going to happen, but the market’s reaction to those events can be totally different than expected. One thing he thinks we have learned from BREXIT is that the world is laser focused on Central Banks and focused on long-term interest rates being lower for longer. His firm’s mission is to modernize equity research, which is done by building equity research tools for his buy side and sell side clients, institutional portfolio managers, and analysts. He builds out fully working financial models for all companies in Canada over $30 million in market cap.

Markets. Most participants are quite nervous about what is going on. However, Bull markets climb walls of worry, so the fact that there is worry out there is good. It means people are taking a rational look at stocks and markets, and addressing the “concerns” versus the “opportunities”. A lot of people like to look at valuations, and markets are expensive. We are towards the high end of the range, but we can remain in this high end for quite some time. The first leg we have seen has been a multiple expansion, up to 18 or 19 times on the US market. What we need now is for earnings to fill in and reduce that multiple. Expects we are going to see that towards the end of this year and into 2017 with recovering energy prices, which will fuel earnings both in the US and Canada. In addition, we have a US economy that is growing, at an anaemic pace, but still growing. Expects we will see an input from global capital markets and global economies, which will push that even higher. On the US front, we are starting to see a stronger recovery. Friday’s jobs numbers definitely help the economic picture. We are also seeing a recovery in housing starts. Not only are there more people are looking for work, but for better jobs as well. He does have some concern with BREXIT and what that is going to mean for Europe. Seeing some signs of strength in Asia, particularly in China. There is definitely a bottoming, and the next step would be growth.

Gold. If you have $1 million sitting in a bank, are you going to give bank $1000 a year to hold it for you? You are going to try and find something else to put it in, whether it is real estate or gold. Two assets that should store their value, if not grow. The sector as a whole has been under pressure for the last 5-7 years, and have invested nothing in their projects. There has been no exploration. That is now changing in money is being spent on the ground and will lead to projects that will be developed 10+ years from now. You have both sides of the demand/supply equation working in your favour for the next few years anyway.

Markets. The S&P is at an all time high. The NASDAQ is above the level of year 2000 at an all time high. On Friday we broke on the TSX to a 52 week high. The question is if this is a fake out or is it going to keep going to new all time highs. No. He thinks not. Energy stocks normally do well from now until the middle of September. It is because of hurricane season. Gassy stocks normally do better than oil stocks. Last Friday the financials powered into new highs, taking the market with them and this is why he thinks it is a fake out on the TSX. Materials and consumer discretionary did not show that kind of a bump. Going forward there are warning signs that we should be very, very careful.

Gold in General. Historically this is the time of year to buy gold and gold stocks until the middle of October. We had a pullback on Friday, but any weakness is an opportunity to buy.

Buying a stock near X-dividend date. Some investors buy to get the dividend for tax reasons and some sell just before for the same reason, especially in the case of foreign dividends.

Negative Interest Rates. A number of countries have gone in this direction. Canada has said they are not going to do this. The economy seems to be recovering in the third quarter.

Bonds. Now they have seasonal strength to October. Technically, the indicators make him twitchy. Longer term bonds have formed a trading range over the last 6 weeks. Hold them as long as they stay in this range. If they break below the range, then consider taking some money off the table.

Education Segment. Seasonal Trends in the Markets. This is a time of year that volatility increases until the middle of October. Something unusual always happens this time of year. This year it is the US election. You normally see a rotation this time of year. Forest products drop from now until mid October. Autos are the same as they change model years. Metals do well until now, then flatten out and drop until the end of October. It is a positive time for gold. It climbs until the middle of October.

Markets. There are a lot of people in stocks because the alternatives are so unpleasant. There are a lot of risks in the bond markets. He thinks wage increase in the US make it look like full employment. You have to buy something with your money. The best part of the US market has been the Russell 2000, the smaller cap stocks. He thinks they are a bit inflated now. He thinks most of the money will be made through dividends for the next year or two at least in Canada. Sometimes companies are paying dividends that exceed their earnings or even their cash flow and this is not sustainable. You have to do your homework and make sure they are sustainable. He thinks the North American economies will be in a slow growth mode for some time. Health care, big technology and experiential consumerism are sectors to outperform the economy.

Markets. The “Lower for longer” interest rate scenario has a huge impact in his investment process. We need to always remember that the value of stocks are not pieces of paper, they are businesses. The value of a business will always be the function of its long-term earnings, cash flow and earnings growth. Just because interest rates are low, as a long-term investor, you shouldn’t be buying things just because they are cheaper than the market, if the market is too expensive. There are a number of sectors that have gotten out of whack. With this near zero world we are living in, people are starting to buy stocks as if they are bonds, and as if dividends will never get cut. No one ever predicted that interest rates would be here. We have never seen negative interest rates before. If these rates continue for 5, 6, 7 years, then owning these stocks makes a lot of sense. However, that is impossible to predict. Obviously when equity prices rise, the risk level rises, and you are better off selling that which is expensive, buying that which has value, and in his view, holding some cash as well. If you are an owner of government bonds, that game is over and dead, and is a recipe to losing money against inflation, even at low levels of inflation. If you hold bond funds or regular bonds, you should sell them. Also, the consumer sector has become very, very expensive. He is still finding value in Japan, which remains the cheapest market in the world, and is the 3^rd largest market globally. He is finding value in US large technology companies, as well as the financial sector, which has been beaten down.

Canadian banks. They’ve done a phenomenal job. Canadian rules make it tougher for them to lever themselves up as much as other global banks. They are all very tied to the Canadian retail sector. If the housing market ever softens, in Toronto or Vancouver, there is room for earnings to soften a little, and probably giving a better entry point.