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

Markets. He would be more bullish than bearish. The amount of negativity out there is palatable. Everyone is worried about something, and of course markets always have something to worry about. Whether it is the election, Brexit, etc. there is always something to worry about. If you look at the 2 main components of the market, interest rates and earnings, they are not that bad. Earnings certainly are falling, and that wants to be turned around over the next couple of years, but they are not bad. Most companies are beating expectations. Also, interest rates, lower for longer, is an ideal market for valuation changes. You have companies building up cash on their balance sheet, you have companies increasing dividends, and there is a lot of acquisition and merger activity, so the corporations themselves are not really worried. Investors are looking at what could go wrong. If you look for what could go wrong, you are always going to find something. There are managers sitting on 40%-50% cash. You have people on the sidelines saying they had no idea what is going to happen in the election. Of course they don’t.

Commodities. The super cycle lasted over a decade. Feels the easy money was made, we have now corrected and the industries have gone through the necessary changes to readjust to the reality of what things are going to look like in a more normalized environment, where supply or demand is not taking off. It is about focusing on companies rather than if a company is going to double this year or whatever the expectation is. It is about what companies can excel in a more normalized environment over the next 5-10 years. Oil really ran ahead of itself a couple of months ago, and Short positions are playing a major role in terms of exasperating the fall, but he wouldn’t consider that as the fundamentals, although it plays a periphery role. For him, the rebalancing has started, and began in the middle of last year as the US supply has been steadily declining. Expects that balance will probably be completed by the middle of next year. $50 is a realistic number to be expected at around the end of this year. He still likes gold companies. Last year, and at the beginning of this year, margins were basically negligible in terms of whether they were really making money. All of a sudden they have gone from something like $50 margin per ounce to $300-$350 margins, so that easily justifies why these stocks have doubled.

Markets. It has been fun evolving the coverage over the years from primarily Canadian centric to global, which has forced him to stay on top of a lot more things in a lot more areas. Everybody looks to Japan and says “the lost decade” and extrapolates that to North America, China, Canada, Europe, etc. There is a little more subtlety to it than that. He is actively looking geography by geography to try and find opportunities where he can ignore the deflation concerns, either because he doesn’t think it is going to happen or because it is priced in. He invests in companies where they can clearly explain what they are doing. Has found most of his mistakes was in businesses where he wasn’t getting the 1^st principles of understanding of the business from the management team, where they were hiding behind jargon and acronyms. His company has designed most of its mandates to be very flexible, and able to invest across geographies. He is looking for growth where others don’t anticipate it.

Markets. Crude oil came down below $41 this morning. Everyone is watching the 200 day and seeing if it holds. It seems to have held so far. The inventories of Gasoline are a concern. Inventories are high because demand for fuel oil last winter was weak. Over the next couple of months refineries will go down as normal and normalize demand. This is a short term impact. Production of oil is down around the world. Summer is typically a crummy time for oil. He calls for $60 crude in 2017 and $65 in 2018, by which time the world will be short oil. He is going to deploy cash he is sitting on this fall.

Markets. People are thinking the equity market is more attractive than the alternatives of fixed income and dividend paying stocks, and have been putting money in. It is interesting that the markets most hit, particularly in Europe, have actually been some of the better performers this month. Feels the Fed has turned less dovish, and are hoping to raise rates, and he anticipates one hike before year-end. He’s been looking at some of the stocks that have been beaten down. There are some high dividend payers that may not have met expectations, or are seeing some declines in earnings, and those have been punished quite a bit. He is also looking at some, where growth is coming but not visible in the next 3-6 months.

Sell before ex dividend date or after? The finance theory is basically that the market actually prices in the dividend when people are pricing out the stock. He back tested and found it made no difference at all on the earnings.

A reasonable high this year for the TSX? That would be a question of what we see happening with gold prices, which has been a huge contributor to the overall returns to the TSX. Gold prices have not moved nearly as much as the stocks, many of them have doubled. Energy has gone up, but oil prices have come down by about 20%, yet energy stocks are generally holding in pretty well, having fallen off by about 7%. It wouldn’t surprise him to see another 3% from here.

How much do interest rates have to increase before high dividend payers, like REITs and utilities, get hit with selling? If you got one move by the Fed, it could easily lead to a 5%-10% selloff.

Canadian financials? Last year, even though earnings were pretty good, everyone was worried about where growth was going to come from and what was going to happen to the overextended consumer. The banks fell about 10%. This year has been the exact opposite. The banks have had a pretty good run. Banks, from a long term perspective, are a great hold, and are basically trading in line with their historical average of about 12-14 times earnings. You get a great dividend, between 3.5% and 4.9%. It wouldn’t surprise him that if there is an issue with rates going up, banks could be hurt. Lifecos haven’t done nearly as well as banks, and are now trading below BV. You get a higher dividend than what you typically get from banks, and picking them up at a lower multiple. Also, they have a larger business tied to the wealth management space, so there is less concern with interest rates.

Business development companies (BDCs)? A very broad category which goes all the way from private equity to private debt. The amount of leverage they can have can get up to a level of 200% or more, or more recently at 25%-50%. His firm has been looking a lot at private markets and private debt space. It is a great opportunity. Regulations have made it very difficult for the banks to lend to certain areas, so they are very slow in acting. He has been able to find a lot of alternative strategies paying in the 6%-7% range. Two of the better names are Apollo (AINV-N) giving a 14% distribution and BDC (?). You really have to look at the individual names, because the characteristics of that sector are weighted.

REITs or energy for dividends of 4%-6%? If you are looking to try to generate income, REITs are probably a better play, because the energy sector is going to be more of a reflection of what is happening with the energy price, giving you a lot more volatility than what you would see in the REIT sector.

Which bank pays the best dividend for the next 3-5 years in a TFSA? The National (NA-T) pays the highest at 4.9%. He likes this in that it hasn’t moved as much as Bank of Nova Scotia (BNS-T). If ranking in terms of quality, Toronto Dominion (TD-T), Bank of Montréal (BMO-T). In terms of more compelling valuations and upside, you have Bank of Nova Scotia (BNS-T), CIBC (CM-T) and National (NA-T). His one caution with CIBC is that they made a major acquisition in the US, so will likely do an equity raise. If you can wait for that equity raise to happen, this would probably be a little cheaper.

Markets. People are worried about market valuations. He thinks they are reasonable considering interest rates. He looks for companies with great cash flow. The market is up because corporate profits are up. Both are up 40%. He thinks corporate profit will increase in 2017. He admits we are creating asset bubbles in specific areas. Sovereign debt is very expensive. The S&P PE multiple it just about where it should be historically. He sees more potential in Europe. You will get multiple and profit expansion. The US is attractive because of the lower risk.

Deflationary Periods from a Macro Perspective. Negative interest rates are inflationary. They create a disincentive for corporations and individuals to spend. Companies generating stable cash flow are good investments under these conditions.

Preferred Shares. Be careful what kind. Floating rate preferreds have gone down. The coupon gets reset. Fixed coupons have done well, but be careful of the credit risk. It is a good way to supplement the income and to diversify the risk.