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

Max exposure to ETFs in a portfolio? ETFs give you only sector and market risk, not individual stock risk. He recommends them for smaller portfolios.

Dividend ETFs. He would look at them. They got beat up by the price of oil. Watch the MERs.

Hedged or unhedged. Buy unhedgd when the CAD$ is high and hedged when it is low. You could have a bit of both. He is concerned about deficit spending. He has reservations about the Canadian dollar. He thinks it might come down.

Markets. We have been a long time since the last major correction. Thinks the markets are getting tired, but this is a point that he really enjoys, a stock pickers market. North American markets just continue to climb the wall of worry, and yet investors have become so focused on what the Fed is going to do with interest rates. If they do raise rates, it will be a sign that the economy is strong and robust, and there is some evidence of that. If a signal comes out, and if the number is disappointing, chances are the Fed will defer raising rates again. Do they really want to raise rates seeing as how strong the US$ has been over the last number of years? They have to be very careful about what they do. In Canada we have been fortunate. We have had some recovery in a number of commodities, and have seen our market advance. On the other hand, a lot of the worries that exist in the US also affect our market. If they raise rates, the Cdn$ is going to plummet even further. He likes to position himself in companies he thinks are going to do well.

Value versus Growth? As a value manager he tries not to pay too much to growth. Growth managers tend to pay a lot more for the unseen than what value managers do. Occasionally he has had a value stock that has turned into a growth like stock, and the multiples tend to go up. In cases where he sees actual tangible evidence of volumes and business picking up, he will hold on up to a certain limit and take profits along the way as it grows.

Canadian Banks? In order to buy these today, you need to have a 3-5 year time horizon, to allow dividends to increase and let the next cycle take hold, in the event we do go into a period of slower growth. He likes the Canadian banks because he believes they are well capitalized and well-managed. (See Top Picks.)

Markets. Feels the US market has been in a stealth bull market for 2 weeks. The majority of “experts” love to be bearish, especially heading into the summer months. S&P is down about 1% over the last 12 months. In that 12 months, there have been 2 corrections, after not having a correction for 4 years. Sees a lot of underlying strength starting to pick up now, and believes we are on the verge of a major break out on the S&P 500 and the US stock market, which will be the next big leg in this bull market. Taking a look at the new highs versus the new lows, up volume versus down volume, they are so much stronger now than they have been the last few times the market has tried to break up, which tells him there is more bullish breadth, more stocks trading at near highs than there has been, which means we can break out because there are more sectors pushing the market up.

Market. For a little while he had thought the market was quite toppy, certainly the US markets. He now feels they are getting ready to go higher. It has stayed in a range from 16,000 to 18,000 and has always come off dramatically. It hasn’t done that this time, but has built a very nice trading base in the high 17,000, and thinks it is ready to roll. Volumes are higher now and earnings are OK. Stocks haven’t had the volatility they’ve had over the last year, but have really hung in. He has been calling for the TSX to go higher, and it has had a great rally. With the oil and gold runs it is sort of a 2 headed monster. Thinks gold is ready to go higher, but doesn’t think crude is. He would stay out of the auto sector.

Energy. He had been looking for something closer to $50 oil at the end of the year, certainly in the 2^nd half of this year. There is an element of arbitrage and momentum driving the price sooner than it should have been. We need to see the supply side rein in, but now the way things are shaping up, it is probably going to be an offset between OPEC growing its production, versus non-OPEC supply coming off, primarily being the US where we are seeing about 750,000 barrels already come off since the peak mid-last year. The demand side is evolving beyond people’s expectations. Last year was 1.4 million barrels, which caught people off guard. This year expectation seems to be 1.2 million to 1.4 million. We are seeing high quality assets sell at appropriate prices, so both the buyer and seller are winning. On natural gas, you really have to focus on the companies with the lowest cost base and strong balance sheets, in case gas takes even longer. Worst-case scenario, he sees it maybe going sideways, trending to the $2 MCF range. However, with certain names, you can still generate very strong returns even though you are exposed to natural gas.

Market. One thing he starts worrying about is what will happen when rates start going back up. These sectors trade very sensitively to interest rates. Whether it’s REITs, utilities, telcos, etc. they are all up 14%-15% this year. He is telling people that they have to be a little cognizant that their portfolio might be exposed. You might see asset prices decline if rates move up in the US, just through contagion to Canada. There are investors who will play a yield/spread trade. There are others that will look at the cost of capital. If you are a real estate investor, you would look at your Net Operating Income and your Cap Rates and where interest rates are. If borrowing at 3% and your cap rate is 5%, you are making 2%, and if rates go up 1%, there goes half your profit. With 80% of the TSX paying a yield, you can build an interest rate sensitive portfolio. You want to be focused more on yield plus growth, which is the part of the market that will do better. He would be paring back on REITs, utilities and the telcos, which are very interest rate sensitive. If an investor did not want to take a large capital gain on a dividend stock, they could Buy a Rate Reset Preferred, so as rates go up that will actually increase in price. He wouldn’t jump in and buy these right now as they have already had a good run. Also, a lifeco will do well in a rising rate environment. Banks should do okay as well.

Markets. The Canadian economy is expected to grow 1.6-1.7% with a deficit of $30 billion. Without government spending we are getting no net new growth. The G7 is going to do everything they can. With debt levels the way they are around the world, spending money is not the way to go. The way we run countries has not worked so we have to rethink policies going forward. Look at the aging demographic. People are living longer and governments are not adapting. Rising energy rates would prompt the ECB to up their forecast for economic growth. Wages are the biggest drivers of inflation. Increases in minimum wages would really help. If the markets are strong it could put back on the table a June move in US interest rates. The Brexit risk is relatively low.

Educational segment. Sell in May and Go Away? On May 19 we broke the neck like of the head and shoulders pattern. The bulls are now back in control. Seasonally there is talk of selling in May. Historically this has worked. From 1928 to today in the the S&P, he showed a chart of weekly price returns and it is flat May to October each year. The fourth year of a presidential year is different. The seasonal patterns for the next couple of months in 4^th years are quite positive. There is weakness in September and October, however.

Markets. He is looking basically at what are the 50 and 200 day moving averages doing. If both are moving up then it is bullish. Breadth is pretty good. He sees a number of bullish factors. Transportation and industrials are moving together. So these are bullish factors. He worries about the fact that it has been about a year since the market made a new high. If you look at the slope of peaks and troughs then it is trending down. It is a little bit of a downward trending channel. We can’t be overly bullish. The valuation on markets is a little, but questionable. The TSX has been in a downtrend since mid-2014. His view is neutral to questionable. The S&P’s last high was mid 2015. Oil can’t get to that $50 mark and stay there. It is looking better, but he likes the fact that it broke out. It is starting to look better. Oil tends to peak out seasonally about this time of the year and then picks up again in July.

Gold Bottom. E.g. GLD-N. Gold broke a downtrend that had a peak in 2011. It has broken the trend of lower lows and lower highs. It is in the beginning of a probable turnaround. There is a seasonal factor against gold in the summer. We have some support here. It might trend sideways for a while here.

Bio Tech stocks breakout? This was on his avoid list last Thursday. He does not like it because of the rule of lower highs and lower lows.