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

Gold mining stocks? Gold is very difficult to predict. Most gold mining stocks do not pay dividends, and have a lot of debt. If you are going to buy gold, he would do it now. The one thing that would predict whether gold was going to go up or go down is the US$. Gold is a place where central governments turn to when the dollar starts going down. When it goes down, US treasuries also go down, and governments start getting discouraged and start buying gold as an alternative for reserve assets. Doesn’t think either of the US presidential candidates are going to be good for the US$, which is why he would be bullish on gold right now.

Canadian Technology. For the most part technology is a smaller cap space in Canada versus the US. He is finding quite a bit of unloved value in this area. When you have an environment where you have a lot of money chasing after fewer deals, you are going to get a price mismatch. Some of the bigger funds started to buy these deals, which brings a fair amount of harder scrutiny to how the pricing happens. In the US, Fidelity was participating hugely, and then they were getting repriced, and this was followed by accounting. In Canada, every year we have to prove valuations of the private companies, their metrics and how they go about that. And they don’t correlate, they are going to jump up and down on valuations, so you have to be very disciplined when you are buying a private company through the scrutiny of your audit committee.

Energy. Previously OPEC had reduced the supply so that there was no inventory and that stoked the price up. However, there was always lots of oil around, lots of excess capacity. Now with Saudi Arabia saying that it was going to produce everything that it can, by definition that means there is no capacity, but it is all inventory which makes the market more volatile. The commodity can sit at $45, but the stock market will start discounting where the commodity can be 6 months from now. In connection with the Fort Mac situation, the first one that gets hit is the insurance company. $9-$10 billion of something has to get sold to pay for it. That money is being stored in assets, and assets have to be liquidated to cover bills. The one thing he is more concerned about is how much it would affect the smaller businesses, as opposed to the big Suncor (SU-T) and Canadian Natural Resources (CNQ-T).

Markets. Thinks financial markets are being supported by stimulus. Today was a great example because the market turned almost on a dime when China announced they were going to stimulate their economy. Earnings have been weak for two quarters in a row, and have actually declined. There were a lot of beats this time, but mostly on the back of diminished expectations on one hand, and what has essentially been record stock buybacks, particularly in the US. That has made earnings on a per share basis look probably better than they should be. Yet the market keeps going higher. He doesn’t see any justification for this except for the stimulus factors. Doesn’t think earnings are going to be there for another year at best, and if that is the case, one of 2 things has to happen. You have to have the price/earnings multiple expand keeping stock prices here, or you are going to have the market fall a bit which is going to bring the price/earnings multiple where it should be. The exception to that rule, are companies whose price/earnings are less significant, because they are in a disrupting part of the economy, such as Facebook (FB-Q) or Amazon (AMZN-Q). Those are the kinds of things where price/earnings are not going to matter as much, but you have a company that can grow in an economy that is not growing very fast. However, they are expensive and there is some downside risk. Single digit returns are the new norm right now. If so, he can do that with some covered option writing strategies on blue-chip stocks, and the stocks really don’t have to go anywhere in order to get that number. There is also less risk.

How do you know what to write covered calls on? He looks at a stock and what he feels is its trading range. Using the premise that the market is based on mean reversion, it is going to come back to the centre at some point. We know markets overshoot to the upside and overshoot to the downside. Nobody knows exactly where that number ends. You create something called a mean reversion, it will come back into the middle. Technicians look at moving averages to try to figure out what that is. The options market can give you some insight as well. By taking options on a particular security you can wrap a trade around what you perceive to be the mean reversion. If you believe it is worth a certain figure, you could sell a call option at the top end of the range, and if there is a reasonable price and you really get it right, you can actually reduce the cost of the stock down to the bottom end of the range. You can play that mean reversion game all day long. This strategy should always beat a “buy and hold”. If you apply this methodology across the board on indexes, it actually does work.

Energy. Feels we will find an alternative to oil, when we run out of oil. Technology will have figured it out at that point. Thinks oil is going to be a worthless asset 20 years from now. If so, then the long-term picture for oil is not good. Saudi Arabia is trying to get what they can get for oil today and build up a sovereign fund. They are putting their money where their mouth is because they are selling the main corporation, which they believe might be worth $1 trillion, which is based on the premise that at some point it will have no value. That means there will continue to be huge supplies coming out of the Middle East and around the world, and we will be sloshed in supply meaning oil prices will stay weak.

Markets. There will be some temporary disruptions to oil operations in Alberta because of the wild fires. There is a short term supply disruption, but this will not affect investing unless you are a day trader. Saudi Arabia is going to continue to be pedal to the metal with oil production. Summer driving will probably keep oil below $40. In September and October, we are at bigger risk for a pullback to $30. Global trade is slowing, including from China. This is a big challenge for the world. All the borrowing and spending is not working.

Markets. Since the financial crisis central banks have tried to do a lot in dabbling in uncommon monetary policies. This has had a lot of unintended consequences in the market places. No one knows what other unintended financial consequences will occur. The money available to borrow with low interest rates has not been invested in capital return. Investors are forced to go into risky assets. When you throw cheap money at people they do silly things. In 2005, crude oil was at $50. You go to the bank to explore your property, you don’t have a business. Now after the financial crisis, you have a business plan. Now you have a booming business. Now everyone is pumping oil. Everybody is over hedging and we have oversupply.

Silver ETF. SLV-N is the way to play the bullion. There is also HUZ-T in Canada. ZVR-T also.

Educational Segment. Companies buying back shares. There are a couple of ETFs that focus on these companies. When you look at what share buy backs have done over the last 7 years to earnings, it has grossed up earnings per share by 25% for the S&P. Companies generally buy back 10 to 15% of shares when they do so. The earnings per share go up, but the EPS goes down. The market likes share buy backs, but it indicates the company does not see many growth prospects for themselves. There is a buyback index. Buying back shares was good until 2000. It is not good when interest rates are likely to rise. PKW-T does not always outperform and has not been doing so for the last year. Watch out when companies are increasing the rate of buying back shares.

Canadian Dollar. There is a big downtrend since May 2 as a result of falling commodity prices. It looks like this will continue. We have a key reversal at the beginning of May. The risk is that if they raise rates it will be beneficial to the US $. Canada is expected to keep interest rates on hold.

Sell in May? Seasonality is one of the disciplines in tech analysis. There are valid reasons behind it. He needs to rely on more additional information. Which day in May do you sell? Volatility is being enhanced by technology and by central banks not knowing what they are doing. Intraday or intra week volatility can exceed seasonality.

Market. Some indicators are becoming very positive, especially as they relate to the consumer. The recovery of housing prices, hours worked, total income available and the increase in the workforce. There is money available for housing and autos, the 2 main drivers of the US economy. There are some negatives, but even though you drill down into the industrial production, which was down, you suddenly realize that the manufacturing production was up and the mining and utility index was way down, which had put it down. We are not going to get any clarity on oil for 2 reasons. 1) we don’t know how long the impact of the wildfire in the oil sands area is going to last and 2) there has been a major change in Saudi Arabia and the indication is that they will not want to put a lid on production.

REITs or utilities? He would lean towards REITs, which have lower price to cash flow ratios. The wild search for yield on utilities has gotten way out of line. The focus is going to be on yields, which will keep the price to cash flow ratios higher on utilities than what they should be. From a risk point of view, REITs are in better shape.

Markets. Thinks we are probably worrying too much, but when people stop worrying, that is when you want to sell everything. We have seen Short Sell positions go up, cash positions go up, a lot of worry about China, US elections, healthcare, etc., etc. On the big picture earnings are okay. They are probably going to go down in the US this year, but the market has already adjusted. Dividends are increasing. We are seeing privatization and takeovers. It really is not that bad. If you can get 3% in a dividend stock, that has the potential to grow and grow its dividend, why get 0.5% in a GIC. He is not convinced that this rally is for real.