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

Markets. There has been a lot of strength attributed to the decline in the US$ since the start of the year. The decline has been in a perfect trend channel and is now testing the lower limit of that channel, which would imply that the downside risk is limited and we could get a bounce back. Investors want to pull chips off the table now that we have the earnings season starting next week, and they want to see those valuations prove themselves. We are at an extreme valuation here. Technicals are overbought and have been rolling over for the past couple of weeks. Also. we are getting into the period of “sell in May and go away”. You have to be tactical during the summer. Avoid areas where volatility persists, such as industrials, materials and consumer discretionary. Go for defensive names such as yields that can lower the beta in your portfolio, so you can cushion yourself from the volatility.

Markets. Canadian stocks are coming out of a trough valuation. A 3^rd of our index was trading below BV. The market had come off in US$ terms, about the same as it has in each of the last major pullbacks. There were really oversold conditions on what he considers value stocks, which is very typical of a market bottom. Since then there has been a move higher in value stocks. The money has essentially been coming from growth stocks. Former growth darlings have sold off, deeper value cyclical stocks have turned the corner. Relative with the price of crude and the Cdn$, they all tend to move together, which has moved the TSX up about 12% from its lows.

Energy. Had been Short energy stocks for about 18 months. As of the beginning of March, he is no longer Short energy stocks in Canada, a fairly significant shift for him. This comes out of his process of sifting for value. Two months ago, valuations were there, but price momentums were very poor. Now that the turn is starting to happen, he can gear up risks moderately in his funds.

What is a value stock and a growth stock? The traditional definition of a “value stock” is using Price to Book, companies that are cheap relative to their BV. Traditional value of a “growth stock” is exactly the opposite, a high price to BV, companies that do not have a strong earnings profile, but have a strong earnings “growth” profile. A lot of the early stage Internet type businesses would be in the growth category, and a lot of the cyclical old industry businesses today, fall into the “value” category. Money has been very much flowing from “growth” to “value”. Value has been such a laggard in terms of an investment style, so there is quite a bit of room for it to run over the next 6-12 months in any case.

Markets. We are range bound and will be for some time. He is seeing near term upside resistance on the S&P500 at the 2100 level. You have to be cautious. It means you have to have upwards of 15-20% cash. Look for singles and doubles rather than home runs. We have seen a lot of revisions downward. Guidance will be key. We need significant earnings growth before we see new highs in the market. Just because the markets are range bound does not mean there will not be opportunities. Fixed income is tough because yields are low and will be for some time. A lot of his fixed income is outside of North America where rates are going lower or negative and so bond prices have been going up. Banks had a nice rally and then pulled back. He got out of TD-T because it overshot to the upside.

Markets. The Canadian market, 2 years out, looks like a better bet than the US market. There has been a lot of Short coverings in Canadian banks. More importantly, looking at it earnings in 2016, they are probably trading at about the same multiple as the US. Looking out to 2017, people are underestimating the amount of torque there is in Canadian earnings going forward. Investors should stick with growth in the US, but stick with dividends in Canada. That part of the market looks very, very robust.

Energy. He sees energy production looking okay here. Rig counts keep on coming down. Production in the US is flattish to down. Those are all positives going forward for the oil sector. Expects oil gets to $50 by the end of the year.

Markets. Feels US and Canada are below consensus growth globally. There are a lot of things on the horizon that could come in that would negatively affect global growth. He is not calling for a recession, but is looking for about 2.5% global growth, 2% US growth and 1.5% for Canada. He is defensive and is holding a fair bit of cash of 25%+. From 2013 onwards, there has been consensus forecasts that start at a higher level at the start of the year, and then gradually go down, towards the end of the year. First and foremost, he wants to make sure clients’ capital is preserved.

Are Canadian Banks good for growth and dividends? There has been a real “sell Canada” trade over the last little while, and the banks got caught in that. The banks have grown at a far greater rate than GDP growth, and he questions how long that can continue. He would focus on dividends as you are not going to get a ton of growth from the banks. The dividends are safe.

Markets. After any piece of economic data comes out, there is a web site (https://www.frbatlanta.org/cqer/research/gdpnow.aspx) that does an update. It has a real time analysis of the US economy. Their current forecast is weaker than it has been recently. Jobs are a byproduct of the forecast, rather than working into it. Gasoline demand may have peaked in North America. The US Population is 5% lower than 10 years ago. We have not seen an aggregate demand for unleaded gas even though car sales have improved. Even the demand in China will peak in the next 5 years. The new battery technology (lithium sulfur) will double the capacity of batteries, but make them lighter.

Monthly Income for an 85 Year Old Investor. At that age you don’t want volatility and would prefer bonds, but after tax and inflation you don’t get any expected return on bonds. He cannot see anyone of that age going into all equities or a target dated fund. A basket of short term corporate bonds might get you 2.25% and might be the best way to address the fixed income part of your portfolio.

Educational Segment. April Showers and No May flowers. He sees a lot of risk. Looking bottom up, analysts started out looking up, but as earnings are coming out, they have taken estimates down just before that. The risk this year is that earnings don’t deliver. Looking top down, the analysts are worse. In 2015 they had big expectations, but then they were wrong. As markets sell off, they start lowering their forecasts. There is downside risk as we get into earnings season again. You should take some money off the table right now and buy back later.

India – a core emerging market holding there? He loves India and the demographics with the average age 28 years old. The currency is devalued 3-5% a year for the last 40 years. That is the challenge here. He does not know of an ETF that hedges the currency. ZID-T is one in Canada and is a way to play India, but you have currency risk. He thinks markets will pull back later in the year. It would be good if the value got back to February’s lows. It could be 1.2-2% of your portfolio and up to 4% if you are bullish on India.

Markets. He only buys half as much as he is considering buying these days because we had a bull market for 6 years. If you take out extraordinary items we are at 24 times and that is where we are usually at at the height of a market. Free cash flow is declining because revenues are declining. Once you get over 30 stocks you are not reducing risk by holding more.

Markets. He is more of an active trading oriented manager, and this is the kind of market that he likes. He came into the year fairly heavy net Short the market worried, and then it sold off pretty dramatically and he jumped back in pretty aggressively in late January, and then was sort of selling again into the end of March. Worries about the overdependence we have on the large banks, like the dovish comments from Janet Yellin last week. Thinks there would be greater confidence in the economy if they started to normalize rates more. Economic growth is slowing down a little and earnings have peaked and are rolling over a little. Valuations are back to the high end of the range. He has checked back and took some profits, and raised his cash position. Everybody seems to be in the bearish camp, and he hates to be on the same side as everybody else. Still worries about China, not the growth, but their banking system.