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

Markets. Historically about every 2 years, we get about a 10% or greater correction. The job of the market is to shake the tree of the unsure investor. This time around, it is doing a pretty good job. The market has been quite volatile and it is probably not over. Thinks this is a classic relief rally within a cyclical bear market, that is in a bull market. Cyclical bears tend to be very volatile, scary, like a roller coaster ride. Secular bears are often related to economic malaise and put you to sleep. In secular bear markets, good investors survive.

US Markets. It is very sluggish and there is nothing to get terribly excited about, but they are pretty close to full employment. There are rising wages and low interest rates, and it is a great capital market. He is overweight the US by about 35%. There is probably going to be some kind of a rollover coming in here to a degree.

Calling Covered Calls back? It depends on the relationship between the price of the stock and the option. Quite often, when he has sold them out 6 months, he just waits and sees. If the stock basically stays in the same place, and he can buy the option back for $0.25 on the dollar, he does that and then buys another right away. If it starts going deep in the money, that eliminates the time value of the option too, so he can take a loss on the option and do well in the stock.

Writing Naked Puts? A Naked Put gives people the right to sell you a stock at a certain price. If the price of the stock goes down, you are still on the hook. Basically you are selling a Put and you have cash to cover it. It is the flipside of a Covered Call. The strategy works until it doesn’t, and he has seen this happen many times. Because the people who are doing Put writing are never actually taking delivery of the stock, it is all treated like income unlike Covered Calls which are treated as capital gains.

Markets. Doesn’t believe we are going into a recession. The market was just overextended and just needed a correction, something in the 10%+ range. Central Banks are still in a mode of easing, outside of what the Fed is doing. Growth has slowed down, profits have turn down a little bit, but valuations have come in, and are more attractive for a lot of companies, than what we have seen in a while. There is a bit of a shift from growth to value, which can benefit Canada a little more. Also, we might be seeing a peak in the US$. Bank stocks have been absolutely hammered. His hedge fund, which was 80% net Short at year-end, is now basically 80% net Long.

Markets. Looking at Price to Book Values on the TSX, it looks like a market bottom. There are lots of value signs, but stocks can stay cheap for a long time. Valuation is not a great catalyst for things to change. A 3^rd of our market now trades below Price to Book. That has only happened 3 other times, 1982, 2000 and 2008. All 3 near cyclical lows for value stocks, 2000 being the exception where the market continued lower, but it was the high growth Internet stocks that rolled over, and more traditional cyclical value stocks did very well for the next couple of years. We are also 21 months into the bear market in Canada, which is well beyond the average of 11 months. From a US investor perspective, which does matter, Canada is down 45% from its highs. That should ultimately attract them. A US buyer not only gets the currency play, but also access to stocks that are well below Book Value in many cases. $7 trillion of government bonds globally are now trading at a negative yield, so the world is now pricing in this deflation scenario, this risk of global negative interest rates. It took a Fed rate hike to get treasuries to rally and yields to fall off. There is irony that the Fed is trying to raise rates, and the only thing that has happened is that rates have gone down. This is because Japan, Europe and other countries are using negative interest rates as a policy tool, which is what is crushing their banks. Overall the market is discounting this scenario of a US recession, which probably isn’t in the cards. He sees weakness currently in manufacturing in the US. Not particularly surprising given that energy is a large part of CapX. Energy is dragging down that part of the market, but we are seeing strong employment growth and wage pressure increase, which ultimately translates lower profit margins for companies, but more discretionary spending by consumers, and we are seeing a really strong service sector. The overall economy, when you combine it, is still strong. Doesn’t think we are on the precipice of a new recession, and thinks stocks are starting to discount that.

Energy. In general, stocks are cheap and a lot of them are trading below BV. For a 10 year hold, from a sector perspective you want to be rotating into them. However, on a case-by-case basis, some may not make it. A lot have far too much debt and will have to do some restructuring, whether it is issuing equity which will dilute you, reducing or eliminating the dividend, or the worst-case scenario, the bondholders becoming the new equity holders. You are probably better off getting into something like iUnits S&P/TSX Capped Energy ETF (XEG-T), and at least you’re balancing your exposure between the good and the bad. Or look for the strongest balance sheets that can at least generate cash flow somewhere in the 30s or 40s. Be very selective.

Gold. This rally looks very sustainable. Gold and precious metals in general do very well right through until the prospectors’ convention Mar. 6^th to 9^th this year. That is a typical period of seasonal strength and it looks like we will have continuing follow-through. Just be aware that you will have only 5-6 weeks to go.

Markets. They’ve been brutal since the beginning of January. Earnings on the S&P 500 companies have been down 4% on a year-to-year basis. That’s the bad news. The good news is that we have just completed a volatility spike. Historically, when you get a spike in VIX-N, once it is over it sets the stage for markets to move significantly higher. The TSX Composite since Jan 21 is already up 7%, so we are already starting to move to the upside. Seasonality is positive right through until the beginning of May for both Canada and the US. In the last 2 weeks, markets have been choppy, but have been forming a nice little base. Today we had a very, very strong bounce from some very critical levels technically. So the stage is set for US and Canadian equity markets to significantly go higher until May.

Canadian $. This has a period of seasonal strength from the beginning of March through until the end of April. This coincides with the strength in oil and an improving industrial production. The bad news is that technically we are in a long downward trend. There are some early signs of bottoming which is fairly encouraging. You want to see more confirmation that it has actually reached its low.

Energy. The energy sector is set up for a major move during the next few months. The period of seasonal strength is from the 3^rd week in January right through until May of each year. We are already seeing technical signs that the Canadian energy sector is in gear already. Forming a nice little base pattern and about to take another move on the upside.

Markets. Gold. It is not a great sign when you see people moving into a safe haven. It is the first time we have seen it since 2008. Investors have exhausted all places to put money: Bonds are volatile, equities are volatile and you don’t earn much in cash. Be selective in oil. He has been negative in oil for 4 years. Even now, he sees we are close to the bottom in oil prices, but you don’t want to falsely translate oil price stability into share price stability in oil stocks. He is not a buyer in the oil space. 2016 is another year of pain, with even more. A hand full of oil companies have hedges coming off. They have been burning cash hoping oil prices will come back.

Weighting – banks and financials. If you assign a 10% weighting, then the subsectors should be included in that. If you add to subsectors then you add to the space. You might differ between Canadian and US, but otherwise both banks and insurance companies are financials.

Negative interest rates in Canada. We are quite a ways from banks charging to take your money. Negative interest rates are more of a term. He believes Canada is going into a recession. He expects interest rates to go to zero. You will not be earning a net positive rate after inflation. This will continue as Canada’s economy struggles.

Do I go back into the market from cash? There is always a risk going to cash, but when you get it right it feels good. Try to build a portfolio you can live with in tough times. Remind yourself that going to cash is a strategy that is not sustainable according to history. Buy now if you are all in cash. He is at 25% right now. Make sure they are dividend paying names. Don’t make any big bets on sectors or individual names.