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

Pipelines? The sector is dealing with so many political risks right now, and it is difficult to get pipes up and going. At the end of the day pipelines are necessary. If the whole sector is getting hit, he likes that as a general rule. You should look at each company and their financial statement carefully. Look at the management carefully and where the stock price has been. Check the dividend to see if it is going to be secure and then make your decision.

Medical marijuana? This is a huge field. He wants to see it legalized and taxed. It makes a lot of sense, but it has to be regulated. The key is picking the right companies, and there is a lot of money to be made.

Markets. Feels the market is overreacting which is typical, so you just have to go with the flow and make good longer-term decisions. He runs with a fairly fully invested portfolio all of the time, because he is trying to collect dividends for his clients to meet their income stream demands. It is really a matter of trimming one stock and adding it to another based on valuations. The market is getting to be good value, trading at about 15X in Canada and about 15.5X in the US. A lot of what is going on in the market is short-term trading volatility, and being a longer-term investor it is nice to see that. Earnings growth has slowed significantly in the US and valuations are getting to where he likes because earnings growth is not going to be 10% plus, which the market has been expecting for 3 years in a row. It will be somewhere between zero and 5% this year, so the market has to adjust to that.

Canadian or US dividend stocks? His rule for US stocks is that they have to be at least a minimum of a 2% yield. Bear in mind that US dividends do not get the dividend tax credit, so from an accounting point of view, you are not as well off as you would be with a Canadian dividend. His reasoning for US dividends is to be able to get into sectors that he can’t get into in Canada.

Markets. In the last 3 years, we have been transitioning from the previous bull market, which was a bull market in commodities driven by the growth in China, to a consumer-based developed markets. We have had a slowdown in China, which is picking up steam. We’ve had problems with commodity prices, which has been an issue for Canada. Ultimately the US is a winner when we look at low-priced plentiful energy and low inflation. However, the risk is if things get too difficult in China or emerging markets. We are one of those pinch points, where the question is, will all the debt that was raised by energy and commodity companies come home to roost. Also, will the slowdown in China impact the developed markets more. You start with the weakest things at the beginning of a correction, and you get to the strength at the end. Now technology and consumer stocks are getting hurt in the US, which could not be further from the epicenter of the problem. We are getting in the late stages of a correction. Looking back at 2 previous long bull markets, there was a bear market that went on through the 60s and 70s, where the US market went nowhere for 16 years, and it broke out in 1982. 2 years into that, there was a correction that lasted 8-10 months with an 11% correction. It was a correction in a bull market, and the market turned around. The things that were the natural winners at that point, technology, healthcare and consumer, took off and rallied for years. Coming out of the 30s and 40s, we had a sideways market for almost 20 years. The market broke out in 1951. In 1954, 3 years into that bull market, there was a correction of about 9% that lasted 8-9 months. Current problems really began in May 2015 in emerging markets, and slowly washed through global markets, and the US was a last market to get hit and is down 10%-11%. The S&P broke out of a 12-year period from 2000 to 2012, that began a new secular bull market for stocks. Secular bull markets see rising multiples generally, and falling correlations. Markets have a history of having strong markets and many years of underperformance as money rotates away. We are going through a transition to a market that will be friendly to consumer-based developed markets, low inflation, low energy prices.

Market timing? It is very important to watch the nature of the market bottom. One of the big mistakes that many people make is that you get a big Up day after a bunch of Down days, and people jump in, the market rallies in the morning and then fails in the afternoon. He likes to see a day when the market rallies 2% on heavy volume, and then sometime over the next 3-5 days, see the market have another 1.5%-2% day. There are going to be 2 kinds of stocks that rally in the beginning of a bounce. Short Covering, people who are covering things that they sold Short. These will have very sharp moves higher and look enticing. Very often on the “follow through” day, those same stocks will not participate. Look for the stocks that were technically sound coming in, where the price was behaving well, where the price was good to begin with. He likes to Buy “good getting better”. You won’t know what is real until a number of days into a bounce in the market.

Markets. The Bear market started in Canada with the collapse of the oil and gas stocks. Since then, stocks have generally been in decline, particularly from March. The US joined us around the beginning of last year. Nobody mentions the word Bear until it is all over. It has been going on for enough time now. You can really see a downer starting around March with everything. It didn’t matter what the companies did. His experience is that you sit tight. There is no point in moving entirely into cash unless you believe you have the magic touch and can time the entry point. Eventually it all regains the ground it has lost. He is mostly sitting on his hands and waiting. Thinks the strength in the US$ is going to continue, because it is the only global currency. The world is such an uncertain place, and that’s where they run. Some gold stocks are becoming more interesting, but there is no reason that he can see that any other currency out there could possibly take over the running.

Cdn $? This is low because nobody comes to it. It pays you nothing. The interest rate is so low you can’t make anything in the bank. You also have the global currency of refuge, the US$. We are blighted with a failure in the resources sector for the time being. There is no need to anticipate a recovery as of yet. Thinks it goes lower.

Gold. He is rather keen on 1 or 2 gold companies which have really got their houses in order and are making good cash flows, are reliable, and could expand. That is without the gold price even going up. Agnico-Eagle (AEM-T) and Detour Gold (DGC-T). They have been going up against the Bear market. There is more talk now as to whether gold has bottomed.

Markets. There is a 60% chance of the bank rate being cut in Canada this week. What else is working against Canada? $30 oil. Somewhere between $50 and $70 is where oil will set back to in a couple of years. Cutting rates does not change the price of oil.

NASDAQ 100. ZQQ-T and XQQ-T are currency hedged, vs. QQQ-N which you have to trade in US$. He recommends starting to hedge the Canadian dollar.

Import inflation is when imported goods, such as food, become more expensive due to the dollar. We are seeing this.

Educational Segment. Are global markets oversold? Everything he looks at tells him we are ripe for a new trading rally. We won’t make higher highs, however. Canada will outperform. He looks at the percent of stocks above the 200 day moving average. Only 16.5% (it is very low compared to other periods earlier in the year) of global stocks are above it now. It was over 50% back in August. Sell into rallies.

Markets. A year from now we will not be looking at such low crude prices. It is a classic supply/demand imbalance and since we are not going into a global recession, it will come into balance. The lowering of interest rate has had a 3 standard deviation effect in how fast the currency has gone done. This could hold the bank of Canada back from cutting rates this week. No one wants their currency sliding this quickly.

Selloff in transports being a predictor of recession. It is an old DOW transport rule. He does not think this is the case today. He does not see the US going into recession, but growing at 2-2.5%. He does not think we are going into recession.