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

Invest in Canadian companies that do a lot of business in the US or invest in US companies? Canadians, as a general rule, have way too much money invested in Canada. They have their homes, they have their jobs, and they tend to have a large chunk of their portfolio invested in Canada. There are some companies that have a lot of exposure to US$ earnings. Royal Bank (RY-T) would be a classic example. The spectrum of choices that are available in Canada are so limited compared to the US. Although the exchange rate is a problem, an $.80 Canadian dollar is as good as it is going to get. US companies are the place to be.

Markets. The US$ will continue to be strong, and may even get stronger. However, when companies report, the FX headwind that they have been reporting all year is going to start to drop off. In early 2016, we are going to see comparatives start to be more in line. The US dollar a year ago was about $1.20-$1.25 to the euro, but in early 2015, that dropped down to about $1.06. So when companies compare this year’s earnings to last year’s, you are not going to hear talk about the FX headwind again. Energy is a part of the market, but we have to analyse things. It’s not enough just to see headlines and draw conclusions. US corporate profits are basically flat for the year, but when you drill down, ex-energy they are up about 5%.

Markets. He has a lot of cash and has found it difficult to find stocks with good valuation to buy. Now we are in tax loss season and he is starting to get some valuations, so over the next couple of months, he is probably going to be putting his cash to use. Regarding the US Fed increasing interest rates, history has shown that stocks do well when interest rates start going up, because it means economies are doing better. As interest rates keep going up, it is good until inflation starts to wield its ugly head. That is usually the end of the market for that cycle. We have some good times ahead. The Canadian prime rate is not going up in any hurry. There is no economic reason for the Bank of Canada to raise rates.

Markets. Dividends are the get rich slowly approach. Slow and steady wins the race. The dividends are the only value of a stock. The dividend champions are those that can raise their dividends. Buybacks are tax efficient. Sometimes they offset stock options the company issues. Some companies buy back below or above book value and this affects the dilution effects of buybacks. He expects modest growth and no bounce back in the western provinces in resources. He looks for modest growth in the US also.

Markets. There is a tug-of-war competing for 3 clearly defined areas, but they are all bound by one thing, the Fed and interest rates more or less. 1.) Tug-of-war is between the US Fed and the other Central Banks, and they are all doing different things. 2.) The US Fed and its own data. 3.) The push and pull between consumer staples, defensive names, and the more pro-growth oriented names. His Bond/Stock Relationship chart showed that from 2007 to 2009 bonds were outperforming stocks, and from 2009 onwards stocks were outperforming bonds. The chart shows that we are right back up to the 2007 level and we want to see that break out higher. We are right at the juncture.

Market. Since April markets have been sideways to choppy to down, all waiting for the Fed to do something. His view is that they have a free pass to move in December. They should take that pass and raise rates. Until then, we have the US$ that has been generally sideways, commodities that have been generally pointing down. It is a strange macro environment. You have the US wanting to tighten. China, Japan and Europe all in an easing cycle, which should put upward pressure on the US$. However, he feels that most of that upward pressure has been played out in anticipation. He looks forward to a rate hike just to get the macro environment back, hopefully trending again and out of this sideways chop. Energy has been a washout. But even with crude testing its lows again, we are not seeing the same selling pressure in the energy sector. It’s too early to call a hard bottom on this, and we have seen more than one false reversal. There is clearly some cyclical strength and money is coming out of the defensives.

Markets. Earnings season is largely behind us and the numbers came in largely as anticipated. For the 3^rd quarter year-over-year, earnings were down about 2.5%. If you exclude energy, they would have been up about 5%. Now the market is looking for a rate hike, which is expected will be raised in December. She thinks they should. US employment picture is very healthy and it is time to start normalizing the interest rate environment. Now the focus is on the pace of interest rate increases. She thinks it will be very gradual and very well telecast. There are no inflationary pressures, so there is no need to do it at a very quick pace. Energy and the US$ have been the 2 headwinds in the US. Expects the US$ to be relatively strong, because it is the only central bank globally that is going to raise rates. 10 year US Treasury bonds are the highest, so it is attracting a lot of cash flow into the US. She is not anticipating the appreciation that we have seen over the past year. That comparison will start to ease as we go into 2016 along with energy prices, so profit growth in 2016 should be much better than in 2015.

Markets. US stocks look more promising than Canadian over the next year and perhaps even longer. GDP growth in the US is about twice as much as the Canadian, which is a tailwind that will favour the US market. Also, valuations are pretty attractive in the US market. It is hard to get excited about Canada when the metals are under pressure. On oil and gas, we are starting to see the light at the end of the tunnel. Banks although favoured are still under pressure.

Markets. Tries to take out as much market risk as he can, so doesn’t have forecasts for the market. Believes in having a structure in place with Longs and Shorts so that he can effectively eliminate a lot of outside events that occur. Most people understand the concept of Buy Low-Sell High. When you are shorting, you are effectively taking these 2 events and reversing the order of them, so you are Selling High and Buying Low. That is really what the essence of a short position is. By having a Long position and a Short position, typically within the same industry, he can take out market risk and can also take out a lot of industry specific risk. For example airline stocks were uniformly hit by bad news today. When you have a Long and Short position you can take out the airline specific risk, and what you are really left with on a Pairs Trade is that stock specific risk. No one can really time the market, so if you always have insurance in the form of shorting in place, when markets are rising very sharply, it causes a break in performance, but you really appreciate it when there are downturns and your Short positions kick in.

Markets. Tax inversions: he believes there are plans in place to address these by the US government. It works for industries like REITs and for Natural Gas extraction, but otherwise it is a big hit to government revenues. There has been a year over year decline in earnings of 3.3% on the S&P. A large part of it is the stronger US dollar. We are getting closer to the end of the expansion cycle. Don’t look for a lot of growth in the US markets. He doesn’t see it with the earnings headwinds unless oil recovers.

Educational Segment. Roll-ups in Horizons ETFs. It is a round of consolidations of ETFs through unit consolidations. It has to do with moving from one futures contract to another, where you lose some premium. HNU-T is one of their most popular ETFs. The loss of some premium of futures contracts is a headwind for this ETF. The average hold time is a day or two. Your average hold time has to be less than a week.

Markets. Usually it is a good time to be in the market, once you get through tax loss in, this time, golds, oil and healthcare. Investors are more sophisticated now and a lot of tax loss selling has already happened. Tax loss impact on the markets should only be a couple of percent. US Markets are earnings dependant now. The S&P will likely give you 5% plus some dividends on average. Oil will go to the mid $50s only. The US dollar will probably stay strong into mid-next year and that will hurt all commodity stocks. Many people have retreated to SU-T.

Markets. There was a pretty good November for some stocks, although he feels the market has been led by things like Google, Facebook and Apple. This is indicative of what has been going on for the whole year. Commodities continue to go lower, so there is no enthusiasm for Canadian stocks whatsoever. We need the year to be over and start fresh in 2016, but it is not going to happen. This is as good as it is going to get for this year. There will be a bunch of tax loss selling. The last 3 and 4 years prior to 2015 had been excellent if you had avoided commodities and put a lot of money into the US. If we get that first interest rate hike in the US, then we can focus on fundamentals. Preservation of capital is the most important thing that he can do for his clients, so he invests scared. That makes him a better investor. He diversifies and doesn’t hold overweight positions and avoids commodities, cyclicals and high beta stocks. Tries to find good quality companies where he can sleep at night. If you have your losers, get rid of them, start fresh and go for quality. If he were starting fresh right now, he would go 50% US and 50% Canada. His best ideas right now are US-based, not Canadian-based.

How do you rationalize buying US stocks at a differential of $0.30 on the Cdn$? You rationalize it by questioning what happens if the Cdn$ goes to $0.70. He doesn’t see a lot of risk in the Cdn$ going to $0.80-$0.85. It is possible, but it seems unlikely in the short term. In the meantime, you are fishing in a very narrow pond in Canada. If you want to avoid resources then you just have banks and utilities left, and pretty much everything is exposed to commodities in Canada. He has no fear in buying US stocks.

Energy. He is predicting the bottoming of crude oil. It feels like we are getting close. Any time an investor buys an oil stock today, they are making an implicit bet on a higher oil price than today’s, because at today’s oil price, every oil company that he looks at is bankrupt, whether it is one year, 2 year or 5 year. $40 oil simply does not work for the industry. Demand this year is now up to a million barrels a day year-over-year, the fastest rate of growth in 5 years. Believes the key members within OPEC, that grew production materially this year, are plateauing next year. The market itself is repairing the imbalance very, very quickly. If oil stays below $55, the world oil market will be undersupplied this time next year.