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

Canadian Economy. He has been in the Bear camp for 4 years, and as months go by we continue to see evidence that it is worse and worse than what Canadians believe. The finance minister is shaving his projections for growth down to 1.2% for this year. Feels the oil situation is going to continue to deteriorate. Quietly we are seeing energy companies laying off hundreds to thousands of people every month. We are seeing further dividend cuts. We are seeing further cuts to CapX and no sign of oil strengthening. Even the businesses that are not involved in oil are suffering. You take that along with the Canadian consumer who is drowning in debt and the Cdn$ that is costing us more to buy anything outside of Canada, compared to a year or 2 ago. What worries him more is that he doesn’t believe there is enough recognition or call to action to change this. He has been 2/3 US to 1/3 Canadian 4 to 5 years now, very light in the commodity space.

Markets. The American economy is very, very strong, and is kind of saving the world right now. We really need the Fed to give us a Christmas present and raise rates. The market is strong enough, the economy is strong enough, the job numbers are there, so just do it and get it over with. There is still a lot of tax loss selling in Canada, but in terms of the US market, uncertainty kills stocks. We have had 4-5 years of uncertainty. If the Fed will get rid of one more piece of uncertainty, investors will start to buy. In a rising US interest rate environment, he sees opportunities in industrials, consumer discretionary and technology. These are areas where there is pricing power. In the tech world, you are getting companies at 13-15 times earnings and they are sitting on hundreds of billions of dollars in cash. Some are paying dividends and the floor is being raised by that cash cushion. Investors should have a balanced portfolio with small caps, large caps, across sectors, good diversity, etc. Look for what the growth rate is, the balance sheet and the valuation. If you eliminate financials, oils and resources, you can get companies that are debt free, sitting on cash, growing fast at 15X earnings. Not a bad scenario if interest rates are not going to spike up, which they clearly are not going to do.

Markets. There has been a pattern on the S&P 500 where the market tends to get in around the 2100-2130 area, and then find a reason to fall. It has been doing this for the better part of a year now. When he was on the show on Nov 5, it was approaching that level. A lot of momentum indicators that he watches were topping out, so he felt that there would be a bit of a pullback, so he pulled out about 10% to take some profits and play a little bit of a dip. He bought back in again on Monday. Thinks this market is fairly secular rotational and violent in its movements, so you have to be quick on your feet and do a little bit more trading than what some people are comfortable with. A silver lining for investors may be that oil looks to be putting in a base, which means that at some point we are closer than we have been in a while to oil possibly breaking out. If the low of August, around $38 a barrel, is tested and bounces off, perhaps breaking the neck line of around $50, it could result in a fairly strong upside into the mid $60.

Markets. He is neutral, so his cash levels come up a little. He is trying to figure out if it is a correction inside a bull market or a bear market. He leans towards it being a correction. Energy and Materials sectors have the wind in their face. There are concerns about banks and Financials. He is seeing pockets of growth in healthcare and technology. But he would make sure to stay diversified. There are pockets even in energy and mining to have a piece of. The markets will not be affected that much by a 25 basis point raise in interest rates.

Markets. The Fed signalled quite strongly that there will be a rate increase in December. They also indicated that the economy is not great, not awful, just kind of mmph. Thinks the Fed is quite anxious to get 1 or 2 rate increases in, so that they will have some bullets in the gun for the next recession, whenever that happens to come. The problem is, if you go into a recession and you have no monetary tools left, what do you do. Particularly if you are faced with a recalcitrant US Congress dominated by Republicans, who don’t believe in fiscal stimulus. This means the loonie is not going to go through the roof. People going to the Dominican or Florida, who have been holding off, expecting the loonie to go to $.80, forget it. It is not going to happen. If the US raises rates before Canada, then we are going to see a lot of hot money flow out of Canada and into the US. This probably means interest rates in Canada will rise eventually. A lot of big cap stocks on the TSX have been very weak this year, including Canadian banks, utilities and telecoms. People globally have sold off the Canadian economy and are worried about the effect of weak commodities. This has given us some opportunities in the Canadian market.

US Markets. Thinks a US federal rate hike will take effect in December. A 25 basis points doesn’t do a heck of a lot, so why not just get some of that uncertainty out of the way. We are starting to see some growth in the jobs market, particularly in wages. It is a consumer driven economy, but at the same time you have a 5% unemployment rate with a couple of hundred thousand jobs per month coming in. This is a very constructive job background. You are also seeing wage growth. He sees a lot less working in this market than what there was a year ago.

Markets. There were lots of special situations that happened today. Gold hit a five-year low. There were special situations, like Costco, that moved to an all-time high. A number of aerospace and defence stocks moved to new highs despite the markets being weak for the last 2 weeks. There are a number of cross currents that are acting quite positive despite these choppy markets. He expects the market will continue to be choppy until the Fed increases its Fed fund rate for the 1^st time. Seasonally, you want to look for a Santa Claus rally, which is getting lined up in a number of ways. First you have to get past the tax loss selling pressures for the next 4 weeks or so. When you have the 1^st increase in the Fed fund rate, the 6 months prior to this, markets do not do very well. Since 1944 the market has gone down 10%. But when the 1^st increase happens, the S&P 500 in the next 6 months went up an average of 10%. Historically, from now until July in the US presidential election year, markets do very, very well. Markets continue to go higher right through until July and sometimes into August.

Markets. The Paris events of Friday remind him of 911 and the show he did immediately after it. It is disruptive to the markets for a few days, but these events are starting to have less and less of an impact on the markets. The markets had already been selling off for a week or so before this event. Once we digest this event, markets will go back to where they left off Friday. The Japanese economy is the leader in the world to face the debt accumulated over the years and the aging demographic. We need other policies than QE.

Overweight TSX stocks because they have pulled back so much? Oil is cheap and Canadian market performance has always been about oil. He might look to starting to overweight Canada with the expectation that in 1 to 2 years oil might start to come back.

Gold – Buy now? He just nibbled last week. He only goes to gold when the risk reward is attractive. A 5% position would be his maximum.

Educational Segment. Japanese Debt. There was a $57 billion increase in global debt since Leman. The biggest accumulation of debt is on the government and corporate sides, not households. Look at credit default swap spreads. Emerging markets have higher spreads. The bond market is starting to get on alert. The trend has turned and this is where we watch for global systemic risk.

Markets. Valiant is blowing up the whole health care space. Oil seems to be entering a second down leg and money is flowing out of Canada. There is always something going up, however, and you just need to be working harder. He would be looking for turnaround stories and those few pockets of growth. He likes alternative finance (specialty lenders), as well as US real estate, especially housing. Sometimes it is hard to sell when you are down 30%. You just have to take your lumps.

Markets. Market had a rally today, but didn’t have a sense that it was a really strong rally despite what the numbers showed, because there was a lot of money moving into energy. Also, defensive as utilities and staples did well. It was definitely a surprise as he had expected a tougher day. This is a very difficult time as nothing is clear. Most investors have to almost take a little bit of a “wait and see” approach. He would hold a little powder back and not be fully invested, until you see a path unfold. As investors, one of the problems we have is that we are in a transitional period. We don’t know if the Fed is going to raise rates, and until that happens we are not sure what it is going to mean. Valuations are not cheap right now and yet compared to any other alternative, equities still look the most attractive, but there hasn’t been real capitulation, valuations are not attractive, earnings have been fairly disappointing. Many people are just wondering what the direction is. Caution is really the order of the day.

Canadian Banks? You truthfully can’t go wrong with Canadian banks. In general they haven’t had a very good year. That cake of pessimism is fully baked for the banks. If you want to make a switch, consider moving to one of the US big banks. A number of them are a lot cheaper valuation, and a much more improving story.

Cdn$? Most strategists think it is going to go down. The fundamentals between the US and Canadian economy definitely favours the US. Thinks there could be $.02 or $.03 come off in the next 6 months. Doesn’t think gold or silver is a solution. If the US does go ahead and raise rates, which most people expect, then all of a sudden you have a risk-free asset that could be treasury certificates you are purchasing, that offer yield. Gold and silver offer no yield.