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

Where are we in the Business and Stock Market Cycles? Cycles have changed quite a bit compared to what it says in textbooks. Post-2000, they have been long and slower. The recession was deep and the recovery slow. It is difficult to say where we are. Given the slow recovery and that the rest of the world has not caught up to the US, we are only half way through.

Markets. Goldman Sacks closed their BRIC fund after coining the term. India has a very young demographic and great growth trajectory. Nigeria also has great growth potential. China is no longer going to be the economy that is leading the world in growth. Their population will start shrinking in 15-20 years. Emerging markets in general may still be the leading source of growth for next decade or two.

Better Returns. There is no buy-and-hold approach that he believes will work. Bonds don’t look good. REITs are interesting, covered call strategies give you an enhancement of yield but limit growth. He advocates smart, tactical rebalancing of portfolios. He likes equal weight ETFs such as ZRE-T for REITs.

Global ETF that would not take a hit if CDN$ rises. There is not one at the moment, where all currencies are hedged out. ZDM-T is currency hedged. You can get the world by choosing as little as three global ETFs.

Educational Segment. Asset Allocation vs. Stock Selection. The market could care less where you bought the stock. Most people don’t know how to get out of a stock. Over the last 60 years, equities were the best choice, vs. bonds, but the problem is tolerance for volatility. By combining different asset classes, you can lower volatility. It is more important than stock selection.

Markets. Sometimes it is all about people wanting bad news and what the Fed will do with interest rates. A December rate hike is almost a certainty. The question now is how big the rate hike will be. He views this as a necessary thing – normalizing. We are still at very low levels of interest rates. The domestic US economy is a real bright spot. They don’t rely on other countries for growth. He is definitively looking at the US as a place to invest. In Canada he looks for companies that export. US financials and Canadian forestry companies are of interest. He is focused on a mix or large and mid-caps. He is looking for higher quality, more liquid larger companies.

US Economy. Employment numbers were pretty solid and this is one of the things that he has been looking for. Thinks the Fed will be really comfortable about raising rates. Monetary policy had gone into a very different field when they decided to do quantitative easing. It was very stressful to the Fed, because in normal times they understand the consequences of their actions, but this time around there was a fear that they were not quite sure of the unintended consequences. 25 basis points does not seem like a lot, but in this monetary environment, it is fearful for them because they are not sure about what is going to happen. There will be some volatility, along with some opportunities to buy and sell some stuff, depending on valuations. An increase in interest rates is very important for the banks. He looks for companies that have relatively large businesses in the US and are generating assets that can be converted back to Canada.

Markets. The US employment trend has been pretty consistent for 5 years now. Unemployment is consistently coming down over time and more people are finding work. About 95% of the US population is now working. We are almost back to the top of 2007. A lot of Americans are working and that provides tons of benefits which means a lot of ammunition for the investment side of the business. The S&P had a wonderful bounce September through October, and he feels we are just going through a digestive phase. If we didn’t have a bit of a sideways move here, he would be concerned. We could go a few weeks or months sideways, or even give a little bit back, but it doesn’t break the double bottom showing on the chart. His cash position is currently below 10%. He has been investing through the entire fall, especially after the 2^nd bottom went in. There is still a lot of room.

Markets. To find where we are in a Bull market, it is tough to look at indices like the S&P 500 and read it. He uses Berkshire Hathaway as a bellwether which shows the lows of March 2009 through to the current date to see where we are in the cycle. He assumes we are going to have 3 great advances, Elliott Waves, which the Berkshire Hathaway chart shows. The 2^nd advance in an Elliott wave is the biggest advance where the easy money is made. Now we have gone through another corrective period, which he thinks is now completed. With that advance, we should advance to new highs. Goldman Sachs and the S&P 500 charts show the same pattern. You cannot have a Bull market without the leadership from the financials, and that is beginning now. The 3^rd up legs are unpredictable and dangerous, so you have to be careful in 3^rd up leg advances. This current advance should persist through next year. As long as the financials are leading and making new highs, we’ll be fine. Also, the economy sensitive transports are now going to begin a new bull phase, and that should begin now.

Energy. He is starting to get interested. We had a rally in energy and now it has pulled back a little. If we get this new Bull next year, it is going to be a global expansion bull.

Small caps? Looking at the Russell 2000 (IWM-US) chart there is a financial crisis peak in 2007 followed by a rebound bull in 2009-2011. This was then followed by a small bear in 2011 and then a 2^nd advance followed by a small bear. We may break out of that and make new highs. This is the time to get involved with small caps.

Markets. Since he was last on the show the S&P has almost rallied back to its old highs. He saw a bottom and had to wait two days to get confirmation, then bought over the two following days. Technology has broken out so he overweighted it on the US side. He also likes yield plays like Canadian banks and telecoms where the down trend has finished and they have broken out. He sees no problems in market breadth. The S&P may pause here before it moves higher.

Markets. The good parts of the market are those not related to oil or resources. Thomson Reuters, Canadian banks, insurance companies, REITs are not bad, but they are all getting a little bit toppy and a little bit expensive. The pursuit is to try to find good value in areas that are buyable. If oil can bottom at around $49, $54 in 2016 and $60 in 2017, and natural gas can do something similar, then you could start picking away. However, they are still expensive relative to their 5 years. Also, doesn’t know if the game of the Saudis is over yet. The bond market has been signalling that it is concerned about global growth. The bigger risk for some time has been lower yields. Even if Yelin does do her 25 basis points it is probably “one and done”, and he thinks we are in the low interest rate environment for quite some time. The Cdn$ can easily go down to $0.73-$0.74, but if you are looking at long-term wealth building, you are probably going to have the Cdn$ back at $0.85-$0.87 in the next 5 years or so. Doesn’t know that you should be buying US companies, but if you can do it through a currency hedged ETF, where currency won’t hurt you, then it makes a lot of sense. He is trying to get the dividend tax credit and dividends that can grow, without having to buy another currency. There are still good opportunities.

Markets. Fascinating how quickly sentiment can change from the negative “things are slowing down” to “OK we can breathe easy”. Earnings have come in, but aren’t rock solid. Companies are beating expectations, but through the year expectations have all been lowered. Top line growth is dramatically slowing. Part of that is the oil patch, but we are just not getting the top line oomph. Lower interest rates have created some levering up and we are back up 10%. Canada hasn’t quite had that snap back the way the US has. His concern is that there are fewer and fewer names that are making new highs and making advances. Going through earnings season, it seems that if you have a miss they shoot you, and those that hang in there continue to go. He is not seeing signs of a really healthy market. He is sitting with 25% cash. It is too early to go back into commodities, but on some of the other names that have gone down, you can wait a little bit.

Gold. The key things he watches are #1 the US dollar, and #2 is what are Central Banks doing. From the US$ perspective he thinks maybe it has done its big move. Individual Chinese demand for gold seems to be strong. At $1100, gold companies can’t produce gold. Gold is pretty stable here. His preferred way to play gold is through Goldcorp (G-T).