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

Markets. He thinks the US dollar is on the way up again, but US companies’ valuations will be going up again also. Eventually money flowing into the US will find its way into the S&P. The stocks in the top quartile of that market will receive the most. The dollar index will go up another 60% over the next few years. People better get used to a stronger currency. It is a little late to position portfolios to take advantage of a lower loonie. In Ontario all the manufacturing infrastructure has to be rebuilt for us to take advantage of the lower loonie.

Markets. His outlook on the market is positive. Technically we’ve had a double bottom, so now the market can go forward based on the outlook for Q1 earnings in 2016. Doesn’t think the Fed is going to act in the short term, and that will give the markets a bit of an impetus. The world has been in a short-term inventory correction in the 3^rd quarter, which has really slowed down production as people adjust. Towards the end of Q4, we can look forward to an uptick as the inventories start to rebuild. The economic data out of the US has been spotty at best. Given the severity of the 08/09 recession, it was going to take a decade to recover, but we are only in year 6 or 7 of that recovery. As China moves to a consumer economy, it is going to have all kinds of ups and downs, but not enough to drag down US or Canadian markets. When energy turns, he thinks the TSX will also turn at that time. The US$, which has been up dramatically this year, has impacted earnings. If that stays flat or starts to decline, that will be helpful to the US corporate earnings.

Markets. Technology earnings has been really good news and the companies are coming out with much better earnings. One of the encouraging things is that you are actually seeing some top line growth, not just cost cutting. Although companies, like Google, keeping a lid on costs is probably a major factor. This probably represents the start of a decent rebound. Particularly with the Fed not raising rates, we are now moving into an acceleration phase. The Fed, not raising rates when they led everybody to believe that they would, effectively means it is off the table, at least until sometime next year. The Chinese will do what they need to do to maintain growth, which maintains social stability. You have to feel that the enormous selloff in the commodities was somewhat overdone. We are probably going to see a pick up in Chinese growth from its low. That will help commodity prices, help the rest of the emerging markets and help Canada with central banks remaining on hold or do more easing. With the 15%-20% correction on August 24, you could say that we are on another leg of this Bull market.

Markets. The rally would have been better if health stocks hadn’t dragged the portfolios down. They were helped today, but then the oils got hit. In any case, this was a good week. Thinks the downside sentiment was very much overdone. He is quite astounded by all the concern about China. We have been through about 3 or 4 of these cycles. China is a managed economy, and politically they have to have growth. They are going to get growth anyway they can. They have huge savings in the economy and have 1.2 billion people so they have lots of resources. They are going to pull and push the right levers and get things going. They are not a consumer economy yet. Once they become one, they are going to be a lot harder to predict. In the meantime they cut rates, allowed greater use of credit, etc. The next wave will probably be some move towards infrastructure, etc in order to get people working. The US economy is doing a better than a lot of others. One is the tech sector. As the economy improves and people upgrade, corporations upgrade their technical systems and thinks you are going to see both consumer and big corporations all upgrading. The commodity sector is probably 6-9 months away from some real improvements, but the market will probably anticipate that. He is willing to sit on the sidelines for another quarter or so.

Markets. Q3 was incredibly volatile and negative. Q4 is going to be quite positive to the upside and we will get back quite a bit of the Q3 drop. Quite a few of the Q3 uncertainties have been cleared up, one being the election, another being when rates will go up. US numbers are starting to look better and China is managing its slow down in a constructive way. He got out of VRX-T because he created a closed end health care fund. He was going to invest the funds in that fund over 60 days and he ended up taking his time. If he still held VRX-T he would have difficult client calls. He has only one energy holding and has moved over to the pipes otherwise. He has a heavy weight in forestry due to US housing. He is a quarter of the way to getting courageous with energy. He feels better about metals than lumber.

Energy. Thinks the market is starting to appreciate that the imbalance in the marketplace is tightening. Their current estimate now is that we are still oversupplied by about 1.5 million barrels per day. Counteracting that, we have had the strongest demand growth this year of any year going back to the great recession. Demand is up about 1.8 million barrels per day this year, and estimated to be up next year by roughly 1.3-1.4 million. The total oversupply next year is roughly equal to 1 year demand growth. Capital expenditure globally is down by around 24%, year-over-year, the biggest drop in the history of oil/gas. Looking out to next year it is likely to be down another 10%. Globally, supply is falling, and the key question is at what pace. Is it going to be quick enough to offset barrels coming out of Iran? Over the past year there have been 3 areas of supply growth. the US, Iraq and Saudi Arabia. The US has gone from a run rate of growth of 1.5 million barrels per day to roughly 500,000 barrels per day from a peak. That rate should continue to drop 100,000 barrels per day per month, until we get a high enough oil price to allow drilling to resume in the US. Believes Saudi Arabia is close to producing at their maximum operational capability of 10.5 million barrels per day, and Iraq is likely to be flat next year. So the 3 primary areas that meet supply this year are at best flat next year. We have record growth in demand this year, and strength should continue into next year. Finally we just have to deal with Iran. It is thought that it is going to be around 300,000-500,000 barrels per day by around Q1-Q2. This coincides with the drop in US production. His belief is that if we do not get a rally in the oil price, the market could actually be undersupplied next year by about 500,000 barrels a day, probably in Q3. We need oil to rally to around $55-$60 versus $45 today. The challenge for energy investors is that a lot of stocks are already discounting that scenario. He thinks investors have gotten more optimistic than the oil market. Money is coming out of the health area and is going into the large underperformer, which is energy. Secondly we saw the oil price for a few days tick up when we saw the US rig count drop. Once the money starts piling in, you get a combination of Short covering, US money coming in and, most importantly, you get generalist investors who manage the multibillion-dollar funds coming in.

Healthcare Stocks. His best read is that everything is being driven off of Valiant (VRX-T), even companies with absolutely different business models. Those stocks are falling 10%-15% a day, depending on what headline we get out of Valeant. It is not just Valeant. The Shorts are acting like a bunch of wolves on some of these names. In a jittery market it doesn’t take very much to scare initial investors out of a name. That starts a negative momentum which is why you get a name like Nobilis (NHC-T) falling 15% in a day. It is down 45% this month.

Small-Cap Stocks. He takes a somewhat niche approach. In North America alone, there are about 16,000 small-cap stocks, so there are always opportunities. Earlier this year he felt that the general valuations of companies were not terribly attractive. You had to pay forward for growth. As we have seen a pretty significant selloff, not just in energy, materials and healthcare, but pretty much everything has been in freefall. People who were up a lot in a year, 10%-20%, had big positions in certain names which they may not have known as well as they thought they did. There was mass liquidation as they tried to lock in gains. Now we are into tax loss selling, and that is creating opportunities in non-energy, non-material, non-healthcare, small-cap land within Canada. It is a stock by stock basis.

Markets. He has been uncomfortable with what is happening in the Canadian markets, so has cut back about a third on his iShares TSX 60 (XIU-T). Then the market dropped down so he switched to the US side. He is very positive on the US and sees continuing growth. What concerns him about the Canadian market is that we are gold, energy, financials and telcos. Doesn’t see any recovery with the golds, and expects $45 oil will continue. Still likes Canadian banks, but is not quite as enthusiastic as he had been. He is using option strategies and covered calls on financials. When you have a rising market, a Covered Call will underperform it.

Which sectors should be included in a balanced ETF portfolio? The most diversification you could buy would be the iShares S&P/TSX Capped Comp (XIC-T), which is diversified, iShares S&P 500 (CAD Hedged) (XSP-T) or the Vanguard S&P 500 (CAD Hedged) (VSP-T). He would have about 20% Canadian, and would also have a combination HAP Floating Rate Bond (HFR-T) as a place to park some cash and maybe one of the laddered ETF’s.

Markets. Has seen a lot of things improve from several weeks ago. He is looking at a lot of breadth and volume, and one by one, he is seeing a lot of improvements, but is still in neutral with his positioning. He uses chart oscillators, which is just looking at different price levels and different price momentum over shorter and longer time frames. Using long-term oscillators they show 1) the level they got down to (how oversold the market became) and 2) that they have now turned up and are positive. The S&P/TSX oscillator shows past corrections in 2008 and 2011, and how the oscillator has got down, but not to the same level. Then it crossed up and there is a positive signal. Also, looking at Volume Thrust which shows volume of 5 to 1 of Up Volume over Total Volume, over a 4-day period. 3 of those days are positive. This is very rare. There has been only 10 times since 1950 this has happened. This shows this is not just a little short covering rally; there are real significant changes that have happened in the market on October 2nd.

Markets. Broadly speaking, valuations are high. There are a couple of groups, especially financials, where valuations are not high and they still look good. A lot of stocks are at the extreme ends of their spectrum, and a lot of them are just going on momentum. To navigate this, you have to go down to the cheap stocks and hope that they start to work out. US investors are all over us on the banks and the housing sector, thinking we are going to collapse. This is a tough market to navigate. Of the energy stocks, including pipelines, only 5 of them had what he would call Fair Market Value. Japan is basically in the stage of collapse. China is slowing down. Europe is pretending that they are recovering, and they are not and their numbers are painfully slow. Globally we have a slowdown. This means that the people in charge are not the politicians. It is the bankers. If we get into 2016 and things are still slowing, he doesn’t think the US Fed is going to stand aside in an election year and do nothing. Some more QE may be on the way.

Investing. The growth of the economy in Canada and everywhere else in the world is not going to be what it was in the past generation or 2 or 3. It used to be normal to grow at 3.5% or 4%. Now we have an economy that grows at 1%-1.5%. Doesn’t think we will see even 2% growth in Canada decades from now. You have to realize that when the speed limit goes down and the economy is only growing at 1.5% instead of 3.5%, we are going to have a lot more technical recessions for the next 5, 10, 15 years. People should set their expectations for substantially lower growth for probably the most of the rest of everyone else’s lives. The loonie hit an 11 year low about 3 weeks ago. He has spent most of the day putting hedges on his clients’ US positions, so as to lock it in at $0.37. In the past 3 weeks we have gone from $0.745 back to $0.77. He thinks the $0.745 was the bottom, but who knows.

TFSA. How does this impact an individual on a fixed income such as the CPP and security benefits? Does income earned in a TFSA account reduce security benefits? These accounts are literally tax-free. Whenever you take money out under any circumstance, you are not going to see any tax, and as a result you are not going to have any OAS claw backs and you will not be paying any income tax. Those people who have already put in the $10,000 this year are probably not going to have to take it out again. He expects the contribution in 2016 will be back to $5500.

As a new retiree, I have funds in a group RRSP that needs to be transferred. Should the funds be put in GICs or left in mutual funds? I am looking to buy a condo. He would do neither. You should build a balanced diversified portfolio using either asset classed mutual funds or ETF’s. Not traditional mutual funds and not traditionally actively managed mutual funds. Use ETF’s creating a balanced portfolio using 6 asset classes.