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

Markets. He thinks the markets have settled down somewhat, other than today’s gyrations after the Fed made their announcement. Investor sentiment remains rather fragile. There are still concerns over the timing of Fed policy, trajectory of how interest rates will move, economic stability and growth in China. Investors have to go back to the fundamentals. The S&P 500 is trading at about 17X forward earnings. Even though we are still in a low interest rate environment and a low inflation rate environment, it represents fair value. You need to pick individual stocks and choose those names that will grow. He still likes the US over Canada. Canada has some issues with where we are in the commodity cycle and how that affects the rest of the market. He continues to favour the areas of consumer discretionary, healthcare, infotech, maybe industrials in financials as well.

US$ strength? At the very least, it is going to remain where it is here relative to the Cdn$, but more likely it is going to move further and further ahead in terms of upside.

Markets. It is more than a 50/50 chance that the Fed is going to raise interest rates tomorrow. As an investor, he is hoping that he is right. This need to get out of the way. The US economy is in reasonable shape and can afford a move towards normalization. Thinks the impact on the markets will be limited. If they don’t raise rates it may just add more volatility, because it is anticipating the next meeting and how much they are going to raise at that time. The US is his favourite economy right now, yet he is not overweight the US market. Sees some better opportunities in other markets around the world. This is a little difficult right now because of the strength in the US economy, but valuations in the US are reasonably fairly valued, so he sees opportunities in Europe and Asia that are a little better. Right now, Europe is being affected by what is happening in Asia. Germany in particular has a fair amount of exports to Southeast Asia and China, and there is negative sentiment coming from the consumer. Newspapers’ headlines are all fairly negative on China which is having a negative sentiment. This impacts Europe, but overall feels European prospects are improving. It is going to be dragged up by the good economy in the US, and he sees some good opportunities in the European stock market. He favours European companies that have exposure to the US. They are going to be the biggest beneficiaries of the weaker euro relative to the US$, and will also be beneficiaries of a strong US economy because of demand from the US consumer. However, he is fairly optimistic on the “domestic markets” in Europe. Thinks there will be a decent recovery in consumption. Emerging-market prospects are not as good as they were several years ago, but when you look at the opportunity with the valuation and the selloff that they have had, there are some real good opportunities presenting themselves.

Stock plays in India? He is optimistic on prospects for India. Thinks Modi is the real deal and really wants to see things improve. There are a lot of different ways to play India. He owns 2 stocks. Zee, which is a content and network television broadcaster. Great company and they have a great franchise. Also, Indian Bulls, a household financing business, which is growing very, very rapidly.

Markets. The S&P 500 had a long consolidation phase where it was consolidating from $2040 to $2135 in August. It was uncharacteristically tight. There was no catalyst to push it up. Inevitably coming into the weaker 6 weeks of the year, the summertime, it was more likely to break to the downside. That is exactly what took place. In October 2014 there was a big drop in the marketplace and it had a V bottom. Then in October the earnings started to roll in and the S&P rallied back up to new highs. The likely scenario is that we are probably not going to move to new highs in the short term. Right now S&P 500 corporations are at historically high levels as far as profit margins go. The expectation is that they are going to have a contraction on a year-over-year basis in the next quarter. It is going to be difficult for companies to grow their earnings at this point. China is in the news a lot and has a huge impact on the world. We are still in the phase of the weaker 6 months of the year and September is typically a weak month. He doesn’t expect the next 6.5 years to be as strong as the last 6.5 years.

Canadian bank stocks? The best time to be in these is from Oct 10 until Dec 31, and sometimes you want to get out at the end of November. (There is another period from January into April.) This is because the banks Q4 ends on Oct 31 and they come up with earnings in November. Usually this is when they come out with their best earnings and when they do their dividend increases and have their stock splits. Banks have been beaten up because of what is happening in Canada. This year will be interesting because we will start to see some of the ripple effect from the oil patch. If we do see a pickup in October, it might be a good opportunity to step in, and use a Stop underneath.

Markets. He is really agnostic as to market conditions, and the last few months have demonstrated that in terms of the ability of his portfolios to react to market conditions. In August his portfolios were flat to within a percent down for most of the month and then, ironically as markets rallied harder in the last 4 days, some of his Short positions really kicked in. He ended up about 2% down in the month. His portfolios are designed to perform very well in Down markets and Sideways markets, and moderately Bullish markets. When you get very strong increase in market conditions, like there was in the last 4 days of August, ironically the fund doesn’t do as well. However, at that point most investors have other stocks in their portfolio that are doing well. The bulk of his investments in his Flagship Fund are in Pair Trades. People are often confused about Pairs as to how you can make money being Long and Short in stocks in the same sector. The idea is to try and remove industry specific risks. E.G. if Long Canadian National (CNR-T) and Short Canadian Pacific (CP-T), he is taking out weather risk, regulatory risks and input fuel type risks. It also takes out a lot of market risk. This is isolating the specific factors that differentiate these 2 companies.

Markets. You have most things descending, because it a bear market. It is also a summer lull market, and we are also inflicted with amazing global events, which he thinks has stunned us. We also have political events. A bit of a frustrating market. As we come out of the summer, perhaps we will slowly get into a better theme, but he doesn’t think stocks will be up by the end of the year. The refugee situation is a massive historical change.

3 market sectors that give the least volatility over a 3-5 year period? Banks, utilities and usually pipelines. However, be selective with your pipelines because there’s all this political nonsense going on. He likes Fortis (FTS-T) and Enbridge (ENB-T). With the banks he would go as basic as possible with CIBC (CM-T), the closest thing to what a bank used to be.

Markets. When you look at retail sales and growth rates over the last 15 years, they have gone down, but China is still growing at a tremendous rate. No one on the planet believes that it is 7%. Most think it is 6.0-6.6%. It is the second biggest economy in the world. This is actually China’s second big spike and fall, the last being around ’08. The world oil demand is still going out and with Iran coming back on stream next year, there are some issues to be debated. The US has seen the boom in fracking and it is over. The world economy is not that robust and strong. If the US had not accumulated 9 Billion in debt since Leman, the US economy would still be shrinking at a couple percent a year.

Gold and Silver. He was long 4 or 5 weeks ago. But deflationary pressures are more than inflationary. Gold is taking a back seat. If it breaks lower to new lows then buy, and sell if it breaks $1250. New lows could result from tax loss selling of gold stocks.

Short Oil ETFs? There is no ETF that shorts oil producers in Canada. He does not recommend shorting oil producer long ETFs.

Hedged or unhedged for Europe exposed ETFs? The biggest differentiating factor in equities around the world is currency fluctuation. At the moment you want to be hedged, but when we get to parity you want to be unhedged to get the benefit of the currency gains.

Corporate spreads – have they impacted ETFs? Credit spreads have widened. There is some value in the credit area right now. But if interest rates rise you will lose some capital.

Educational Segment. It is FED Week. What happens with interest rates for the next couple of years is really important for investors. The probability of them moving up a full 25 basis points next week is about 20%. He is expecting half that. There is about a 60% chance that the Fed does a half a move. In the 50’s when interest rates went up at first when hikes started, the markets also went up because it was due to the economy being stronger. He does not think we will get over tightened any time soon. He thinks that even if the FED tightens 4 times, the markets will still be strong. There is no historical period to use as reference as to what to expect. He thinks lower rates are here to stay for quite a while.