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

Markets. We have moved from a point of low volatility to suddenly high volatility. When that happens, the challenge is you’ve got a number of hedge fund investors who are leveraged, and they measure volatility as a way of deciding how much risk they should be taking. As market volatility picks up, they are forced to reduce risks on both the Long and the Short side. We saw a lot of that on Monday in the big sell off. J.P. Morgan recently said they expect as much as $100 billion to follow on selling from those types of investors. A dip like that often retests the lows, so that would be back to the lows that we saw on Monday. The rally back was very much what he would consider low quality equities. He didn’t see meaningful, long term value buyers step in to pick a bottom, which leads him to believe that there is further downside. If you are trying to construct a balanced portfolio, it has been a real challenge. The more defensive aspects have not been defending you.

Markets. We are in the middle of a prolonged business cycle in the US, and he has used the market pullback as an opportunity to increase his exposure to some high-quality dividend holdings. Unfortunately, retail investors look at the volatility and just think they want to avoid the market entirely. The reality is, the value of these large companies doesn’t change 20%-25% in a day, even if you do have a slowdown in emerging market growth. It is discipline and a steady hand that you really need to have when markets are this volatile. In the last 4-5 years there has been an increase in household spending in the US, but it is largely as a result of high income households. Low to middle income earners haven’t really seen their wages go up all that much. Once they start feeling a little more confident, because of wage growth and home price appreciation, it will have a positive knock on affect for the economy. It will encourage corporations to spend a little bit more. European growth expectations were ratcheted down by the ECB last week. It is his view that the quantitative easing program will help, the same way it helped in the US. In the interim, corporate profits in Europe and the UK are still 40% lower than they were in 2007, so there hasn’t been a fundamental improvement in the corporate sector in the economy, and that is what is going to drive a combination of earnings growth and multiple expansion. It makes sense to have a little bit of European exposure.

Markets. The correction came earlier than expected and the worst is probably over. The lows on Canadian and US markets hit August 25. There is a perception that the month of September is a terrible month for equity markets, but that is probably more of a myth than anything else. The S&P 500 and the Dow, for the last 10 Septembers, have actually gone higher. TSE composite has gone up 6 of the last 10 periods. However, the caveat is that when the markets do well in September, they go way down. This year, we have hit the low and we are going to go through a volatile period of base building. 14 times, when the Fed as been about to increase interest rates for the 1^st time, the stock market has gone down. On average it has gone down 10%, and already this year on the S&P 500, it has gone down 12%, so we have already seen the correction prior to the 1^st increase in interest rates. We are going into a period of volatility and you can expect these big moves one way or the other, but ultimately when you get a test of the previous low, it is an opportunity to start buying.

Gas. Watch the gassy stocks, both Canada and the US, as they are starting to significantly outperform the market and we are just entering a period of seasonal strength. This normally bottoms right around the 1^st week of September and moves higher right through until the 3^rd week of December. Starting to look very interesting. (See Top Picks.)

Lumber Stocks? These tend to bottom around the middle of October and then move up strongly, normally through to April of each year. Then from April to October they go strongly on the downside. These have, what he calls, double seasonality. They don’t just go up, they go up and down and up and down during both periods of seasonal strength.

REITs. These have a tendency to do very well in the summertime. This is because interest rates tend to move in their favour. Right now the sector is still in a downward trend, but there are early signs of bottoming here, which could mean that we might be going into a period of seasonal strength. He would like to see more evidence. Usually if you start to see interest rates move lower, that has a positive impact on the REIT sector. This year it is not acting like it normally does, so he would be very cautious right now.

Junior golds? Gold bullion actually bottomed around the middle of July, as you would expect for seasonal trade, and then would take you right through to the end of September. Gold stocks actually bottomed at the time as well, but recently they have been underperforming gold itself. He has become concerned that the seasonal trade for precious metals stocks in general is not working the way it normally does at this time of year. The end of the seasonal trade is right around October 1, so you are starting to run out of time, so it is a question of when you sell these securities.

Silver? This has 2 periods of seasonal strength, one now until the end of September and then it comes back in January until February. Silver has been disappointing this year.

Copper? This has seasonality usually from around the middle of October right through until April of each year.

Passive or Active Investing? He is very biased towards active investing, because there are ways that active investors can make additional profits in the markets, by using a combination of seasonality, technicals as well as considering fundamentals. The key is, if you are willing to spend the time to look at what you are doing in the investment area, then you can outperform the market. But you have to know what you are doing and be very, very attentive to what you are actually holding.

Play natural gas through ETF’s or through companies? There are lots of opportunities either through the commodity or individual stocks. For example if you want to buy a natural gas in the US, the most actively traded ETF is UNG. A Canadian ETF would be ZJN-T, which is a basket of gassy stocks plus some oil and gas equipment stocks. Arc Resources (ARX-T), Painted Pony (PPY-T) Peyto (PEY-T) are gassy stocks. The key is you want to be in stocks that are going to be showing the strongest seasonality at right around this time of year. Some of these are forming some really interesting patterns.

Markets. This has been a well anticipated correction, and not any more serious than umpteen others that we have had in the past. His focus is on the fundamentals and the fundamentals, particularly south of the border, are quite good. In fact Canada is doing better than he had anticipated. It seems to be handling low oil prices with a minimum damage so far. Our trade numbers and employment numbers are better than everybody anticipated. This is actually a time that people should be picking away at stocks they like. He focuses a lot on dividend paying stocks and the telcos have just walked through this period as have the utilities. Markets are more volatile, but the markets are different now than what they were a few years ago. There are a lot of big players in the market and a lot of them depend on volatility to make money. If there is no volatility, they will create it if they possibly can. His view is that you get good positions, hold them and add to them when you can.

China. He considers certain concerns to being over the horizon, in other words it is something that might happen. Doesn’t see the Chinese economy collapsing. It is a managed economy. They can push a few buttons and a couple of million people will be out working somewhere. They have huge foreign exchange reserves and still have lots of capacity. It is going to grow at a slower pace simply because it is changing gears, but it is not going to go into any kind of a negative. 10 years ago it was growing at 7%, and now it is only growing at 6%.

Markets. There has been a very long run in the bull market for the last 7 years. Most of the pullbacks have been very modest at 5%-7%, and a few weeks later we have been back at the highs. This pullback has a different tone to it. There are greater issues with the central one being China, their stock market and their economy, which has an impact on commodity prices, that impacts Canada and Canadian prices. We don’t really know what the data is in China and what the economy is doing. The Chinese government can only support the stock market for so long. He believes their economy really is slowing. He expects a period of heightened volatility, but also some great opportunities. When we see situations where the market sells off a lot and big, high-quality, blue-chip companies, that are not impacted by commodities or China or what is happening in Europe, that can be a great opportunity for investors with some cash.

Canadian Banks? He favours US banks. The US economy is improving at a greater rate, and the housing market is improving there. In Canada there are probably some downside risks in housing and Canadian banks have large mortgage businesses. Also, Canadian banks would have more exposure to energy through loans to corporations in the energy sector. Also, has exposure to the Alberta economy, which is going to be under some pressure. The earnings torque on the US side over the next few years is going to be better.