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

Markets. Markets have been pretty flat all year which has made it frustrating. His is a dividend shop, so his clients are underperforming. On the oil side, some of the higher yielders had been forced to cut their dividends. In the utility/pipelines, dividends are going up, but investors are worried about interest rates, which hurts those companies short term. In the case of banks, interest rates are going down in Canada, but thinks this is a temporary situation. He is going to look for opportunities to add new companies that have lower current yields, but growing dividends at a faster rate.

Canadian Banks? Year to date they are down roughly 5%, while US banks are up 5%. The market is not recognizing Canadian banks currently. Some of that is due to earnings growth which has compressed from about 10% to about 5% over the last year. He is at full weight in banks. (See Top Picks.)

Gold? We have seen the market meltdown in China, Greece, etc. and gold has done absolutely nothing through this. Also, he doesn’t expect inflation to be a much of a threat through the next 3 to 5 years. Because of this, he isn’t sure there is a lot of upside in gold. He is not adding to his positions.

Economy. Bank of Canada lowered the interest rate to .05%. It is obvious they were worried about growth. He questions if this is going to do that much, and may have some repercussions. When they cut rates, it stimulates 2 primary things: 1) Interest rate sensitive sectors such as real estate and housing which is already overstimulated, and 2) it hurts the Cdn$ which has already been weak. Consumer spending is supposed to stay strong and a lot of foreign companies selling goods to Canadians have been eating some of the Cdn$ weakness up until now. Wonders if there is going to be a little bit of inflated goods prices as we go forward.

Canadian Banks? These are fantastic franchises. They have a dominant market share in Canada and are very high ROE businesses. The challenge is that one of their key areas, Canadian lending, should have some headwinds here. A) Because of high real estate prices and B) because Canadian economic activity is quite muted right now. You should be buying US banks, not Canadian banks. (See Top Picks.)

PayPal? (Trading on this starts next week.) One of the leading payment providers globally. Have a fantastic franchise. They are in lots of brick and mortar as well as online purchasing. Believes these are the growth engines of the future. The question is, will other players catch up or displace them, such as Apple’s I pay. Growing very, very nicely at about 20% a year. Trading at about 32X earnings, so it is not all that cheap.

Economy. Bank of Canada cut the overnight rate by 25 basis points, and the reaction to the loonie was quite astounding. This is an unusual situation, because the loonie is not weak as we have seen in other recessions. They are saying that the 2^nd quarter is going to be negative and when that is confirmed then we are officially in a recession. It is a different type of recession, because it is certainly not a recession in housing or the financial sector. It is really on the commodity side, which is something out of our control. Managers are reluctant to make long-term commitments to capital spending. We have seen a weaker dollar for the last 8-9 months, but it has not been long enough for them to put shovels in the ground and ramp up that manufacturing side. 1.5% GDP growth is forecasted for 2015 and you have negative first 2 quarters, which means they are expecting a pickup in the 2^nd half of the year. We have been bombarded with issues such as Greece and China for months and months, but the economy is moving along very, very nicely. Hasn’t been a buoyant recovery, but it has been strong and steady.

Canadian housing market? Just as the overall economy is unusual, so is the housing market. If there is a housing bubble, it is going to be confined to Toronto and Vancouver. If you go across the rest of the country, in some of the smaller communities there is no housing bubble and there hasn’t been huge appreciation, in spite of low interest rates. A lot of US money managers have been shorting our banks as a way of exploiting a Canadian housing bubble, but they are forgetting that our housing market and banking system work very, very differently from what the US does. We are not going to have a repeat of the US situation back in 2008-2009.

Canadian Banks? Generally businesses change and industries change. If you had said 30 years ago that people are never going to go into a bank again to get their money out, nobody would have believed you. Industries evolve and they will evolve with it. They may end up with a lot of expensive real estate, but part of the evolution of business is adopting new technology and using those technologies in their business. We have some pretty smart people running our Canadian banks. It’s a great oligopoly situation, so we don’t have to be too concerned about them shutting the doors anytime soon. They have been moving more and more towards online banking.

ETF’s or stocks in a TFS account? Part of this decision would be the amount of money that you have to invest to get a properly diversified portfolio of equities. It is pretty difficult if you don’t have the capital of $100,000 or more to assign to an equity portfolio. If under $100,000, you are probably best served by going the ETF route, and diversifying by country and market size.

Biotechs. Thinks you can buy selectively in this group. You have to be very careful because the multiples range from 14-15 times earnings to 50-60 to 100 times for some of the upstart companies. If you are looking for a broad array of companies, you could do it through a biotech ETF. He holds Gilead Sciences (GILD-Q).

Markets. It looks like Greece is going to come to some kind of a process and isn’t going to be a major concern. The market in China has stopped falling, but you have to remember that it was a very sharp decline over a one-month period. It is still quite strong if you look at it year to date. Thinks it is largely contained to China itself. Oil was down initially, but is now up and she doesn’t know if the market is thinking the Iran deal may not get passed. If it does get passed, it is still going to be awhile before their crude comes back on the market. She has been very underweight oil in all of her clients’ portfolios, and really has not been adding exposure since last fall. There could be a chance of another pullback this year. Likes the banks because the sector has lagged the market because of its overhang on energy, housing, etc. Recently there have been some very strong numbers such as employment, auto sales and housing.

Canadian Banks? Likes the group as a whole. They have lagged on concerns over the impact of energy on earnings, the Alberta economy, housing, etc. She doesn’t think there will be a significant housing collapse because rates are low and affordability is not an issue. Energy exposure seems to be quite manageable. Thinks they can grow their earnings mid--single digit. They all have target payout ratios of 40%-50%, so they are going to increase their dividends 4% or 5% every year. Her favourites would probably be Royal (RY-T) and the Toronto Dominion (TD-T).

S&P 500. Seasonality is a funny thing. Sometimes it doesn’t work and might go for a string of a few years, like the past couple of years where it kind of didn’t work. But when it works, it works well. Right now we are in a trading range and its acting very similar to what a Summer can be in a weak period. He is looking at a lid on the S&P 500 in the low 2100’s with the floor in the mid-2000’s. Markets, from October through until about May, tend to be relatively positive but in the spring they pretty much go sideways, and often can selloff into October, which is a time when you would start buying.

Markets. Smart Money was just 40% confident in a bull market. About 1.5 weeks ago, when Greece was at its full bore problems and everything was uncertain, they were just 70% confident of a bull market rally. They are back to 60%. The majority of sophisticated investors are bullish at this time, and that is a good sign. Thinks the market is going to be very choppy for the rest of the summer and is suggesting that every time the market gets down into the low $2,000s, it is probably a buying opportunity for picking up good stocks. Every time it comes off and heads into the mid $2,100s, is probably the time to exit out of stuff you don’t like, but continue holding stuff you do like. He is relatively neutral to bearish for the summer and is currently holding about 50% in cash, but expects that to be 40% in a short time.