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

Energy. It seems to be trying to put in a bit of a base and could be a surprise to the upside in the fall.

TSX. Seasonality is similar to the S&P 500. This is interesting because it is so weighted in 3 sectors that you would think the seasonality would be far closer to those sectors of energy, banking and materials.

Markets. Thinks the Greek situation is way overblown. When you see what has happened over the last 2-3 years, Drahgi’s moved in saying this was not going to be a problem, all the loans have been taken out of the private banks and moved onto the government balance sheet, and yet it goes on and on and on. The situation is not meaningful.

Markets. We are finally having the summer rally. Every year, for the last 12-13 years, we have seen something completely unexpected happen between May and October, causing huge volatility. This year it is Greece and China. Once the volatility is over the market then moves higher. We now have the start of the intermediate Summer rally, which started last week. The S&P 500 last Tuesday came down to its 200 day moving average and has now moved up giving us confirmation that there is technical support under this market in the US. In Canada it is not as much, but he is seeing real strength occurring. This has happened in surprising areas such as fertilizer stocks.

China. The initial data coming out has been positive. It seems the Chinese government wants to protect the economy, and he is starting to see some actual economic data that supports that scenario. Sales coming out of China increased nicely in the month of June. There is still a concern, but it is becoming less.

US Earnings. This is an area where he has a concern. The US banks are probably one of the few sectors which show very, very strong numbers on a relative basis. Facts indicated yesterday that earnings for the 2^nd quarter on a year-over-year basis for S&P 500 companies will drop by 4.4%. The same thing for revenue. The market has been anticipating bad news coming into these earnings reports. If they do what they normally do, they are always slightly better than are expected, which also is very positive for equity markets.

Presidential cycle. Historically, a year before the US presidential election is the strongest year of the 4 years, and typically the market does particularly well as you get into the latter part of the year. Markets normally do quite well at this time of year, but take a little bit of a dip in October and then takes off again. The period from October is usually one of the strongest of the US presidential cycle.

Silver. This has 2 periods of seasonal strength. One is starting right around now and goes through until October. This is followed by another in late December through until February. We have just started into a period of seasonal strength. Historically the best thing to be in is gold because it tends to outperform silver at this time. Recently both have shown some very good technical signs of bottoming. Silver bottomed last week on an intermediate basis and is now up 6%. The 1-year chart shows a long term support from December through until now. Last week there were early signs of momentum indicators all starting to turn positive. Silver and gold go up because of the wedding season coming up in India in October/November and there is lots of buying to make jewellery. Also, there are periods of volatility coming in the summer. When people see volatility in equity markets, they run to gold and silver.

Economy. Greece only highlights what is the worst case in a really bad bunch of countries that are in a pretty dysfunctional system that is not really working very well. A small population with a lot of debt. The euro community wants to keep it contained because they don’t want Portugal, Spain, and in a worst-case scenario, Italy and even France thinking that they could negotiate some kind of special situation. While Greece itself is not enough to cause a major problem in the global economy, the longer-term fears of the whole euro falling apart would be a major problem. People are distracted by headline news about stock markets and not paying attention to what is happening in the overall economy. They are worried that China slowed down from 14% growth to 6%-7% and that is a nightmare, but you have to realize that in 2006 or 2007, when China’s economy was growing at 14%, that was a long time ago and the economy has still been growing very, very rapidly. The economy today is twice the size it was back then, so the absolute economic activity of 6%-7% is still very large from a global context. India is also having accelerating growth of around 7%. Those are very good signs. Returns to investors in global markets this year have been very poor, close to zero. Canadian investors who had the foresight to put their investments outside of Canada are earning a great return, based mostly on the drop in the currency value. This is going to be the 1^st real quarter where we are going to see the bite of currency appreciation that the US$ had vis-à-vis the currencies. There is no question that multinationals are having a problem. Europe has been sluggish. Offsetting that we are starting to see the beginnings of a wearing off of the seasonal and the bad weather influences that the first part of the year brought in. There is reason to believe that stock returns are going to be quite muted this year and it will be a challenging year.

Markets. We have had 5 years of well above historical norms in the way of returns, with essentially no volatility. When looking at equities on a broad basis, there are no real bargains out there and you could argue that some stocks have too much optimism priced into them. This is an environment where you want to have some cash on the sidelines and be ready. He is underweight equities by 20%, and most of that is in cash. He is not forecasting any sort of meltdown or catastrophe, but likes to have a bit of cash because a) it helps insulate the portfolio and brings down the volatility, and b) it gives him an opportunity to step in and do some buying. He is not doing any major buying right now in either equities or bonds. Thinks bonds is an area that is going to have more risk than investors think. For the last 30 years bonds have been pretty synonymous with safety, but for the last 20-30 years we have been in a flat to declining interest rate environment for the most part. Eventually, as rates do start to rise, it will put downside pressure on the bond market. He looks for equity names that will grow their dividends. If it starts hefty, the odds are that it is not going to have the same rate of growth as something that is more modest. Also, does not want to be caught falling into a dividend trap. It is great to get a big dividend, but if you lose what you are getting in dividend plus more in share price decline, it hasn’t been a worthwhile exercise. Be careful not to be overweight in interest rate sensitive securities such as utilities, REITs and even some of the telcos.

80% of a retiree’s portfolio in financial services for the dividend. He likes Canadian banks, but would caution about having 80% in any one sector. Canadian banks are great businesses and barrier to entry is nearly impossible and the dividend is safe. But don’t forget you are buying equities and there are risks. If you look back to 2008, the Canadian bank share prices were down almost 50%. He would strongly encourage you to diversify. He is underweight Canadian banks because loan growth is really slowing and that is a big part of where they make money.

Asset allocation for a 9 year old child’s portfolio of $10,000? If the money will not be used for 10 years or more, then you could be in almost all equity type of allocation, as long as you are buying quality. Avoid buying individual stocks, because no matter how high quality the company is, it will not give you the opportunity to diversify properly. A good way to get that exposure is through an ETF using a broad index such as the S&P 500. He would look at splitting between US and Canada, 2/3 US and 1/3 Canada.

What instrument do you use for holding cash? With interest rates at all-time lows, there is nowhere you can park cash and get a reasonable rate of return, unless you are taking on risk. If you are putting cash where it is going to be fully liquid, there is no chance of it being worth less than what you put into it when you want it, and there is no tie-up period to it. You are going to be earning somewhere around 1.5%. There are lots of ways to achieve that.

Markets. Thinks we will have pretty good clarity by the end of the weekend on Greece. The real D-Day is July 20, which is when the bank loan for the ECB is due. His suspicion is that they will come to an agreement. Economically, it really doesn’t matter if it leaves or not, because the rest of Europe is pretty much firewalled against it from an economic perspective or a financial markets perspective. China remains a bigger worry. Because stock ownership is roughly 8% of the population, as opposed to North America which owns 50%, we are not seeing the huge impact, and there is certainly no correlation between stock prices and a wealth effect and consumption. He doesn’t think you should be too worried about either of those situations. He is in the market buying right now. When you see these pullbacks, you should be in their buying. There is nothing suggesting that this rally will end. It has gone on for a long time and the market needs to let off steam. This is probably a healthy thing and marches on higher from here. From here to the 20^th, it could be a little choppy.

Energy. Production has continued to go up and hasn’t stopped. Demand is slowly growing as well, but not nearly enough to compensate. This is the 10^th weekly close downwards, which is a record of sorts. The oil complex has been under pressure for 2.5 months now. Thinks oil is range bound. Supply/demand is sufficiently out of whack right now. Saudi’s are pumping full out Russians are pumping out oil at any price, so he expects this will be a range bound commodity.