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

Markets. In the most recent CPI numbers 80% of components have a gain of 2.14% and this is a far cry from what people are worried about. Next year you are going to see 2.25 to 2.5% and then a rise in interest rates. In 2006/7, the interest rate curve went flat and this is abnormal. You won’t get a flat yield curve any time soon because that would kill the economy and that is last thing the Fed wants.

Investment Advisor Fees: He charges 1.25% on the first million and that stays constant regardless of the value changes in the account. He charges it quarterly.

Markets. In April he raised some cash in his funds, because he knew the pipeline for IPOs was quite large. Also, in the summer there is a little bit of weakness in the sectors, and he wanted to have a little more cash on the sidelines in order to participate in some of the IPOs or get some names that have been beaten down quite a bit. You have to be very selective on IPOs and be sure that there is good visibility and that multiples are not too high. The problem is that when all IPOs are doing really well, the multiples expand quite a bit and people know they can get higher valuations for them. Sometimes it’s good to be in an environment where IPOs are not doing well and are trying to come public. That is where you can get some good values. You want to see the dust settle on some of these, so you can see what kind of valuations they will normally trade in. Smaller cap names in Canada, outside of the resource sector, are growing earnings fairly rapidly and don’t trade at ridiculous valuations. He would feel comfortable with a lot of them in Canada. In the US, some of the high flyers trade at much higher valuations and could come down more. Investors should have 5%-10% of cash sitting on the sidelines, just so that they don’t have to sell something in order to buy something.

Markets. We may have a new federal government in the fall. This would represent an opportunity. It could cause a bit of a shock to the markets.

Quarterly Earnings Reports – should investors pay attention to them? He thinks there is too much emphasis on 3 months. You should look at a year. You can compare quarterly earnings to a year ago. Watch for write downs, debt increases and negative cash flow.

A lot of people are saying the markets are overextended and valuations are stretched. IPOs have valuations that are insane. He would be more wary of investing now than in 2009/10 after the blow off. It was the same in 2005, but there was still some run left in them. He would still invest, but be quicker to sell.

Markets. Central banks in the rest of the world are leaving rates lower for longer. The recovery has been anemic everywhere in the world including the US. People are nervous that the Fed is going to raise rates, but they delay and delay. The rest of the world is lowering rates to fend off deflation. Low rates drive the stock and bond markets. Dividend yields are a big part of the returns to investors. He likes companies that are growing their dividends and earnings. Some of these companies have corrected quite a bit, as they did last year at this time. The run up in the US dollar has run its course. He would not be buying Euros or Yen at this point.

Markets. If you believe we are in a continuation of this elongated cycle that we have been in with a lot of disinflationary forces, then he thinks you can still be constructive on a lot of the yield stocks that have come down quite a bit over the last couple of weeks. He is seeing opportunities in select names in utilities, REITs, telecoms. Also, still likes the growth names. You kind of want to toggle back and forth. This is a different environment than past cycles. Not sure how long this is going to last, but the opportunity is that you buy the yield when people are really scared of runaway interest rates and you buy the global growth stories where people are afraid there isn’t growth. We are still very much in a bull market and we are not going to have anything big, as long as Greece is contained.

Canadian bank stocks? They have a lot of negative press around them. There is a big US Short. As long as a real estate holds up, this is a sector that you can own. Payout ratios are low and dividends are high. P/E ratios are quite low and growth levels are good. When they get to a level of 4.6% as a group, that is when he buys them. Not a lot of risk and some decent rewards. Royal (RY-T) would be his favourite growth play. He also thinks there is good value in CIBC (CM-T).

Gold. There are 4 things he looks for to gauge the short term direction on the gold price and where he goes. The 1^st is yield and what the Fed does, 2^nd is the US$, 3^rd how the ETF is positioning, and 4th how the futures market is shaping up, with speculators being either Long or Short gold. The perception is that higher rates will be a headwind for gold, which has kept a lid on gold recently. However, going back to 1994, there have been 31 rate hikes by the US Fed, and on average gold has performed well, a little bit more often than not. Given how depressed the gold price is and the fundamentals, he feels that it is very difficult for even an interest rate hike to push gold lower. A headwind for gold is the US$. The US has propped up the dollar which makes gold more expensive to own for consumers in other countries. The consumers who talk about gold are China and India, where there is a cultural attachment in owning gold. Demand there continues to be strong, but has tapered off as of late. As those countries emerge and wealth grows he expects gold demand to rise, particularly in China, as they move from an investment driven economy to a consumer driven economy. This should be the 1^st year that we see supply taper off in 7 years. Psychologically that is an important milestone in the gold market, which should really put a floor underneath the gold price. Looking at all the variables, he thinks gold should be at about $1250, and we are currently at $1180. Sees the upside versus the downside ratio for gold being about 3 to 1. A good risk/reward to him in the short term. We have been in a bear market for 3 years and they don’t last forever. While it is difficult to put a finger on a catalyst in precious metals, all the elements are there that tell us we are bottoming. If we go to $1150 or below, the real industry fundamentals will take hold, which will help put a floor under the gold price and prop it up. Supplies should peak this year.

Silver. An interesting metal, because it is seen as a higher beta metal than gold. One thing he doesn’t like at the moment is that there is a lot of supply. A lot of that supply has to be consumed by ETF’s and investment demand. Has seen the demand rise recently, due mostly to demand out of India, because it has implemented some taxes on gold. Most demand is being propped up by artificial demand by India. His exposure in his funds is mainly about 7%-8%, and mainly held in 2 investments, Fortuna Silver (FVI-T) because of its new discovery and significant wealth creation, and Silver Wheaton (SLW-T) because of its royalty business model.

Markets. He sees the Fed bending to what the market wants. It seems that expectations of the market have been a lot farther off in the past than they are now, but expectations are still for a lower rate for longer, so the Fed seems to be bending towards that. If you saw more market volatility pick up, you would expect rates to be lower for longer. Today’s increase didn’t look like it was that much from where it was in the past, so they are bending even more to the market. If we go through the summer and market volatility picks up, with some of the data not being as strong as it has been in the last couple of weeks, then he expects rate increases would be pushed out into 2016. You have to be prepared for the case where they do raise rates in September, and what you have to really be prepared for is if they surprise the street and raise rates sooner than the market expects. He is net Long for his clients, but does have a Put option strategy, where he takes insurance and is willing to give up a certain amount of return to protect a portion of the capital. Currently has about 20% of the fund protected in the event the market sells off. He has been using things like emerging markets. Looks for Value names that have actually moved giving a good market support. Holds 20 stocks, so is fairly concentrated.

Economy. There is a secular move in the US$, and it is going to go on for quite some time. When it moved from 80 to 100 on the Dollar Index (DXY) everyone thought the move was over. When you look at the last 20-25 years, it started at around 80 and went to about 160 before it crashed down to 80 again. Then in 1991, it went from about 80 to about 122. He believes we are more in a Ronald Reagan rally rather than a Bill Clinton rally. The top will be at about 160, so we have quite a ways to go. The issue is that Canada is in a real tough place and the Canadian equity market is in a bear market. There are significant headwinds, and we need major structural changes to get us back on course. The good news is that the Cdn$ will help. We won’t see out and out deflation as other countries have, because as the Cdn$ floats, if we get down to a good level for it, it is good for Ontario and good for manufacturing. Feels that about 80% of valuation will be driven by where interest rates go and where the world economy goes.

Economy. Federal reserve just started its two-day meeting and his guess is that they will raise rates. Thinks they are anxious to get going on it and send a message. A quarter-point or a half a point is not going to have a big monetary influence on the market. The suggestion that the Fed is ready to move and the economy is ready to absorb higher rates is very important to them, so he thinks they will go, but then probably take a bit of a break and talk the markets up a bit. On bonds, his guess is that the long end of the curve continues to be in the control of the bond market. The Fed, of course, has great control of the short end of the curve, and with their bond buying program has some influence on the long end of the curve through a quantitative easing program. The market itself is going to take a bit of control, understanding that we are into a bit of a stronger economy and the Fed will start to normalize the monetary policy.

Markets. Investors are kind of bearish from a sentiment standpoint, and that is a great and powerful contrarian indicator. We are seeing a good deal of negative sentiment which is positive for the market, certainly in the short-term. Technically we are in a bit of an oversold condition.