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

Markets. Another breakdown on the talks of Greece. He has said for months now that it won’t work. If they put a band-aid on it now it doesn’t matter. The question is not about Greece so much as about the Euro. Italy and Spain are next. On Wed, the Fed will make their announcement. A survey said they expect to raise rates twice this year and 5 times next year. The market has priced in one this year and 4 next year. He expects a raise of an eighth of a point when it comes. The tick up in bonds, however, is due to what is going on in Europe right now. Larry would be surprised if the Fed even does a raise in rates this year but if it comes it will be September.

Park money in a Bond ETF? The question is interest rate risk. You want shorter duration bonds right now. There is no clear answer because if an interest rate rise slows the economy then long bonds could rally. At this point he likes adding duration to bond portfolio.

Educational Segment. A coming 10-20% correction. We get a 5 to 10% correction every year. The last big one was a 16% correction in 2010. It was a Greece-related correction. We are due for one of these bigger ones in the back half of this year. You have to have balance in your portfolio. Volatility is there.

Markets. Concerns of higher interest rate fears are probably overblown. QE1, QE2 endings had fears of rising rates, but they actually fell. He thinks rates will stay low for quite some time. There is a disproportionate amount of money moving to savings. The public is not borrowing as much; countries are not borrowing as much. He prefers companies for you which you don’t need to know what is happening in GDP numbers month to month. High growth rate companies can over shadow this noise. His newsletter recommends mostly US companies.

The two best banks with the best returns are WFC-N and USB-N. They came the closest to resembling the success of a Canadian bank. These are the only two banks Warren Buffet has owned.

Markets. All his clients have moved up into equities, because the alternatives are pathetic. Investments for his clients are in stocks, bonds or cash, and no client is going to pay him a fee to sit in cash to get guaranteed negative returns. The only alternatives are stocks and bonds, and bonds pay a pathetic rate of return, and many of them are negative on a real basis. He is sticking with dividend paying companies, and so far so good. Currently he is invested 60% Canadian and 40% US. You have to own good quality companies. You don’t know what stocks are going to do and you don’t know what interest rates are going to do, so you have to own a bunch of different types of companies that will benefit if different things happen.

Markets. He is a little cautious. We are starting to see signs both in Canada and the US that it is getting to be later innings. Hard to know when a bull market is going to end. There are a lot of IPOs happening, companies coming public at aggressive valuations, many oversubscribed deals, a lot of private equity firms spinning out companies they had taken private out of the public market. Also, there is some hype around certain sectors. He is not getting really bearish yet, but there are warning signs, so is trying to be more selective and find companies that are a bit more off the radar screen that trade at lower valuations. The risk is always a timing risk, so he tries to add to his Short positions to hedge off some risks. One risk today is if interest rates start to go up.

Housing. Quite a different story between Canada and the US. The US is coming from a very depressed level of home prices, whereas in Canada pricing has been strong for some time. US market has been improving for the last couple of years and he sees that continuing because there is limited supply. There needs to be 1.5 million new homes built every year, and right now housing starts are at about 1 million. The fundamentals and outlook, based on the demographics of household formations, are very good.

Interest Rates. He is not a macroeconomic expert, but tends to focus on bottom-up analysis. Believes rates are poised to increase. There is a question of timing and magnitude. As a starting point, he does not think bonds are a very attractive place to be invested in today. You want to look at businesses that benefit in a rising rate environment, whether this is life insurance or US banks.

Oil. It looks like there is competition to get out as much supply as possible. She was very encouraged to see how quickly the US and Canadian drillers pulled back on their rig counts, but at the same time she has seen a lot of companies trying to drill the higher impact wells in order to get crude production back up to where they were before all this started. She hasn’t seen the pullback she had been hoping for, but thinks it is coming. The amount of capital and activity that has been taken from the space is so enormous that we are going to see a re-supply response sooner than later. Inventory numbers are very encouraging, and we got to a peak of about 490 million barrels. Capacity is about 525 million barrels so there was concern that we were going to get to full storage, but it has pulled back by about 20 million barrels, which is very encouraging. There has been a slowdown in exports to the US which is helping a lot. However, the increase in the supply numbers for the US is not helping on the supply/demand balance, but she thinks that is going to come sooner rather than later. There are a lot of big global projects that are being shelved right now so there is going to be a pretty significant impact until that supply/demand balances.

Markets. Stocks have been fluttering for a while because overhanging the markets is this issue of whether rates are going to go up or not. He thinks they are going to go up. The Fed is waiting for the numbers to verify their decision. Just as everyone thinks things are awful, people then get a surprise and jump back in. Now we learn the US economy is not in a shrinking mode. He would not be surprised if there is a 50 basis point rise in the rate in a couple of months and then another before year end. 2016 will be the eighth year of the cycle. The Fed needs 150 basis points in order to be able to later reduce rates to provide stimulus. He is a value guy. In some senses it is getting harder and harder to find value. There are a lot of stocks that find themselves quite extended. There are sectors including the financial sector that have kind of been left behind in the movement upwards. It is a rising interest rate environment very much favours those kinds of stocks.

US Healthcare. He only finds two companies that offer any kind of upside potential. PFE-N and GILD-O. The others are expensive and extended. They have already moved. He would not look at this area. GILD-O has some exciting developments coming. It has good momentum. PFE-N is trading at 2.5 times book and is one of the cheapest health care stocks he can find. It has a decent dividend and will prove to be more defensive than offensive. He almost put this as a Top Pick, but didn’t because he doesn’t like the group.

S&P. This is one of the longest bull markets in history. There are still some elements in the markets that make some sense. The last part of bull markets are normally accompanied by rising interest rates. It is getting late in the day. The ongoing stimulus in Europe is quite positive for the markets.

Seasonality. In the latter part of July you tend to get a pickup in volatility. Volatility tends to rise between July and October. Right now we are in this stagnant market, a neutral sentiment. A bit of volatility has crept into the equity market and the bond market recently. What better time to think of a possible Summer rally. At the end of June is when you get your typical Summer rally into the month of July. Kind of the last Hurrah before the market tends to get really rocky and a little bit weak. Between June 27 and July 17 the S&P 500 has actually gained about 1.22%, so if you are in equity positions you want to think about decoupling from the equity market and reducing your beta, because between July and October you are going to get the uptick in volatility. You can play this by bringing up a chart of the volatility index, the VIX (VXX-N), and draw a line at 12 and draw a line at 21. When things get complacent, below 12, you want to think about hedging your portfolio, perhaps buying into volatility, perhaps taking profit in some of your positions. Conversely when things get over 21, when fear is spreading throughout the market, you want to take advantage of that. Buy into certain high beta positions; perhaps start preparing for your fall allocations. Sell at 12 and Buy at 21 has worked quite consistently. To benefit from volatility, the asset class that tends to benefit the most from volatility mostly is gold and possibly entering into a position a little bit sooner. The end of July all the way through to September is the period of strength for the gold miners. Period of seasonal strength for gold itself starts a little bit sooner, at the beginning of July. When you start to see an uptick in inflation that is usually a good indicator that you are going to see some movement in the price of gold. The gold trade has worked about 70% of the time.

Resource Equities. When looking at supply/demand fundamentals and their underlying commodities, the supply side is starting to react to lower prices and you are starting to see projects deferred and slowed down and capital cuts. For the metals/mining sector, it has been a 2-3 year process. Thinks the worst is over for base metals. He is strategically positioned more for things like zinc and nickel, a little less on the copper side. Expects there will be a check back in iron ore, but later in the year you might want to look at that. He can see gold range bound between $1150 and $1250. Not a bad entry point if you focus on low cost producers. There is a seasonal pattern for gold between July and September. For oil/gas, it is a much more of a responsive change. Thought it would take 3 to 4 quarters before it took hold, and he is seeing this in the numbers. He could see oil checking back to perhaps $55, but relatively range bound between $60 and $70 over the next 12 months. Comfortable that from now on there is a good entry point for oil. Natural gas has been a longer-term play in a sense of adjustment to the supply side of the equation. There are a number of factors coming up this year in terms of power demand, new power generation capability as well as LNG kicking off late this year and moving forward over the next several years. This should drive the price range closer to $3.50.