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

Markets. We’re already seeing some distribution starting. Today was positive, but it could be short-lived. There is some push-pull going on and probably confusing a lot of investors. On the TSX, it is the 14,900 that he is watching. Interesting that we don’t have the commodities participating meaningfully. It is hard to see a catalyst in Canada. S&P 500 books a little more positive. There is a lot of confusion. The Dow transports have been falling off since late last year, while the Dow industrials have been gradually moving upwards. There is a bit of the divergence between the two. You want the industrials to be confirmed by the transports that are shipping things.

Markets. Markets have been pretty range bound for most of this year. First we had a lot of weakness in economic data in the 1^st quarter. Based on the strong US employment numbers in the last 2 months, it was largely weather-related and strikes in the Western ports. There is a rebound in employment which suggests we should see better economic growth going forward. With lower energy prices and the stronger US$, there has been a negative profit revisions for the S&P 500. Going forward, there is not a lot of room for multiple expansion, and it may be a profit driven story from here on. Feels the US economy is on a slow path to improvement. Also, consumers will benefit from lower energy prices, and if they stay low consumers will start spending. Improving employment will also lead to consumer spending. Thinks the US currency will stay strong and investors should continue having some of their investments in the US.

Markets. Markets are basically unchanged for the year, both in the S&P and the TSX. There are a bunch of different issues on the forefront, and some of them are valid concerns. The big ones that the markets are struggling with are 1) rising interest rates and the impact it is going to have on corporate profitability and the competitiveness of stocks over bonds, 2) a strong US$ and the impact on the profitability of corporations, particularly US multinationals, 3) what is going on in Greece, which he thinks is going to continue to drag on for quite some time and 4) emerging markets have been pretty sluggish, and China continues to show signs of decelerating economic activity. Thinks investors have not been paying enough attention to the big moves in currencies.

Transports. There is an old theory that the transports have to confirm the strength of the industrials, because the transports are carrying the wealth of the nation on the rails or in their planes or their trucks. Energy should be a huge tailwind for them, and that is not panning out. A chart with Transports and the Dow shows a large divergence with the transports falling and the Dow starting to follow. That is a classic Dow Theory warning sign for a correction.

Markets. The strong US dollar is starting to have an impact. ECB and Japan are full peddle to the metal with QE and the US is pulling back. It is about what is likely to happen over the next year. The run-up in the Chinese market could be locals speculating on the increased weighting in world index (MSCI), resulting in the buying of Chinese stocks.

In Europe, dividend payout ratios are generally higher, but you don’t get the dividend tax credit. All the ETF providers in Canada have a fund that gives this exposure (Eg. EUR-T). He believes the Euro is going to get weaker so you want to be currency hedged.

Energy Sector. The Alberta election was a big catalyst in the energy sector, pushing it down, as they wanted to raise taxes. He believes we are making a big bottom. ZEO-T gives you exposure to the sector.

Smart Beta ETFs take the universe of ETFs and filter for momentum characteristics: Momentum, price, etc. When momentum is hot, these are where you want to be. When value investing is in favour then these will underperform dramatically. He is weary on momentum strategies over the next year.

Educational Segment. The 6 Tenants of Dow Theory:

(1) The market has 3 movements. We are in the speculative phase around the world now.

(2) Market trends have three phases.

(3) The market discounts all news.

(4) Stock market averages must confirm each other.

(5) Trends are confirmed by volume, which is not what it used to be.

(6) Trends continue until there are definite signals they have ended. If industrials are doing well, then the rails should be doing well. In ’05 and ’06 the correlation started to break down in preparation for ‘07/08.

In ‘11/’12 it started to break down but we did not get a bear market, so he challenges Dow Theory. Don’t pay a lot of attention to it, but it is an important point about divergences.

Markets. Typically the summer is not the most euphoric time. He is 70% cash about a month ago. He is slowly deploying cash, being patient over the next couple of months. He tries to find a stock that is mispriced for whatever reason. He took profits as we headed into the most recent run on energy. We went from way to pessimistic to way to euphoric and now there are a few new headwinds we have to deal with. He deals with single stock opportunities. You should be heavy in cash and be ready for table banging opportunities and then if you are wrong take your loss quickly.

Markets. Thinks North American markets feel somewhat stretched. We’ve had a good correction since 2008-2009, and since then he feels investors have been bidding up the market, particularly those looking for yield. In Canada we are having the fall in energy prices, which is still reverberating through the economy. In the US, things have consistently gone up in the face of what is really not gung ho GDP growth. In Europe, we have the well known problems there, but it does look like it is somewhat stabilizing. This recent pullback provides an opportunity for investors to determine at what price levels they will be comfortable stepping in and initiating some positions. Thinks we are getting close in a number of areas there. He would be very surprised to see the US Fed raise interest rates this year. The US$ has been so strong, and he thinks that is already beginning to hurt their exports.

Telecoms? Feels they are all worried about their businesses to some extent. The Internet is changing the game very rapidly. They are trying to stay ahead of it by offering streaming services, etc., but really smart kids know how to stream without paying for a lot of services. People are getting phone services over the Internet much cheaper than the used to get it over wired line. All this leaves them with is the Internet providers, maybe offering some enterprise solutions, etc. Bell (BCE-T) and Telus (T-T) are executing relatively well to date. Rogers (RCI.B-T) has been struggling with their model. His personal choice would be Bell which gives you a good yield with good success with their fibre-optic to the home.

Markets. With jobs being added, it is further evidence that the US economy is recovering. However, we are still not seeing the US consumer starting to loosen up the purse strings and spend money. The good news is that the recovery is still on track, but the bad news is that the consumer has not become as active as many would have thought. His strategy is designed to identify dividend paying stocks that will grow their dividends. On a valuation basis, he still sees more opportunity in the US. He has been two thirds US and one third Canada for the last 5 years. Likes the US regional banks over the national banks, because they are more focused on consumer banking, which is where he sees the growth. Has been pessimistic on the commodity/energy space in Canada for several years now, so missed the oil price drop. Although oil is undervalued, it is still a bit early to step in.

Markets. Market breadth is about participation i.e. when you want to talk about how many stocks are rising versus falling. He pays attention to that when markets are making new highs. Was it just a few stocks that drove the index to make new highs, or was it a broad based rally? There are signs that currently breadth is not as deep as he would like to see. There are 7 tenets of Dow theory, and one that a lot of people pay attention to is confirmation of the index. Such as Dow industrials versus transports, the theory being that if you make something you have to ship it. We want transports to be moving up in conjunction with industrials. That has not been happening. Transports have been diverging down, which tends to be a sign of poor breadth and possibly a correction pending. Also, some of the other sectors are not confirming highs. There are 9 sectors he likes to pay closer attention to, such as energy, consumer staples, discretionary utilities, materials, etc. He looked at 9 major sectors (outside transports), and noted that only 7 of those 9 major sectors made a new high that same week. Everything else was either flat or down. Chart showing transports (IYT-N) versus the Dow Jones Industrial Average (DIA-N) shows a wide divergence starting in March with the transports dropping to about -9%. He is low beta and is also holding plenty of cash. He is not “super bearish”, but is expecting some sort of correction.

Markets. Some of the negative revisions in the first part of the year are starting to go back the other way. The market is telling you that rates are rising. The bond market has really gone through a shift. Whether a rate hike in the US is fall 2015 or spring 2016 is a mute point. The sell off today constitutes a buying opportunity. More money is going to rotate from the fixed income world into equities. Sectors looking good are financials, consumer discretionary, technology and healthcare. Energy and Commodities look bad. Utilities and REITs don’t look good either.