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

Oil stocks. Get rid of all of them? He has a zero weight and believes there is a risk in the commodity price. There is lots of supply coming at the market. He would certainly reduce exposure to the energy sector. There is real risk there.

Markets. As much as he would like to see the US markets detach themselves from what has been going on with the US federal reserve balance sheet, if you look around the world the QE gravy train continues, and he thinks it would be ill-timed for the US to step in at this point and do a sort of conflicting move with interest rates. Still expects something to happen at the very end of the year, but once we get through this earning season and the last S&P 500 company reported with the media, analysts and market strategists having nothing to talk about except what was going to happen with interest rates, he believes this has caused a very healthy tug-of-war, and markets have been going sideways. Thinks the sideways action resumes one way or the other, and thinks it goes higher from here. If you own really good high-quality names, and stay on top of them, keeping your weightings in check, you are going to do well. Earnings multiples have expanded quite substantially and earnings need to be strong. We had a bit of a head fake in the 1^st quarter, and he thinks the 2^nd half looks pretty promising.

Which pharmaceutical company would have a good position in the North American aging population? He has owned iShares US Healthcare (IYH-N) for a very, very long time. Also, owns Valeant Pharmaceuticals (VRX-T), Merck (MRK-N) and Pfizer (PFE-N)

Markets. Valuations spook him a bit. 10 of the indicators are near or at all-time highs, and there is only one thing unfavourable, and that is the trend. The market wants to go up, but everything else is equal to 2000 or 2007 in terms of the level of valuation. Be careful because you have done very well, especially in the US. Take some profits. Canada has been a pretty lacklustre performer, only up about 4%. A lot of the defensive stocks are down year-to-date and are interest rate sensitive because people are worried about the rates going up. Also, resources are such a big element within Canada, it is dragging down the overall valuation and making earnings look pretty expensive. To be defensive, you want to hang out in things like utilities, REITs, some of the consumer stocks and some of the financials. You might also want to have some short or medium term bonds as well, because there is not much difference in the yield you are getting, but they are a lot less volatile.

Mutual Funds or ETF’s? Both are vehicles for gaining experience to the equity market. Over the long run, equities are the highest returning asset. To get that higher return, you have to put up with the volatility. One of the things you can control is costs. ETF’s are a cheaper way of getting exposure to the market. However, you are just getting the return of the index, whichever index you are choosing. In the mutual fund, you will have an active manager, but most active managers do not beat the index. However, if you can find one, you will probably do better in down markets as well as getting a lot of the upside.

Markets. He is relatively bullish. The combination of a solid macro overview with relatively attractive valuations and low interest environment makes a great set up for equity markets. Even though markets have done well for the last year, there is not a lot of compelling reasons to force them down. Growth has been grudgingly slow, and this has been the story since the 2008-2009 recession. Every year we are recovering, but we are not getting that traditional 5%-6% strong growth out of the recovery. This year the US is going to be the driver. China is kind of weakening a little. Europe is showing some signs of strengthening, but is still bumping along the bottom. It seems that every region is contributing a little bit. You don’t have them all lined up at the same time, which is good in some ways, but bad in other ways. He has had remarkable continuity in the construction of his portfolios over the last several years.

Markets. Bull markets always come to an end and you can’t predict when. This one is pretty long in the tooth. We are seeing signs of the economy slowing down, but interest rates are not going up. He doesn’t know if markets can correct or the cycle can turn without interest rates increasing. Eventually people just get fatigued and the selling starts. At the moment he has 50% in cash and wouldn’t want to be less than 35%-40%. He would deploy that when everyone was running for cover. Didn’t have a lot of cash in 2009 and it was the worst feeling ever because he knew stocks were cheap and he hadn’t harvested enough cash. Imagines banks can dream up other ways to print money, but they can’t really do much more quantitative easing and they can’t lower rates much more. Ultimately none of that is going to work unless we create real economic growth.

Asset allocation. This is probably a timely moment for asset allocation. Most investors focus on stock selection and look at the upside of a stock, but in reality, asset allocation plays every bit as big a role if you look at long-term returns. As we head into a period where low interest rates are coming to an end and rates are going to rise in the near future, this is an incredibly important time to review asset allocation and probably make some changes. Asset allocation is not something that should be static, but is something that investors should pay attention and focus on. He is still finding his most value opportunities in Japan and Europe, outside of North America. The US has undergone such an amazing bull market that valuations are getting stretched. They are being supported by ongoing low interest rates.

Would you play India and/or China? Everyone wants to play these 2 countries because they represent better growth than you get from the rest of the world. However, both of them suffer from extremely poor corporate governance, not friendly to investors. Japan is the largest exporter to China, so that is a way to take advantage of growth in China. The Indian economy is still developing in many ways, and some of the companies are controlled by the 60 wealthiest families in India. A sideways entry into India would be through Sun Life (SLF-T) which is the largest insurer in India through a joint venture.

Markets. As of Friday’s close, there was less than a 50% chance of a rate increase in the US. The odds in Canada went up a little bit, but he would be surprised at one. He suspects energy prices will be the swing factor. People are buying the Bank of Canada two year if they don’t want much interest rate risk. China is a little bit better than expected, but it had no impact on their stock market. When he sees individual investors rushing into the market without knowing what they are doing and driving it higher, he likes to hold off. He thinks we have bottomed in oil right now. Somewhere around $40 there is a bottom in oil. There is tremendous excess supply in the oil sector. In the fall, the unleaded gas demand drops in September you will see a downward move in oil.

Educational Segment. A tool to gauge GDP growth. See the Berman’s call Blog today. GDP Now. The US economy has not grown in 2 months. There is no chance the FED is going raise interest rates this year. There is no employment number that goes into GDP. Personal income was up 0.4%. People are not spending. More people are working, but not spending. There are more reports coming out through the month. Earnings revisions are a big, big risk to the marketplace.

Markets. Equities continue to be the go-to asset. The Fed cannot be clearer that rates are going to higher. Solid companies that are going to increase their dividends are the way to go. You are seeing takeovers and dividend increases. The fed says rate increases when they come will be slow and steady. Credit is more disciplined now. Companies are not loading up on debt and buying companies on whim. You are not getting acquisitions for the sake of acquisitions. Small caps have done well and this shows confidence by the market.

Markets. He is pretty sure the Fed is going to raise rates at some point, arguably September/December, whatever. The outlook for bonds is not great. The market is not cheap, but it has also given low rates that remain low for a long time, still reasonably valued. He can’t make a Bull case for 15%-20%, but can make a case for some stocks here and there of 5%-7%. Those plus dividends and good pickings, you can get a decent return. Thinks healthcare, technology will still work for a while. In Canada banks actually had a good quarter and you could do some switching among the banks, but the US banks look good. A 5%-7% correction in the middle of all this wouldn’t distress him and would probably be nice and healthy. He can see the Canadian market from here mildly outperforming the US, but only because of the energy side.

Markets. He tries not to forecast the markets, but is cognizant that we are in the month of May, and selling will have some merit to it. Also, be aware there are opportunities in the summer, which is one of the reasons he has pulled down his net exposure in his portfolios and is sitting on around 67% cash in his flagship fund. Still likes non-bank financials and he tends to use the banks as a hedge for market risk. Likes the consumer stocks as there is a scarcity value of those. As investors flee from the resource space, that tends to be a safe haven for them. Avoids direct exposure to the resource space. More of a “bottom up” investor rather than a sector player. A typical hedging trade could be Canadian Pacific (CP-T) which is overvalued, and where the first risk is market risk and the second industry specific risk. Because of this, it would not normally be in a pairs trade within that sector, so Canadian National (CNR-T) would be a natural choice. If diesel fuel goes up or down, it affects both of them equally, which helps to take out some of the risk in the portfolio. This allows him to focus on the alpha.

Markets. It is inevitable that we need a correction before we get any kind of a summer rally. Every year, in the last 13 years except for one, there has been a summer rally. It’s difficult to pin down when it happens, but you can tell by watching the VIX Index closely. Historically, something happens in the summer time which causes volatility to increase. When volatility increases, look out because you then go into a corrective phase, and you don’t want to be there because the amount of correction can be significant. Once the correction is over, you are set up for the next move, which is your summer rally. The TSX Composite is really fascinating, because it is hanging in there. If it drops another 80 points, it completes a major breakdown on the index, and establishes a technical selling to move markets lower.