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

Markets. He is somewhat bullish for the next couple of years. The 2008-2009 session and its correction was so severe it could take up to a decade for the economy to get back to normal levels. This gives you 3 years to go in this bull market. There can be short term disruptions, either geopolitical or weak economic data, but looking out 3 years on how well the US will do and how Europeans might recover, this gives a pretty potent mix for higher markets.

Energy. With the fracing and the additional non-OPEC supplies growing at quite a rate, oil is going to be in plentiful supply for over the next decade anyways, if not longer. That will be a tremendous plus for the economy. He expects the outlook for oil will be a little higher by the end of this year, but it is far too early to know how the impact of a number of influences will be on the price. Feels that $50-$75 is not a bad price range.

US$. A 10 year US government bond is at about 196. If you are in Europe and looking at some alternatives there, you can buy a 10 year German government bond for 17 basis points. He doesn’t know who in the right mind lends any money to anybody at 17 basis points for 10 years. Clearly the US bond market is still attractive to foreigners. As that capital inflow is maintained, that is going to put upwards pressure on the dollar.

Gold. Had thought that inflation would be higher and that international finance would be rockier, and that gold would reflect those 2 things. If something happened to the price of oil, gold would go up.

Markets. He will reduce his correlation to the equity market during the summer because that is a period of increasing volatility. There is a lack of positive catalysts to drive the market higher. You don’t want to be exposed to all that volatility. Investors expecting a decline between May and October might be disappointed. The average is only a decline of about 2 tenths of a percent. The market has actually been more positive than it has been negative about 62% of the time using the S&P 500. If you are not of the belief that we are going through a recession, you could actually do all right during the summer. For him, he wants to reduce correlation. This year there could be a higher than average chance of a sizable correction during the summer. He is seeing economic data that is a little bit soft. His biggest concern is if the Fed does not raise rates because the economic data is not strong enough to support it. S&P 500 is basically flat during the summer. There are no major catalysts to drive it higher. You get your major strength from October to May. The major sectors that pull down on the broad average are discretionary, industrial and materials. If you stay away from those and go towards lower beta securities, you can make plays in consumer staples, which is a big thing during the summer, such as healthcare, utilities and even some of more commodity sensitive areas such as energy, agriculture and even gold miners.

Healthcare. Tends to do well during the summer. It is less correlated to the market, so you don’t see the seasonal shift that some of the other sectors do. The period for healthcare starts about now and runs through to September. (See Top Picks.)

Gold. Seasonality for gold follows the same time frame as agriculture stocks, from about the end of June all the way through to September and October. Basically this is a time of rising volatility.

Markets. The NASDAQ is above its all time high, but he is very concerned about what he is seeing. The reasons for markets going higher is a problem. The Chinese economic news continues to worsen, for example, and yet the market continues to go up due to stimulus. The US is the only market that has lagged and it is because they stopped QE. The medicine of low interest rates has been way overdone. You are forcing all investors further down the risk curve just to get any kind of return. This is not right and when it ends it will end ugly. He is getting more defensive. He has more cash than previously.

Canadian Banks. Consumer credit in Canada looks a lot like the US in 2007. More regulatory capital will be required due to the federal budget. Loan demand just isn’t there. He is cautious on Canadian banks and has lightened his positions on recent strength.

Markets. It is hard to look around and find good value. Markets are quite expensive. We are seeing a pretty soft US earnings season. Greek problems are coming up. There is fear of seasonality. There has really been a softening of US data points in the last little while. Even though equities are expensive and much harder to buy here, they are still so much cheaper than bonds. Expects the market will get the benefit of the doubt. Data is generally improving in Europe. There is a lot more accommodation in China. US earnings have been pretty murky to date, but a lot of the earning releases are front-end loaded to multinationals, which are very sensitive to a tough greenback. Domestics will start reporting in the next little while, and he thinks that will also give a little bit of a lift. You still have the effects of lower oil to come, and you have easy money everywhere. Pullbacks will be shallow and you want to keep on trying to buy them.

REITs. REITs have had a pretty good 2015. Part of that comes from the base at which they were. They started the year looking very cheap, so a lot of money started to flow back in. The collapse of oil stocks also helped. Also, interest rates have not been going up, despite what everyone thought was sure to happen. Canadian REITs are more attractively valued compared to US REITs. They have always traded at a discount, which makes sense. However, they are at historical wide spreads now, indicating there is still value in Canadian REITs.

Markets. Because he is focused on mid-caps, there are only about 450 names that are listed in Canada. This gives a relatively narrow pool. This is narrowed down more because he doesn’t invest directly in resources. When you take away the non-resources and focus on mid-caps, there is a fairly decent pool of about 200 names that he is interested in. Currently, he is about 90% Long and about 50% Short, so his net exposure to the market is about 40%. If you have a 40% net position, you have about 60% cash, so if he sees something he likes, there is no need to sell something to get it. Constantly looks at the liquidity of his portfolio to make sure that he is able to get out. As a general rule, he wants to be able to liquidate 85% of his portfolio within 5 trading days.

Markets. We are in a secular bull market for stocks. This is a multiyear period where 2 things happen. Earnings grow, but as people become more confident, multiples that people pay for those earnings expands. One of the hardest things to do in a secular bull market is to stay invested. All the way through the 90s, more value oriented investors felt that multiples were getting too high. If you sold stocks when they started to look more expensive in the early 90s, you missed a big part of the bull market. Against the backdrop of low interest rates, which are likely to stay there for a while, the return that an investor can get buying equity with a dividend, and get dividend growth, is very attractive. Unless you think rates are going to go up a lot, the relative return available to an equity investor is still very compelling. There are several sectors or themes where there are some big macro shifts that have taken place that can support expanding valuations for a few years. We are likely to see more volatility over the next 5 years, then what we saw 2007 through 2011. There were a lot of negative expectations built into the market, but that was more short-term weather driven. Those secular themes are likely slowly kicking in and will be good for industrials, consumers, technology and healthcare.

Markets. All of the problems he was worried about in December, still exist. Valuations really haven’t changed much. This really validates what his concerns were. You have a rapidly rising US$ and a fairly robust domestic US economy, but you have dislocations. Europe is doing a little bit better and getting a bit of a break on energy prices, which is somewhat transitory. The strong US$ has been a big headwind for US multinational corporations. Whenever you have a strong US$, you tend to have emerging market crises, and we are on the verge of one. There is no question that US domestic businesses have done better than US multinational businesses. His cash levels have built up pretty substantially and he is now standing at 27%. You really have to search around in the weeds to find investment opportunities these days.

US$. Where there are free-flowing currencies, and countries have to repay interest and the notional value of the bond in US dollars, it is going to be a lot more expensive for them. This will likely cause some credit stress over the next year or so. He is pretty sure the dollar is going to remain strong over the next year or so versus most currencies, specifically the euro and the yen. For the first time ever, Chinese estate values are going down. Money has been coming out of there to feed the stock market. Chinese mainland stocks have doubled over the last year or so, more importantly the last 6 months. Margin requirements were raised on Friday, but to combat that a shift in the reserve ratios to kind of neutralize things, the market seem to be a little positive this morning that there is no worsening in the Greek situation. Year-on-year earnings are declining, most of it, not all, is coming from the energy sector. He expects this for the next number of quarters.