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

Markets. There are a lack of catalysts when it comes to earnings. Earnings aren’t expected to be strong in the first quarter. We will muddle around in this range for a while. Negative surprises are outweighing the positives 5.4:1. It has mainly to do with the strength of the US dollar. April is typically one of the stronger months of the year. It is usually not a volatile month, be he doesn’t see huge returns. There may be volatility again in the summer time.

Which one technical indicator to use as a buy or sell signal. You should never just use one indicator. Look for divergences and support, etc. If you stick to one, you will run into trouble. If you could only use one, then look at the advance/decline line as a market indicator.

Markets. Commodity stocks are not value stocks. They can become oversold. Commodity stocks move in cycles or super cycles. We are 4 to 5 years into this cycle with commodities being out of favour. They are not worth buying here yet. He prefers to wait until they start going up again before showing interest. He likes Europe and parts of Asia. The good time to buy European stocks is when everyone hates being there. The southern part of Europe is the trouble zone so he looks at Northern Europe. He concentrates on European-headquartered multi-nationals. The Canadian dollar going down has offset the Euro becoming weaker against the US dollar.

Time to move US dollars back to Canada? At some point you are going to want to do that move. It is too early right now.

Markets. What the Fed did yesterday was positive for markets. It takes the unemployment and inflation rates into account. Growth is not robust and the US dollar is slowing down exports and earnings from companies from exporting US companies. It is a good environment for finding companies but you have to be selective. Mid to small cap stocks are starting to do well and high yield bonds are starting to do better. Healthcare companies are doing well, but most are growth by acquisition stories.

Markets. Policy divergence is going to be a key theme for the next several years. If rates go up it is a signal that the economy is doing better. Use any pullbacks or dips in the US as buying opportunities. The US completed a deleveraging process for corporations and consumers. Corporate profitability should continue to go up. You have to watch the currency risks in Japan and Europe and you should hedge. You are earlier in the deleveraging process and that includes governments. In Canada you look at companies that benefit from a stronger US dollar.

REITs. Generally speaking, a focus on macro events, rather than looking through to what the company fundamentals are doing, usually doesn’t result in very sound investment decisions. This is why he spends a lot of time focusing on cash flows and finding good businesses. If anybody were to build a business based on just one type of interest rate scenario or macro economic scenario, it would not be very sustainable. When he is looking at management teams, particularly in the real estate sector, he is looking to see if they can generate above average free cash flow growth in an environment of rising rates, and is the debt maturity schedule laddered. If those 2 questions can be answered, this is likely to be a sustainable business that can stand the test of time.

How are Cdn REITs affected by increasing US interest rates? Historically, REITs will sell off in the short term in the face of rising rates, but over the medium to long term, if rates are really rising because of economic growth, the sector will come back quite handsomely.

Markets. The US has indicated that rate hikes are going to be slower than anticipated. This has flowed through all sectors of the market, more importantly the bond market, which reacted quite substantially. Even though earnings are decent, not substantially dramatic in terms of their growth, that still merits a higher PE multiple, so you can have stocks that are grinding higher. Cheap borrowing is still available, which is going to drive growth a little bit higher for a lot of corporations. In the mid-cycle stages, chances are that you would want to be in sectors that are a little more cyclically focused, such as discretionary, technology or industrial based. We have yet to move to that late stage of the recovery where you normally would have the resource sector as the market leader. As a stock picker he is going to stick to his mandate which is Large Cap, but specifically lower beta names, ones that have low variability, but most importantly growing dividends.

Markets. He has rarely seen a market in which he has measured so many stocks at fair market value or well above them. Buying cheap does not always seem to work out, however. The big question is what is going on and what the Fed is going to do. This late in the business and market cycle, if you put yourself in the place of the Fed, what do you do. The market is okay and the economy is okay, but not bubbling along. So you want to keep interest rates low and keep stimulating, but as time goes on you are going to run into a market cycle peak and if you do you have no ammunition to counteract it. It would be nice to see a 200 basis point increase in interest rates. If the Fed was fighting a recession later on you would want to have 200 basis points to be able to cut. The last end of the market phase is usually accompanied by rising interest rates and we have not seen it yet. If rates rise it DOES NOT mean there will be a catastrophe in the markets. But if they don’t rise, what are we going to do?

Markets. He is expecting stalling growing growth in the economy. We are in a situation where GDP growth globally, certainly in the Western world, has gone from 3% to 2.5% to 2%, and now quite possibly dropping below that. Growth in emerging markets used to be very high single digits, and is now perhaps in the lower half of single digits. This is in spite of having debt levels that are really ridiculous, where you really can’t do much more to spur growth there. Also, the stimulus policies are just unprecedented. Unemployment remains high and growth remains very low. Consumers can’t spend more because they are maxed out. The US might be the one exception, because they might actually start raising rates to deal with this. At some point, market efficiencies say that you should be taking into account all available information, including information that hasn’t happened yet. There are 3 sectors which are “slowing growth proof”, i.e. not as likely to be susceptible to slowing growth. These are agriculture, water and infrastructure. (See Top Picks.)

Canadian listed ETFs giving exposure to stronger US sectors? Hedged or unhedged? The company that has sort of cornered the market on various sector based in the US, is First Trust, and they have about 9 of them. They are currently unhedged and will remain so for the foreseeable future. If the Cdn$ sinks low enough, they will consider putting a hedge back on. When the Cdn$ drops below $0.75, that is the time when it will be prudent to put a hedge on.

Market timing? He is a skeptic of market timing. There are 3 things that he tries not to do. 1.) Pick stocks, 2) pick people who pick stocks and 3) those who time markets. Timing markets is very difficult. It presumes a level of intuition and foresight, which he doesn’t think people can genuinely claim to have. As a result, he looks a lot more to building a diversified portfolio within asset classes, and then adjust to trim the sales as circumstances change.

Corporate bond ETF’s? He does not like bonds. He can’t, in good conscience, recommend that anyone buy a bond, when the Government of Canada bond is paying less than the inflation rate. That is a negative real return in Canadian bonds right now. Use a high interest rate savings account if you don’t know exactly when you are going to need the money, or even a regular bank GIC.

Tax ramifications of holding US dividend ETF’s in a nonregistered account? The problem is that you don’t get the dividend tax credit. He would rather you held US dividends in an RRSP, so that you don’t have to worry about that sort of thing.