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

Markets. For 18 months, his view has been that we are in a new secular bull market for stocks. Fullbacks are likely to be shallower and shorter lived than we have seen over the last many years. When you have a market that is both growing earnings and a slowly expanding multiple of earnings that investors are prepared to pay, it is a very durable market. For consumer led developed economies, very low inflation is a really great thing. This is because the consumer has a little more money to spend and balance sheets are getting better and there are some big sectors that are big winners from low energy prices and low inflation. This would include transportation and retail. In the US economy, 72% of the activity comes from the consumer. He came out of the move in October, well over 97% invested, so very few of his Stops got hit. The biggest reduction he had from a sector exposure, starting in July and into August, was largely leaving the energy sector. The money was moved more towards things that were more consumer concentric, healthcare centric, transportation centric or technology centric.

Energy. There is no indication that the weak pricing is about to abate. Has felt for the last 12-18 months, this is a sector where the tide is going out. Commodity prices are dependent on the last dollar of demand, and if production is growing more quickly than supply, then you have a problem. We are going through the greatest oil boom in the history of the US.

Markets. Oil may be going into the $60s and Brent may be going into the $70s. What we see in the extremes is that more and more people pile onto the trend. In this sector you get more volatility. The energy sector is currently his biggest waiting in his sleep at night portfolio. He has primarily the Canadian sector because it has been hit harder than the US. ZEO-T is the ETF he uses. The biggest in Canada don’t dominate this ETF. It is one of his bigger positions that he accumulated over the last couple of months. Small cap markets are getting stretched here. Small caps are lagging again. In a robust market, small caps should be leading. This is telling us the underlying markets are actually weak.

Caller asked for a recommendation for an ETF for 5 years for a RESP account. There is no growth in fixed income and probably only 2 or 3 percent. With a bond fund not having a maturity date, there would be interest rate risk. He recommended a fund he manages for BMO, the Global Tactical Dividend Fund, the ‘D’ class.

Educational Segment. Interest Rates. He and his guest felt interest rates will not be raised next year. The world economy is slowing even though the US is growing slowly. Only 37% of Americans are employed, down from 42 in 2007. There isn’t enough demand to create inflation. They won’t want to raise interest rates at a time when they will affect the 2016 election.

Markets. The market is in over bought territory. Either the market will move sideways, or you get a decline. It will be 5 or 10% at the most. He thinks Russia could spook the markets regarding the Ukraine. Thinks we may be nearing the bottom in oil prices. Sees continued improvement in corporate profits. Sees a reenergized US consumer. The outlook is improving dramatically. There is room for a PE adjustment to the upside. US inflation should ramp up next year. Wage rates will be up as unemployment rates come down.

Markets. Stocks are meandering higher. There is a perception that they are zooming higher because the S&P hit a record level again. That can happen day after day and still be a meandering market. Multiples right now are at about historical levels. 15 years ago we were trading at about 16X expected 2015 multiples, and the long-term average is just a fraction ahead of that at 16.2X. There is not a lot of volatility, so you don’t see big swings in the market. Complacency is always a bit of a worry. Through the October correction, there was a feeling that this might be a bigger correction. The true effect of a correction is to feel some pain. When you have V shaped bottoms, you don’t feel a lot of pain. It is essential that you buy things at the right price and don’t chase and buy high valuations. You never see risk and damage until it is too late. Overall he is constructive on the market and this meandering can continue for awhile.

Tax rules on non-Canadian assets. For anyone who has over $100,000 cost base in non-Canadian assets, outside of registered plans, you must file a T1135. If you don’t file this form, the fines are up to $25 per day, to a maximum of $2500. (Gordon has an article on his website www.goodreid.com. You sign up for e-articles.)

Markets. This reminds him of 2007-2008. We have low interest-rates, and all this is really doing is inflating the value of financial assets. There is almost a zero interest rates in the US for 5 years which, gave 2.5% growth. Europe is still in the can with zero growth. Japan just slipped back into recession, and now the People's Bank of China has come out saying they are cutting interest rates because the economy is slowing. Markets are going higher, but are creating a bubble kind of condition. He would prefer the market was going higher because of a strong economy and growing earnings. It is going higher because of stock buybacks and higher valuations in the market in general. It is hardly a buoyant economy to justify some of the recent moves, particularly in some of the non-resource parts of the market. He is looking for areas that are a little more value oriented and a little more yield oriented. His cash levels are higher than what they have been before. Today he is Selling into strength rather than doing any Buying.

US Growth. He sees growth better than anywhere else right now. Going forward they have a few more headwinds as the US dollar is going to be a little more difficult for them. With Europe and China slowing down and with Japan in recession, if all your trading partners are doing poorly, it is going to be hard for the US to rise on its own. Earnings are growing generally, but there is a lot that scares him. You feel you are getting pushed into buying stocks because things are going higher, but that is what happened in 1998-1999.

For a long-term hold of 5 years or more, what would be the best sector? A lot of people like energy infrastructure and pipelines, but he finds that area overvalued. Some of the big US technology companies that have a global footprint look great. They are generating a lot of cash and margins are holding in. This would be at the top of his list. You could buy an ETF such as SPDR Technology (XLK-N), or pick a basket of 5 or 6 names. Likes healthcare, but it's a tough one to find the right names.

Markets. The market correction was very short, but he did buy a few things for a few accounts where he was bulking up on some stocks, but it began to run away from him quite quickly. Thinks we are going to see another leg to the downside going forward. PE multiples are still pretty high. The same problems exist in the world that existed before. There are all the geopolitical issues globally. There is also starting to be a real divergence in monetary policies globally. US is backing off from quantitative easing, but we have Europe and Japan going more towards that direction. There are a lot of mixed signals right now. We are towards the end of the year also, and there are a number of areas, particularly in Canada, that are into tax loss selling, which is putting some pressure on materials and energy stocks, for the next few weeks anyways. US seems to be carrying the world on its shoulders at the moment, and he thinks fundamentals are lagging valuations still.

Markets. The first part of the year was pretty good and the second part has declined since then. Mining stocks have declined most of the year. The oil sell-off started in the second half and the markets have not performed well. There is long term significant value in the mining category. There are big discounts. TCK.B-T is on sale. In Oil and Gas there are a ton of good companies. The demand for copper will not go away in emerging markets.

Bond Yields. As to whether bond yields are going up or down, the forces are pretty well-balanced right now. The bias is towards slightly higher rates from this point, but not by very much. Feels rates are going to inch up a little. In the early part of the year, there was a big shift in demand. There was far more money to invest in bonds than there was bonds available. US deficit shrank, and all the geopolitical tensions caused foreign investors to flee into the treasury market. Inflation has been low and growth has been weaker than expected and commercial banks have been shoring up their balance sheets because of the new law, so there have been more buyers of US government corporate bonds than sellers. In the last 12 months, government yields have fallen and US corporate bonds have risen, which tells you there is trouble in the junk bond market. Part of the reason for that is the energy patch, where a lot of weak balance sheets are emerging with the plummeting of the price of oil. The boom for high-yield bonds seems to be over, the number of people issuing them has fallen and there are fewer investors wishing to buy them.

How will currently listed debentures react when long-term interest rates go up? Will it be more dramatic or the same as bond yields? “Listed bonds” would be convertible bonds in Canada, and as a group of bonds, they are unrated and subordinated at very low quality. Many of them are small and don't trade very actively. They will rise in yield as long as the conversion value isn't worth much. Many of these have become overvalued. Their prices will fall as general yields rise, but not in a straight line because the conversion value may kick in and cause them not to fall as much as regular bonds. He does not invest in convertible debentures and thinks they are junk. If you really like the company, buy the common.