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

Markets. Thinks valuations are rich when looking at the PE’s, certainly in the US where it is 19.5 on the S&P and 23-24 for NASDAQ. Earnings growth has been okay, but nothing special. The moves that we have seen in the market over the last year have effectively been valuations being more highly rated or investors being willing to more highly value the earnings. He thinks it is vulnerable. If there were any likelihood of interest rates going much higher, people would start to draw in their horns. Doesn’t expect the Fed will drop interest rates at this time. What they have been doing is taking the $10 billion out of the QE4, and we are pretty close to taking all stimulus out.

Expects much higher volatility, especially given the record levels of margin debt, high valuations and the time of the year. It is amazing, with the geopolitical uncertainty, that the markets keep going. A pretty good time to take some of your profits.

US banks? Has never been a big fan of US banks, because they did much worse than Canadian banks. Most of them cut their dividends and have the weight of the government regulation bearing down on them as well as enormous fines. Of them, Wells Fargo (WFC-N) has been consistently the best run. If you have to buy one, buy Wells Fargo.

Markets. He has always had quite a bit of cash in his portfolios and it hasn’t hurt his results. Has been able to find some pretty decently valued companies. The overall domestic situation in the US is quite good and there is pretty decent economic growth. They may raise interest rates, but they are not going to start raising them dramatically. It is going to be very data dependent. The businesses he does own, he is quite optimistic about and there are good things to happen. There are probably some constituents in the Federal Reserve that would like to start taking a more hawkish stance, particularly just to maintain their credibility. The Fed is on a trajectory and will stop tapering at the end of October. At some time they will start raising interest rates, but it doesn’t mean they will start raising rates in January. The numbers are good, but there are still lots of warning clouds on the horizon, growth is still very modest and is likely to decelerate again after we’ve had a build up after very weak winter and spring numbers. Problems in Europe are also a bit of a drag. We are not going to see any huge inflationary pressures. There is no reason for the Fed to go and stomp on economic activity that they have tried so hard to foster.

Cash. How much should a retiree have in their portfolio? He is running little bit higher than 15%. Somewhere between 15% and 20% feels right to him. It puts you in a position of confidence when the market corrects and they start to sell off. Also, if you have cash, make it US$’s. He is positive on the US$.

Markets. He thinks we had the economic recovery because we had ultra low interest rates. He is waiting to see what economic performance we get when the FED raises interest rates. 1 in 5 people on the US are still on food stamps, so he is not sure they have fixed anything. If Scotland separates the issue is North Sea oil. The issues are also how much of the debt do they assume and will they have their own currency. There would be brutal cuts to social services. If Scotland and its oil were to leave the UK this would be a problem. Maybe at the end of the day it will not pass. There are all kinds of destabilizing factors linked to this potential event.

Educational Segment. Liquidity trap. October is the last time they are doing QE. They are pricing in the first move by next June. You have to understand what the fixed income markets are going to do. We won’t have the liquidity from the FED, although Europe will fill in some of the lost liquidity.

Markets. You look at the VIX and other indicators and there is not a lot of fear out there. Yet things in the markets are deteriorating. He likes buying when people are afraid. You can’t argue the market is cheap any more. Thinks you could easily see this market down 15%. A 5% correction would create panic and down it would go. In the past you never knew what the catalyst for a pullback would be. You could still have a breakout to the upside where the market goes up in one final frenzy. There are less and less stocks participating in the advances.

Markets. The fall historically starts as the weakest time period of the market. September 16 through to October 9, the market has recorded an average decline of 1.8% and has been negative 18 of the last 30 periods. We’re still seeing very low levels of volatility in the market. The VIX is 14 right now and historically it should be about 24. It could still go much higher. Seeing all the turmoil we are seeing including some of the headlines and the coming elections, there are a lot of catalysts that could lead to a drawdown in stocks. You want to take advantage of this weakness. There are appealing buying levels during the period of seasonal weakness ahead. S&P 500 shows a significant rising wedge pattern. If we break below the lower limit, currently at 1950, there could be significant downside potential. He is expecting that support line to hold.

Energy. There is normally a period of strength for energy stocks at this time of year. Oil tends to rise around hurricane season, but hurricanes have been much weaker than historical norms. Because of this energy stocks have been poor performers. He is not seeing too many positive tendencies ahead to support the trend in energy. The period of seasonal weakness starts from mid-September until about the beginning of December.

Markets. Had thought there would be some kind of time correction as opposed to an actual 5%-10% correction, because there was too much money on the sideline. Because of this, he basically stayed fully invested, which was the right thing to do. Sold a position recently, so now has some cash. Markets are choppy. It’s September and October, so his current short-term thinking is that the market is really worried about the language from the Fed next week, and that maybe they raise rates sooner than they said. He doesn’t necessarily buy that, but it is getting priced in with a strong US$ and a weak Cdn$, weak bonds and weak pure yield stocks. On the other side, banks still do well. Lifecos are also beneficiaries of higher rates, so all those stocks are doing well. If the Fed says rates will stay low for a considerable time, he thinks there will be a bond market rally and you’ll see a Cdn$ rally back to $0.91 plus. Thinks the stock market is more nervous within sectors and he doesn’t think the market moves up a lot or down a lot. From here, we are really driven by earnings growth and/or the lack thereof, stock by stock and group by group. Canada has done very well, better than most G 20 countries. You now have to look at group and stock by stock.

Lumber stocks? Lumber prices have done well generally and the stocks have lagged a little bit. There is a soft 3^rd quarter coming, but he expects US housing to pick up slowly and the 4^th and 1^st quarters to be better. (See Top Picks)

Markets. Has being fully invested for a while and has started to raise just a little bit of cash, to take some of the gains on his positions. He is seeing conflicting things in the market. On the macro economic data, some parts are looking great, but others are not looking so great. Tempering his enthusiasm a little as he had since the fall, in case there is some kind of reaction to potential talk of rising interest rates. While he doesn’t think that is going to actually happen soon, he is getting prepared for the volatility that might result if people think that is going to happen. He is of the view that this is a false alarm and that things could correct a little bit, but who knows where rates go as they have been backed up for a little while. Today was the first he had seen signs that interest sensitive names started to pull back a bit. Hedging is important for him. He is managing his portfolio as an absolute return generating vehicle. When he gets cautious, he looks at how he can protect the downside if something happens. The cheapest way to do that is through the long-term bond. It is extremely cheap to hedge with. He is expecting a good end to the year and is still 90% invested.

Markets. Most bull markets end with monetary tightening when the economy gets overheated, but there just isn’t signs of that happening. Share buybacks are helping and are partly due to low interest rates. They borrow to buy back stock. There is complacency out there so you have to be careful. Year 3 of the presidential cycle typically does well after a weak year 2 but year two was strong in this case. You see a 10% decline in markets once every 28 months and we are in month 34. You can wait a long time for a decline. The complacency level concerns him because investors become vulnerable to a shock. Margin levels are high again. This is one sign that you have to be careful.

Markets. He can see some choppiness going forward given geopolitical tensions that are happening, as well as negative seasonal tendencies typically this time of the year, when the volatility index normally jumps by about 15%-16% on average over Sept. and Oct. There are also concerns as to when interest rates will rise in the US in terms of Fed fund rate. Plus concerns over China’s economic recovery. Still believes there is a strengthening US economy. We’ll see a grind higher in equities. It’s just in the near term there could be time for a bit of a pause. You’ll need positive earnings trends to continue and corporate earnings to continue to do OK. If you apply an expected $130 earnings per share on the S&P over the next 12 months, and multiply that by the 17 multiple that we have right now, that gives you $2,210 on the S&P, about an 11% return. He is looking for a 4%-5% pull back. Doesn’t really see a correction in the stock market unless there is an earnings recession and he doesn’t see that at this point. He is sitting on 10%-12% cash at the moment.

Markets. A lot of people think the markets are high here, but he thinks not. You look at the S&P earnings and we are where we should be on a PE basis. There is no indication that interest rates will go up appreciably. He thinks we are going up another 10-15%, but there may be corrections in the next few days or weeks. He feels you get 7% in the market vs. treasury bonds at 2%. You have to do security selection and have cash on the sidelines. There is every indication that we keep going up slowly. The US recovery is fully in place. Things seem sluggish from a jobs perspective, but from a company perspective, they are profitable, expanding and have high export growth. The US housing recovery is also in place. Consumer debt levels have really come off from 100% to 70% and they have net savings of 4-5%. The US is a dynamic economy and they are growing at 3.5%. The harsh winter messed up the statistics.