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

Uranium. The general price of uranium will have to go higher. The industry, represented by Cameco (CCO-T), suggest that they are all in costs. Total costs are about $70 a pound and they sell it for $30 a pound. They lose $40 and try to make it up on volume. That can’t last. It could take 2 or 3 years. The restart of the Japanese nuclear fleet and the continued buildout in Japan tells him that the price can and must go higher. It doesn’t have to do it right away.

Markets. Feels there is an August phenomena where people want a bit of a pause. We’ve had good runs on both sides of the border, but better in Canada, however that follows a year where the US outperformed Canada. Not so sure it is going to be more pronounced in one market than the other. It may be more pronounced in some sectors than others, where fatigue has set in. He views it as a healthy pause and there is nothing like getting the wall of worry reactivated to make us more confident that we are going up. He likes the earnings stories on the things he owns and the strength in the jobs market on the US side. Feels this phenomenon will be well done by Labour day and we will have a very strong last quarter. We are in a corrective climate and there is some rotation back towards income. The 2^nd part of a correction is, where there are opportunities. Feels there are some opportunities where there has been some downward pressure on earnings in really fine companies. There are some other companies that are within striking distance of their all time highs, because the growth is there. He is tending to hold a little more cash and to be a little more cautious, but where there are good earnings growth and where he is confident of the story, he is adding.

Markets. We always get a correction at this time of year. People talk endlessly of a correction coming, but later we will look back and say there was a correction, but you could find a lot of fine stocks and find that they are down 10% to 25% even without bad news. When people talk about a correction, they are talking about some classic doom and gloom, where everything just falls. We haven’t had that and we need a catalyst for that. He has been sitting on what he has, mostly blue chips and dividends.

Gold. This has had a long base, and he keeps on thinking that we are about to break out to the upside, but we just now hit a low of just above $1,100. We should be hitting a summer rally just about now. He sees it at $1,600 a year from now. Last year people sold their golds, and are out of the sector. Have now seen stock market gains go up dramatically with it looking a little expensive, so he expects we will get new buyers coming back. One of the big issues is all the quantitative easing and printing of money. A lot of the money has stayed on the banks’ balance sheets, and hasn’t gotten into the economy. At some point he believes the banks will realize they are getting only 2% on their treasuries, and could get a bit higher return and start lending out to businesses, etc. When you get the money going into the system, your M2’s and M3’s start to kick in, and that’s when you could start to see inflation kicking up.

Silver. Absolutely loves this commodity. On a long term basis, this is going to outperform gold. About 66% is for industrial use, and industrial use has been good. But it also has a precious metals characteristic. Ratio of gold to silver historically has been on a ratio of 16 to 1. Right now we are at about 60 to 1, and he expects that ratio to come down. If gold was at $1,600, silver historically would be at $100, a 4 or 5 fold increase from where we are. He is expecting to see that. The last time we saw this was in 1980 when the gold price was around $800 and silver was at $50, a ratio of 16 to 1.

Markets. He looks at earnings. Earnings drive stock prices over time. Wouldn’t be surprised to see the market correct 10%, and wouldn’t be surprised to see it go higher 10% from here. Thinks Fair Value on $130 of earnings per share on the S&P 500 next year is somewhere in the $2,000-$2,100 range. A lot more in the next 5 years, so he is more focused on 5 years from now, not 5 minutes. He is hugely bullish on equities. Thinks that corporate managers are doing everything right these days. They are buying back stock and using low debt to make acquisitions, which is accretive to earnings. Canadian population is growing, people are richer, portfolios are growing if you stay invested, our houses are becoming worth more. The same in the US. These are positive things.

Markets. Expects the 2 day sell off is the start of the correction that we have all heard of. Has been positioning himself in the past couple of weeks as negatively as he has been since 2011. Has a net Short in his hedge fund. He is still a long-term Bull and the glass is half full, but it seems so extended in the short term for a variety of reasons. It just seems that it is ahead of itself, and with political actions seems to be breaking down a little. Thinks we are overdue for a correction. His worry is that everybody is expecting 5%-10%, but sometimes these things gain momentum and it wouldn’t surprise him to see the market off 15%-20%. The safest place is to have cash on the sidelines. Some of the cyclical sectors are starting to act a little better. Europe growth is slowing down, but emerging economies and China seem to be doing well. Thinks gold is all right in an environment like this. Feels the highest risk sectors are energy, technology and social network. The earnings are sort of winding down now, so what is the next level?

Markets. We have had a few false starts this year on days like this, and then things rally back. It is too hard to tell. The correction is way overdue and he believes it would be very welcome. There won’t be a lot of places to hide when it comes. As a value investor, he is having trouble finding value here. He doesn’t find anything at these values to buy, and has some cash that he wants to spend. He hopes this Market does sell off and wouldn’t mind a 10% correction. He probably has 10%-13% in cash sitting on the sidelines.

Markets. We have just entered the most volatile period of the year. From the start of July all the way through to October volatility typically rises. As we have seen since June, the Vicks has spiked about 50%. The S&P 500 has now broken support at the 50 day. Since the 2011 lows, we have been rising in a narrowing range and the rallies have been less intensive. Investors do not believe in the rally. That is a bearish setup. If we break below the bottom trendline of that pattern, it could suggest significant downside potential. It seems reasonable, especially now in this seasonal volatile time frame, that we will see a correction happen in the next couple of months. Right now there are no favourable recurring events to drive the market higher. We are past earnings season. Between now and the 3^rd quarter earnings season, the market’s economic data tends not to be too favourable at this time.

Precious Metals. Gold is in a period of seasonal strength, and silver can tend to benefit as well. There has been a significant decline in gold prices over the last few years, but over the past year, they have started to show signs of bottoming. The chart is showing a good sign of a “head and shoulders” bottoming pattern. This implies that if we get a break above the neckline, there could be significant upside potential. Gold is due for a retracement. $1200 would be the new support for gold. $19.50 would be the support level for silver.

Platinum. Platinum tends to do well in the first half of the year, when industrial production rises and manufacturing tends to do well, January through to April. That’s when you want to be buying platinum. It is currently starting to show signs of rolling over.

Natural gas. Seasonality is from September all the way through to November. Last year there was a huge run-up all the way from September all the way through to February. We are within the seasonally weak period, but we are seeing signs of a bottom. Currently there is a bit of consolidation. It has certainly become very oversold.

Markets. Feels the market today was hit by the real, genuine, credible fear amongst the Bears that the Fed could be behind the curve. Yesterday there was a 4% GDP print and today there was some wage inflation, the biggest in a lot of years. We saw the 10Yrs race up, and then drop because of all the geopolitical concerns. That is the kind of thing that can bring an air pocket to this market. Feels we are going to have more of a correction. The S&P 500 cut through the 20, 50 and the 100 on the 2-year daily chart. If right, he can see another 4% down on this move, unless there is some other move that comes out. At the end of the day, this will be a real buying opportunity for a whole bunch of different reasons, but there might be a bit of a challenge for this bull market hegemony that we have seen so long. If rates rise for the right reason, this will be fine. He doesn’t think we are going to 4%-5% interest rates. We might have 2.9%, 3% or 3.2%. In low interest rates, what asset class do people want to go into? Feels that markets are very well supported. In any sort of trending market you are going to have days like today.

Protection strategies in the event of a substantial market downturn such as 20%? For most people it is about asset allocation. If you have a 50/50 asset mix, equities to fixed income with a tactical swing of perhaps 20% either way, then before the 20% happens, you may want to have only 30% in equities. You also want to own stocks that are doing well. Some will benefit from having an option facility. Others can benefit from being able to Short. Also, Futures makes sense. However, the key here is really experience. He finds that people usually put on protection when it is too late.

Hedging and protection strategies? Unless he is really, really confident that a position is going to drop, he won’t ever Buy Puts. The reason why options are so good is because you can write premiums. If you like Bank of Nova Scotia (BNS-T), but you think it has $3 downside from here, you sell Calls and you get a second income. If you like Canadian Natural Resources (CNQ-T), but you don’t want to buy it here because you think it is a little too toppy, you oblige yourself to own it a couple of dollars lower by selling the Puts. So options really make sense that way. If you want protection, then Shorting is the much cleaner, better way almost all the time.