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

Markets. S&P 500 and Dow made new records today, but it doesn’t feel that good in terms of the market because, if you are in the tech stocks, you would have done really well earlier in the year, but there were some pretty big corrections in the last few weeks. Same thing with health care and energy. This is going to be a market where money is going to be going around chasing the area that hasn’t moved as much. There might have been a difference between the big cap, the mid-cap and small cap as well. Has been pretty aggressive in the market over the last 4 months and started pulling back a little bit ahead of the correction, but perhaps should’ve done more. Feels the market will perform well overall into the year end. What is challenging is that a lot of stocks have run pretty hard and are getting expensive. Transition is difficult and he thinks the market will broaden out into the end of the year.

Markets. He looks at stocks rather than indexes, because an index can mislead you. We’ve had a tremendous run-up in energy and a lot of the TSX is made up of energy stocks which makes the index go up, but that doesn’t mean that every stock is overvalued. There is no sign in the Canadian economy of overheating. If anything, it is quite the contrary. Today there was a jobs report that was frankly depressing. Economists had expected a modest increase, but we had -29,000 in jobs, mostly full-time which erased the gains we had made last month. There are no signs in Canada of inflation or shortage of employees. Instead we hear of companies leaving town. There is no incentive for the Bank of Canada to tighten things up. This recovery has been much slower and much more prolonged than anybody expected. It is only this month that the number of people employed in the US got back to the number that it was in July 2008.

Markets. Congratulations to anyone who took the seasonal approach this year. If you bought the market this year in October and held until now, you realized 9% plus dividends as a return. We are going into a period of volatility. He is now 10% invested in the market. The economically sensitive sectors are giving technical sell signals. Earlier this week mines and metals gave sell signals. Energy sector yesterday had a breakdown on the 20 day moving average. These sectors are most vulnerable to a correction. He is in XLP, consumer staples. This is the time of year that bond prices tend to do well. There are opportunities in the summer time to buy on weakness.

Gold stocks are strong mid-July until beginning of October and end of Feb until mid-May. Gold has been basing out here. It doesn’t look like that second period is going to be a good trade so go with the first.

REITs. Usually do well in the summer time. This year they have been hitting new highs. This is a sector you want to own and to add to going forward. IYR-N is an example in the US and XRE-T in Canada for ETFs.

The Nasdaq is strong October to January and mid-April until mid-July. This year it seems to be bottoming, but relative to the S&P not so good yet good relative to the 20 day moving average. The trend is not that good, so it is iffy as to whether the trade will work this summer.

Pipelines are sensitive to the energy sector which peaks this time of year.

Nat Gas. We had some strange things happen in Nat Gas in the last couple of weeks. It is caught in a range. The best period of seasonal strength is from Oct until Dec as well as around this time of year. It is not a clear picture right now. Trend is up, below 20 day moving average and neutral compared to TSX. You may want to look at it as we get into the fall.

90 day Gov’t of Canada bond. Watch gold and gold equities and after 90 days go with the better of the two, or look at energy or health, utilities or consumer staples. He wants to be prepared.

5 month Gov’t of Canada bond. You want to avoid the volatility until October.

Markets. There is a lot going on in the world like geopolitical risks. Investors are thinking it is time to shift back onto value. It is too early to give up on growth. You want companies that are growing 20 or 30 percent. But when you see a selloff, you should not panic and become emotional. If a company’s growth rate is sustainable, well managed and has a competitive advantage, then it may be okay at a high multiple. There is a peak of M&A activity. Managers are more confident that before. A lot of companies realize they will not get this opportunity for the next 5 years. Disclosure: The guest has no interest in any of the companies he will discuss.

Markets. Investors need to exercise a bit of caution. Markets were good last year and continued to forge ahead, particularly in Canada. 9% in Canada and US 1%-2%, but fundamentals and the economy are not moving forward that quickly. People are looking for 2%-2.5% in GDP growth. At some point the market has to take a pause. When they do, that will probably be an opportunity. We have been in a bull market for a number of years and they just don’t go straight up all the time. People should be prepared for a pause. It is getting much harder to find things that you are really comfortable buying, unless your outlook is extremely long-term. He always looks for a stock with more potential upside than he would see on the downside, usually some kind of ratio 2 to 1 or 3 to 1 downside risk. This is getting more and more difficult to find.

Markets. Prior to the last 5-6 years, everything was moving in the same direction i.e. either risk on or risk off, so if you were a stock picker, it was really hard to generate good returns as everything was moving in the same direction. Over the last 9 months or so, if you were a good stock picker, you were being rewarded. Companies that are coming up with good earnings are getting higher multiples and those that aren’t are getting decimated in the market. This is the kind of market that is going to be thriving. If looking at small/mid-cap areas, whether it is growth or value, you can find areas that you think going to have good returns over the next couple of years. Mergers and acquisitions are starting to trickle down from the big caps because it is cheaper to grow by acquisition rather than organically. There have been a few takeouts in the small cap area over the last couple of months which he feels will continue. He is a bottom-up fundamental analyst so is really looking for companies that are growing earnings, trading at low multiples, very low debt to equity on balance sheets and high ROEs. He uses quantitative screening as well as meeting with many management teams.

Markets. Dividend land has picked up pretty well. We were suffering for the first quarter. The rotation in the marketplace does not affect him much. People are moving to momentum, but he is just collecting his dividends. The TSX is up 8.5% this year so that he thinks it could consolidate at this point. The pause that refreshes. He is at his max for banks and for energy, both of which he is comfortable with. He is adding to his materials weighting. It is a 2015/16 story, but gets dividend that is safe while he waits.

Banks. He is a long term holder. They are good 5-10% a year dividend growers. Half the business is the retail business in Canada. You could pare back over the summer and get back in in the fall if you want. He believes, however, that you should stay in the market to keep getting the dividend.