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

Markets. Saks being bought out at a time when the whole sector is being overvalued. We are at the top of the sector for the sector. We are just entering the time of seasonal weakness. We are leading to Christmas when the retail sector does very, very well. OBV is the volume added when stock goes up and subtracted when stock goes down. Tells you if a security is being accumulated when stock goes up. XRT-N, the US retail ETF has been going flat while the market has being going up. Gone below 20 day moving average. Sign that sector is going into a time of seasonal weakness. Gold is up 6% last week. Sell point is the end of September. Oil goes through to the end of September.

Educational Segment. Transport Sector. Up over 36%. On average from Aug 1 to Oct 9, it has declined 4.6% on average. It has a lot to do with economists changing estimates on economic growth going unto the 4^th quarter. CP and CN came out with second quarter results last week. Classic head and shoulders pattern. It could drop to the $95 (18%) level easily. Sector is impacted by higher energy costs, accident in Quebec, for example. You want to sell your transportation stocks on August 1^st or possibly even short them.

Markets. We are a little expensive on trailing earnings on the Dow and S&P. Almost all the sectors are overbought. If you look at the S&P we had a MACD up against it. The TSE is still down a couple of digits. Very low volume here. There isn’t conviction for the higher prices we are seeing. There is a warning that something is not confirming and that things should not push higher from here.

Investing. In January he called that yields would tease higher and his Top picks were Power Financial, Manulife and Magna. One never knows things are going to happen and you don’t know if it is going to go in a straight line. Continues to try to sell old areas (bond proxies without growth, utilities or no compelling growth features) that probably won’t do as well over the next couple of years and tries to stimulate areas that probably have the wind at their back. You can sell everything right away but a lot of them continue to have really good value. REITs as a group are probably trading for Canadian bond yields for around 2.75%, so at these levels they’re actually quite attractive but the question is, were are those bond yields going to go over time. His view is they are probably going to go north of 3% over the next 12 months. That will hurt the REITs a little bit, but even more than that, if yields come down a little bit, they are over owned. On any sort of relief he expects people are going to be lightening up. Expects there will be an opportunity for the group of them but probably at lower levels from here.

Markets. Towards the 4^th quarter, you could see signs of Europe starting to dust itself off. China is a little bit more troublesome but ultimately he believes you are looking at a soft, not a hard landing. Who knows what the Fed is going to say this week. At the end of the day, they have been trying to engineer this thing all along so they are going to be very sensitive so it should be market friendly. His main focus is to look for the good companies and try to buy on weakness.

Markets. S&P 500 seems stronger to him but he doesn’t really watch indexes. US is starting to get better and percolating. A lot of naysayers are saying that the market is disconnected from reality. Doesn’t believe that because in his experience, markets really only get disconnected when the retail, naïve, innocent investors pile in based on stock tips from all sorts of sources. Doesn’t think that is happening. There is still a lot of retail money on the sidelines. The low interest-rate policy that the Fed is pursuing seems to be working.

Auto sector. He would probably stick to the parts makers. They are smaller and he likes small companies. You have to be careful because big carmakers have a lot of power, so you want to find one that is not in the commoditized product.

Markets. Expecting them to slowly grind higher. In the near-term, we might face a bit of weakness because we have had a pretty good run both in Canada and the US over the last month. Things are getting better. Employment is hanging in there. Fed is still very accommodative. Manufacturing and consumer numbers are good. For Canada to make up some of the ground we have lost against the US, it has to be the late cyclicals or the commodity stocks. This is really going to take a growth rebound in China which doesn’t look like it is in the cards at the moment.

Markets. Risk assets are in a tug of war. Doesn’t see this changing. The tiniest hint that monetary policy will be pulling back and the market reacts. Thinks they will want to see some pickup in the economic data before tapering. Thinks the economy is ‘hooked’ on the monetary stimulus. He doesn’t see a lot of value in equity markets except for gold.

Gold Stocks. Has a large long position in the gold sector. He looks for the ratio of stock performance relative to gold price. That ratio bottomed just a few weeks ago. This is a leading indicator for the sector going forward. Likes how well the markets reacted to Gold Corp’s bad news recently. Does not see what will take the sector down now but he would exit in October.

Global Markets. A lot of the investments he made, in the last couple of years, are really benefiting, particularly with US exposure and are starting to do quite well. A lot of the gains have really been currency driven. He runs an unhedged book so currency, particularly on the US side, has been very attractive to him. Also uses currency as a mechanism to get into a market. Euro is weak so this is where he is looking at the moment. Emerging markets are selling off so he would look to add some more there. About 30%-40% weighted to Canada. Any buying on his part would probably be resources.

What would be your preference for a railroad stock on the global market? Hasn’t initiated a position, but is looking at UMP (not listed). CSX Corp (CSX-N) is obviously pretty cheap because of the coal volumes. Internationally he likes MTR 66HK, basically the Hong Kong subway with international operations. Manages subways in China, Stockholm, Australia and the UK and pays a decent dividend. North America has the best of breed in terms of publicly listed companies.

To what extent do you assess corporate governance of global operations by comparing and contrasting with the model of corporate governance employed by Canadian big banks? To what extent do you weigh corporate governance as a factor when deciding between various global equities and asset allocation between them? Governance is very, very critical. He takes the view that he is going to invest alongside management and going to be entrusting your capital to them to manage your capital on your behalf. “Management, management, management” is really the play. Tends to invest in founder owned companies. These tend to make decisions for the long-term growth and sustainability of the dividend.

US Economy. Expects the US economic cycle to drive Canada but it is going to be slow and steady for the Americans. Given that the US is Canada’s largest trading partner, he thinks it will indirectly benefit many Canadian corporations and the Canadian economy more broadly. US growth is being driven by an improvement in employment and improvement in housing. Both of those things will gradually get better during the next 2-3 years but we are operating significantly below capacity if you look at things like the output gap where capacity utilization is in the US.

Interest rates. He focuses on dividend paying stocks, usually very high quality companies that are able to sustain and increase their dividends over time. A rising cost of capital, if it shot through the roof, would be very concerning but in the absence of a very quick increase and if rates gradually go up coincident with a rising economy, he doesn’t think it is the end of days for any of his dividend paying stocks and he is a Buyer at this time. This is encouraging news for REITs as well, as the US/Canada would not be raising interest rates if economies did not support it. Cash flow growth should partially mitigate, if not fully mitigate impact of higher interest rates.