Andrew HamlinA Comment -- General Comments From an ExpertA CommentaryN/ADec 11, 2015

In general, it's a bit of a cautionary note for the market overall. All this fighting is good for oil prices, which is good for the companies that he covers. Higher prices = higher revenues and earnings. So it's very positive there.

But overall, investors have to be cautious for a few reasons. Chip stocks have come under pressure. The Shiller PE is back up near historic highs. And the 10-year government bond yield is just over 4.6% (~5% is where people in the know start to get very concerned about ability of US government to meet its obligations). There are enough things there to worry about.

The defense for that is to pick inexpensive companies that are trading at a discount to peers. Look for ones with identifiable catalysts.

It's a little more vulnerable. The worry is that it'll sell off if there's a selloff in the US markets. We could, potentially, revisit the time between 2000-2010 when commodities did really well but US markets did poorly. 

Time to be a bit cautious, perhaps raise a bit of cash. Be selective in terms of what you choose. Realize that it's been going great for a long time, but that doesn't mean it'll be extrapolated out to the future.

Commodities could do very well if the status quo holds. If the AI balloon continues to stay inflated, that's positive. Uncertainty in the Middle East will mean higher oil/gas prices, especially in Europe. That's all positive for the stocks he covers.

As they relate to oil & gas, it's a pretty good situation for Canadian producers. Geopolitical instability increases the price of commodities, so that's positive for revenue. Every time Trump sends out a tweet at 3 am the CAD tends to sell off, and that's positive when you get revenue in US dollars but expenses in CAD. 

It's an area where there's clearly a need for Canadian production into the US. The US may be the largest oil producer in the world, but their fields are starting to roll over and they still don't produce enough to be self-sufficient. And we're the #1 supplier of oil and nat gas to meet that gap.

That's why the West is trying to get another pipeline built because the growth is all in Asia. Asia is the single-biggest block of demand for energy, which is likely to increase in future.

Very possible, though hard to say what's going to happen. Petroleum reserves have kept prices artificially down. If we get to the point where those supplies have evaporated, that will cause the price to spike and to spike quite high.

You have to look at the utilities sector. Pipelines are also good; though not as good, because it's perceived as being commodity-sensitive (even though it's really not). You could do well with ENB and TRP. Also with PPL, though it's a Hold right now. On the power side, H and EMA and FTS are all good names.

You'll get your dividend, and the safety means you can sleep at night (and that's worth something). You can get diversification via funds and ETFs.

It's probably part of the negotiation tactic by Trump. Best to remember what won't change in the near term, which is that Canada and the US share a border and are each other's largest trader partner. We will likely reach a resolution at some point. Despite the US-Iran war, tariffs, and interest rates, earnings growth is resilient. The AI investment cycle has been strong. Despite volatility, the S&P if up 9% and the Russell 2000 18% this year, which points to a broader market. Eli Lilly has outperformed Nividia 2-1 over the past 12 months, for example. The market is stronger than you believe, despite obstacles.

US banks have done well. In a barbell approach, he owns the higher-quality JPM and GS as well as Citigroup, which is weaker but improving. Use this barbell approach: strong and established as well as improving banks.

There's roughly $1.4 trillion in margin debt in the US. Says Warren Buffett, "People aren't investing. They're not even speculating. They're outright gambling." Historically, then, we'll see markets in any month go up down 1-2%, but this year it's 5-10%. If investors hold a stock that's up 500-600% in one year, they need to remember that stocks historically move up or down 10% a year. So, the most prudent thing is to rebalance and sell half your position. In a few weeks, if the tech companies don't report that the billions they're spending aren't profitable, the market could correct. Rebalancing is important. He's holding 5-15% cash to buy beaten-down stocks. Not only tech, but banks and insurers have gone up fast and far, so take some profits.

The big US banks report this week and are expected to report excellent numbers, but can this performance continue? The economy is growing. Watch for anything the banks say about consumer sensitivity and inflation, like credit card delinquencies. AI is an exciting story and will shape economies for decades to come but is creating volatility in the market, making it speculative.

It's more important to hear what the US Fed says about trade than the inflation announcement at the next Fed meeting. If we get another sharp inflation number, the US Fed could raise interest rates in two weeks. He doesn't think Canada will see a rate hike. If the US raises and Canadian doesn't, that answers where the risk is in the USD/CAD trade.

Most people feel inflation when they pay for groceries and gas, but wages drive real inflation longer term. Wages are the cost of input for most, not all, industries. But wages matter in the North American economy which is 70% wages. Technology actually creates a lot of disinflation; machines, not people, work farms, which lowers costs. Wages troughed in 2011, the year the average Baby Boomer turned 65 (and retired). Since then, more have retired and now we have less immigration. The future of demand/supply in labour will tell us where inflation will go. More of his own staff has asked for raises beyond inflation, because of the sudden shock of inflation in recent years. Nothing wrong with asking that. But the new inflation base is unlikely to remain 2%. The population is shrinking, therefore is bad for the labour supply. Can AI replace those workers? Some. Some AI can replace those workers, but not all. During earners, what will companies say about wages and pass those costs to consumers?

We've seen a lot of rotation in the last 30-45 days. Tech was where most investors were crowded into, and now the air is really coming out of that sector while other sectors are starting to move. US healthcare is really making moves, as are US financials (Canadian ones have been doing that for some time). Sector breadth is broadening as investors look for returns.

His team trimmed its tech exposure over the last month. They're not moving out of the sector entirely. There's often rotation inside the sector itself -- software stocks were beaten up in the first quarter, and now some are coming back to life. At the same time, chips and semis are losing some steam.

He's looking at anything under ~$5B in Canadian industrials and technology that's been left for dead in the summer, a not-unusual occurrence when volumes dry up. Yet the fundamentals on a lot of them have been extremely strong. If they continue to execute from a business standpoint, the stock price should follow.

His firm follows top-down indicators, and these are all still positive across all market caps. Seeing rotation into different sectors. If you project where growth is going to be, and where inflation is going, it looks as though the fall could set up quite nicely especially with the earnings expected in the next few months. It should all have a positive impact for the markets.

There's always rotation going on in the market. So you need to have a diversified portfolio. You need to have a stop point, so you know when to get out and when to stay in without emotions taking over. There's a great book called The Art of Execution, which defines how you should think of yourself as an investor.