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

Markets. The US is improving and economic numbers are looking increasingly normal, however, there is a disconnect between the improving economic numbers. The numbers for both the US and Canadian economies were better than expected. Meanwhile bond yields are going down. As a result, there is a risk that yields may end up increasing, and as a result, he ends up favouring stocks over bonds. Stocks are reasonably priced at about a 15 multiple both in Canada and the US and thinks that earnings will continue to grow quite well. On tech stocks, we are now seeing a lot of the large-cap stocks breaking out of a 7-10 year sideways band. While they are increasing in price, he feels there are others that will end up doing better.

Markets. There’s been push and pull in place for a couple of months. Eventually we will get an interest rate hike. But the push and pull is definitely giving us an opportunity. There are a number of high quality German companies that have been hit hard due to the Ukraine. The lack of US interest rate was a stimulus last year. This is a multi-year trade moving up. We are seeing lots of M&A as a way for US companies to grow.

Australian Banks – Dividend strength. They have massive reserves. Over time that has made itself into the economy. Given that it is an ADR, the Australian dollar has been high and it has been hard for repatriation for earnings outside of Australia. He has a negative view on the country. He’d like to see a lower Australian dollar. You can buy one of them now, however.

Markets. He is still pretty well fully invested. He is not a Market Timer, but just buys businesses that he thinks are good value. Not overly concerned about having a correction, as he thinks it will be rather muted. If you bought the S&P on the day before it peaked in 2011, you would still have a 12% annualized rate of return, over that 3.5 year period. If we see markets fall, cash will come in and underpin it.

Canadian Banks. Do you buy and hold? He tends to hold them. His favourite has always been Toronto Dominion (TD-T). If you were coming in with cash and looking to buy one bank, it would be TD. If you are looking to buy 2 banks, the 2^nd one would probably be the Bank of Montreal (BMO-T). The commonality between the 2 is the exposure to the US market.

Markets. He uses a number of top-down indicators including short-term and longer-term ones. Right now they are all positioned very favourably. His portfolios are currently on offence, which means they are close to fully invested. Showed a Presidential Cycle Patterns chart, which showed the first 2 years as typically fairly flat as far as returns go. Going into the 3^rd and 4^th year there were fairly strong numbers. Starting September and going out into April and May of the 3^rd year is when it tends to have the strongest performance. This is where we are heading right now. Historically, September is the only month that actually has a long-term negative rate of return. He would not be surprised to see a correction this September.

Markets. Indicators seem to be overbought, herd mentality is very bullish which is the point at which we should be getting nervous, but when you overlay that with where we are in the seasonal part of the year, this is a defensive time of the year. October is the one for the big splash moves. September is our worst month of the year. There are fundamental things such as the QE ending, Europe possibly in a deflationary situation, and we had a great Q2 GDP, he thinks there are a lot of things that are going to converge over the next month or 2, to see where we are at. To have defensive positions now makes a lot of sense. It is where you place your money once you get a bit more guidance.

Oil. The critical level is $90, and the crude oil chart shows we are just around there at $93.73. If we break down through that $90, it probably means we go to the mid-$80. The price of oil could fall and yet you could have a really good oil investment run-up, simply based on how it executes and whatever area of the market it is in.

Contrarian Investing. Seasonality is very important to him. He does most of his buying in November and December during tax loss season. From March through to that point, it is very rarely that he Buys stocks. In November and December, it is very rare that he sells winners, because he wants to defer taxes. He is also looking at individual stocks and what they do over the course of a year. A lot of stocks have cycles, which can help with buying and selling. It’s an interesting time of the year because he used to call more CEOs and CFOs in August, and found a lot of them were away from their desks, often for a number of weeks. He now answers his calls and emails, but is not at his desk quite as often at this time of the year.

Medical marijuana? This is a tremendous growth industry and has gathered a lot of momentum. It wouldn’t surprise him to see some companies in the gold sphere, become medical marijuana companies. If they do, he would be very wary of those companies. People who constantly change sectors, often don’t know about the other sector and are just chasing the money, usually for themselves.

Markets. In this environment, it would be prudent to engage in some profit taking. We have had several years now of market gains. You never really make money in the stock market, until you actually sell it. In some cases, where he really likes and admires a company, and thinks it could continue to do well, he is just taking partial positions off. It is getting more and more difficult to find stocks that you consider to be outstanding value for the long term. He is trimming more in respect to weightings. Tries to run fairly concentrated portfolios, and typically has anywhere between 20 and 30 equity positions at any point in time. An average weighting for him would be 5%-6% depending on the risk profile of each portfolio.

Silver. What gets gold going gets silver going. We need inflation. Deflation is the bigger risk to the economic story for the next couple of years. We need Gold above $1500 and inflation in order to get another up-trend. If we get a washout in the next month or two it could be a great buying opportunity.

Educational Segment. Financial Literacy. Are you a smart consumer of financial media? The government wants to strengthen the skills of Canadians in financial matters. You can get ideas from TV, but you must do your own research. You need to have a plan as to when to get out. 65+ year olds’ bankruptcies have increased 600% over the last 20 years.

Markets. We had a bit of a sell off over the last couple of weeks. In Ontario, there has not been a day over 30 degrees in all of July and August. Usually Aug, Sept, and Oct are not terrific for energy stocks. He increased his cash weighting to 32%. Nat gas has fallen, but stocks that have been pounded in some cases do not get so much revenue from gas, but rather from oil. There are still opportunities although the easy money has been made this year.

Markets. September and October is a very difficult time some times. The record for a consistent decline during those few months is spotty at best. You have to be aware that it is out there, but who knows if it is going to hit. If it does, it will be for geopolitical reasons, specifically the Ukraine, and perhaps to a lesser extent what is going on in Iraq and the Palestinian/Israeli conflict. This could derail on a very short-term basis. Looking out 2-3 years, the US economy is going to finally get back to a more normal state of affairs. At that point, you might be pleasantly surprised by corporate revenues, corporate profits and perhaps P/E ratio expansion. A chart showing Forward P/E Ratios from 1977 to the current time had an average of 13.70, and as of last Friday we were 15.2X Forward Earnings on the S&P 500. Above the average, but not outrageously so. The most optimistic outlook for the PE ratio is 15. If it got up to 18 in today’s environment, he would be a Seller. Unless there is a cut off of oil from the Middle East, we’ll probably follow the US.