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

Markets. We are in a unique situation where there is so much money on the sidelines; people want to take advantage on any dip. We are not getting traditional corrections, but getting 3%-5% corrections, and then we see money flow positive coming to the market. On the other side, there is this healthy skepticism that is not allowing this to turn into a bubble, which is very, very good. So, while we are pushing the top end in terms of valuation ranges, earnings are coming in pretty healthily on an ongoing basis, quarter by quarter. As long as we keep the cap on and not get too exuberant, the market will work its way higher in a gradual way. There are a lot of people out there who are still feeling the effects of 2008 psychologically, and just not able to commit to the level of equity exposure that they would like to, or think they should to achieve their financial goals.

Small Caps. Historically these have outperformed large caps. They have an ability to move in a nimble way. At this point in the market, we are starting to sniff a little inflation, which is a good thing for small-cap companies. It gives them pricing power and the ability to adjust on the cost side in a much faster way than very large companies.

Markets. The average return, on the 1^st three companies he recommended in his newsletter 3.5 years ago, was about 800%. These were not speculations, but value companies with revenues and profits. It is a lot harder to find them today. He is a bottom-up investor, and it is harder to find things, so he just wants to build cash, and wait for a better opportunity. Cash holdings are probably in the 40%-50% range. There seem to be a lot of earnings misses, and PE multiples seem to be going up. Thinks earnings are going to have to catch up to what the stock market is doing. Feels central banks globally are orchestrating a campaign to keep equity markets healthy and give people confidence. However, there comes a point where valuations have to catch up.

Profit taking. Always take profits. It’s really simple. A profit in your pocket is a “real” profit. One that is on paper can be meaningless. You owe it to yourself to take some off the table. The riskier the stock, the more you should take profit.

Markets. Expects to see a pickup in global growth in the 2^nd half of the year, especially in the US. There are bumps along the way, and that should be favourable to the equity markets continuing to grind higher. Thinks that valuations are a little bit stretched at this point, so we need the earnings and the EPS to pick up a bit. Those positive trends hopefully will continue. So far this season, 1/3 of companies on the S&P 500 have reported, and 76% have been estimated so far. That is good news. Comparing equities to bonds, equities are probably the winner in terms of what is going to happen over the next 12 months. Interest rates should stay low until next year. Some of the geo-political tensions are getting a bit worse, so some of those things should be watched out for. Also, volatility low levels are way lower than what they should be. Well over 25% below long-term averages. He is moving cash up a little bit from 25% to 12%-13% right now, in order to take advantage of any opportunities. He continues to favour the more economically areas, the cyclical stocks whether they be technology, energy or industrials. These are the areas you want to be in right now.

Markets. Volatility has been benign for so long, that expectation would be that at some point we have to have volatility move up. With the geopolitical events last week, there was a one-day spike. When you have a very low volatility period for a long time, chances are at some point it is going to go up, and markets are going to get choppier. He is still positive on equity markets, and feels pretty good about the US economy recovering. Valuations are a little more stretched than they were a year or 2 ago. You have to be a little more selective on your stock picking, and hold a bit of extra cash. In his funds, he does a bit more hedging, and looking at short positions, and ways of hedging out some of the risks in his portfolios. Key themes are the US economy, which he thinks is going to surprise to the upside, and increased M&A activity.

Stop Loss. These are very difficult to use. You really have to be on top of them and adjust them along the way. You can’t just use them by keeping them static. If there is an unusual event in the market, stocks can move down quickly and back up, and you can get stopped out of your position at an unfavourable price. He generally doesn’t use them, and just tracks things carefully.

Economy. We were hit with the bad news of the weather in the 1^st quarter, which took the steam out of the US economy, and slowed things down. Just naturally you would see a 2^nd better half. Feels the things that will get things going in the US will be housing starts. Existing home sales were pretty strong. The last housing start number was a bit weak, which was a surprise, but it seemed to be weather related. Feels the US domestic economy is going to have a very good 6 months, and that will get things going. The US needs at least 1 million housing starts every year.

Markets. He has never seen a Bull market that is so disliked by so many people, primarily professionals. More in the US than in Canada. However, the market just keeps marching up. As long as short-term interest rates are zero, if you are not in the market it is like being Short. The S&P 500 was grossly overvalued in February 2000, in the tech boom. It took 10 years to reconcile that, which was then followed by a financial crisis.

ETF’s for beginner investors? He would wholeheartedly recommend ETF’s for investors that are starting off. The tricky part of investing is deciding which stock or sector you start with. There is no end of information. If you are starting a portfolio, just keep it simple. You just want to focus on asset allocation.

US ETF in an RRSP. Is it better to hold a basket of individual US dividend payers so I don’t get taxed? That is a very good idea. You do not get US withholding tax on a registered account.

Base metals ETF’s. Would you choose equal weight or a cap weight? He does like base metals. They have taken such a beating and have had a horrible 2 years. He would tend to be more in big cap weighted stocks rather than equal weight. (See Top Picks.)

Investing. Russia is an ongoing saga. When the first market dip came and then bounced back he said it was not done yet, but that it was only market noise. It does not impact global growth. The best way to battle Russia in their new cold war is for the world to take less of their resources, so that will benefit Canada. But that could be years away. For now it is anxiety taking place in the summer months and investors may decide to defer buying. Stocks are weak in Europe with financials leading and we see it going below a long term trend line so it might be a good idea to back off and not be an aggressive buyer. One of the best ways to be defensive is to buy the US dollar.

Shorting Equities – which equities to short: He is negative on the energy sector in the short term. One bullish thesis is that North American supply of oil offsets OPEC. The US is importing less and less from OPEC, moving demand to Canada and that changes demand dynamics dramatically. But names like SU-T are overbought. You might short as a quick trade, but there is nothing that is particularly overvalued at this point. RWM-N plays the short side of the Russell 2000.

Equity based hedge for inflation over 15 years? The only inflation he knows of is inflation-linked bonds. TIP-N in the US. There is one in Canada also.