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

Lifecos or Canadian Banks? He still likes the banks better. They seem to have a lot more latitude in terms of growth. Likes their quality of management, although Manulife (MFC-T) would be on a par. If he had to choose one bank, it would be Toronto Dominion (TD-T), but all the Canadian banks are good right now.

Markets. We were incredibly oversold and so we are having a rally now. Interest rates have collapsed this year from 3.0% to 2.2% this year. It is worse for finding yield in fixed income so you have to go back into the stock market. We really saw the hit in the mid-cap, retail investor stocks. Oil came off also so oil stocks should be looked at.

Markets. To really understand what has happened, you have to isolate what brought this market down. There were a lot of contributing factors such as Ebola, terrible events in Ottawa, but the key is understanding where Europe is going. There were encouraging data points out of Europe today and a big market rally, which was not surprising. If you can see more data points like that on its own, he thinks you have the next leg up of this bull market. Unfortunately. today is just one data point. You need more before you can be sure. Also, markets can go higher if investors become confident enough that the ECB has investors back. The ECB is mostly job owning. It might even be beyond the ECB at this point, and requires the involvement of Germany and a fiscal stimulus. This is what has markets so worried. If you can see PMI's rising in Europe like they did today, stocks look really good. Stocks do want to go higher and the Bulls do want to run, but you definitely need Europe. It is typical that there was the retracement we had today, but you wouldn't buy just based on this snap back. You would buy if you are seeing a change. If you see the weak data points that we saw in September in Europe as just a summer slowdown, and will be actually snapping back on their own, it doesn't matter that they are feeble. What investors need to see is that it is trending in the right direction. This is really a “wait and see” to see who does carry the next leg. It really does depend on Europe.

Banks or oil companies for sustainability of dividends? First of all, payout ratios on the banks are between 40% and 50%. He doesn't know if the Canadian bank has ever cut its dividend. You have the highest assurance of quality in banks. Energy names are in the penalty box with an uncertainty and a question mark around oil. Capital wants to go somewhere. If investors are not looking at oil and at telecom stocks, they're going to go to bank stocks.

Markets. Had expected there would be some weakness going into September/October. However, it was a lot more severe than what he was expecting. As a result there has been some technical damage done to the markets, and he wants to see that the support is held in a number of different areas. If not, then he will probably become more defensive in his portfolios. Technically he is watching both the 50 week moving average and the MACD indicator crossing the zero line for the TSX. When the MACD crosses down below the zero line, this is normally followed by more significant down side. If he doesn’t see that breakdown, he’ll probably be in a position where he wants to add back exposure to his portfolios. If he did see that breakdown, he would probably take more defensive action and Sell down. Typically when heading into recession, oil and interest-rate indicators give signs of an economic rollover. Instead of oil spiking up over 80% in a 12 month period, it has gone the other way and is actually a big stimulus to the consumer. At the same time, the spread on interest rates between Short and Long is still very wide. This is a little surprising, and that is why he is concerned about what might be ahead for the markets.

Markets. He always believes in having structure in place in order to be prepared for any market conditions. Having Shorts in place as a form of insurance, is something he believes in. Up to the end of August, markets were up 12% and everybody was happy. When you put Shorts in place, it is actually a drag on performance. It is not until you get to a place like Sept/Oct when the market starts to head south, that you all of a sudden realize the value of having insurance. He uses Shorts for hedging purposes as well. If he has a Long position, he wants to Pair that with a Short position. What people sometimes miss in Pair trading is the relationship between the 2 stocks. You can have a Long and Short position, and both of them can go down and you can still make money, as long as your Short goes down more than your Long. Conversely you can do this in up markets as well. He tries to ignore the day to day movement of the Market itself.

Markets. He is calling this V bottom snap back a technical bounce, and we could see lower lows. The TSX dropped all the way from $15,500 to $13,800 and he expects we will recover some of that. Feels the correction is far from over. There are some issues out there to deal with. The slowing growth in Europe, some of the slower numbers we have seen in the US and yet you still have the potential for a US rate rise. China numbers are not blow away anymore. Earnings are not blowing anybody away. He wants everyone to stop saying “let’s buy the dips”.

Markets. Every time there is a Monday holiday we seem to get some market volatility. S&P got down 9.4% and he was looking for 10, so we saw that. 16-17% of the S&P has reported already and he gives it a B+ rating. IBM missed big, but when looking at various sectors, the change in earnings have been actually pretty good and in fact a bit better than expected by about 2-3% going into the quarter. Revenue has been better than expected except for IBM and they are pointing to currency problems. IBM may be a specific story. We’ve seen some pretty good moves in financial stocks in the US after earnings reports. He thinks it is a 70% chance it is a market bottom for now. It may be a challenge in 2015 as the FED tries to ‘remove accommodation’.

From a 3-5 year perspective he likes oil and gas. He was looking for pullback and we got it. Looking out at the dividends from the energy sector, relative to where the banks are, he likes the dividend in the energy sector much better than the banks for the next 3-5 years. There is talk, though, in the market where Saudi Arabia are going to be complacent in the energy price and this will punish Russia. The spike below $80 in oil is probably the bottom and certainly in the low end of the range. Below $75 makes no sense because of cost of production.

Gold. A number of months ago he identified a double bottom. We tested those. But every rally has gone to lower highs. The now triple bottom is still vulnerable. Gold is not responding to recent S&P lows the way it should. Wait for panic selling and then buy in for the next decade. The lows of last year have to be taken out and then there has to be panic selling.

US Dollar and portfolio adjustment. Japan needs to continue to weaken their currency. Euro may go to parity. US dollar staying strong may be a drag on US earnings so you may want to change your portfolio as currencies weaken.

Educational Segment. Volatility and the Bond Market. In his sleep at night portfolio he looked for this correction. Bond markets have done very well. With 3 ETFs you can buy the entire world of fixed income. He saw a 10 point spike in their charts. Hedged fund portfolios are forced to come and buy fixed income securities. He looked at the spread between VIX futures. Wednesday of last week we saw the spike in the VIX spot and the bottoming of the S&P. What he did was to get out of a lot of fixed income and rolled it into equities while they were so low and bonds were so high.

Markets. He is starting to pick at some stuff. He gets the sense that the worse is over for the correction. Same for the stories that had people nervous have started to abate. We were three years without a pullback. He never sells into those things. November and December are pretty good months usually. If you held good solid companies you only got knocked back a few percent.

Banks or Healthcare? Banks in Canada have been money makers in Canada as long as the eyes can see. Banks double every 10 years. To invest in Healthcare you have to invest outside of Canada and lose the dividend tax credit. He likes medical device companies. ZMH-N is a preference in healthcare.

Life Companies. They make more money when bond yields are higher. Right now bonds are so unrewarding. If you are SLF-T or one of the others, then what you get on your bonds is so much less than before the financial crisis. The question is how they can invest unearned premiums. He thinks it is premature to buy the pure life insurance companies at this time.