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

Gold. Was doing well until two months ago and then we had a sharp rise in the US dollar so gold broke down from $1350 to $1226. You don’t often get such a sharp move enduring for a long period of time so he thinks gold prices should turn around in the next month or so. Seasonally he would expect it to turn around in November.

Markets. Over the last 50 years from the mid-term US election through to the spring, this is the strongest period of market gains for the whole 4 year cycle. After the election the Fed usually increases interest rates. The next two years should look decent from that perspective. There are lots of risks out there and Europe has been in recession, but he has been asking the banks in Toronto when they see the end of the cycle and they don’t see it. You would have to have some nasty shock to put us into recession like a sharp increase in oil prices. Historically the 4^th quarter has been double digit gains. You have to be selective in the stocks you buy. Some of the commodity areas have been under pressure and there is starting to be value there.

Markets. This may be the 2^nd inning of a huge secular bull market in the US$. The performance of the US$ relative to the $index is the best it has been in 17 years. Today it made an eight-year high against the Japanese yen. He loves long-term secular trends. He showed a chart going back to 1997, which shows a long-term bull bottom forming on the US$. Once it passes new highs, the world will wake up and portfolio managers globally will be allocating assets back to the US. There is a lot of good, long-term news coming in that is beneficial to the US$. Europe is certainly a basket case economically, and will be for quite some time. The Japanese certainly want to engineer the yen lower. His client holdings is up to about 45% in US$ equities, this was actually zero 2 years ago.

Economy. Federal reserve is unwinding its money printing, Europe is accelerating it and Japan is doing the same thing. There is a ton of new money being created in the system. As we saw with QE 1, QE 2 and QE 3, it is impossible to tell in advance exactly where that money is going to be channelled. It doesn’t stick. There are no capital controls. Liquidity is going to continue to be tremendous. She continues to be bullish on equities, more so than on bonds and more so on North American equities.

Markets. Thinks valuations are rich when looking at the PE’s, certainly in the US where it is 19.5 on the S&P and 23-24 for NASDAQ. Earnings growth has been okay, but nothing special. The moves that we have seen in the market over the last year have effectively been valuations being more highly rated or investors being willing to more highly value the earnings. He thinks it is vulnerable. If there were any likelihood of interest rates going much higher, people would start to draw in their horns. Doesn’t expect the Fed will drop interest rates at this time. What they have been doing is taking the $10 billion out of the QE4, and we are pretty close to taking all stimulus out.

Expects much higher volatility, especially given the record levels of margin debt, high valuations and the time of the year. It is amazing, with the geopolitical uncertainty, that the markets keep going. A pretty good time to take some of your profits.

US banks? Has never been a big fan of US banks, because they did much worse than Canadian banks. Most of them cut their dividends and have the weight of the government regulation bearing down on them as well as enormous fines. Of them, Wells Fargo (WFC-N) has been consistently the best run. If you have to buy one, buy Wells Fargo.

Markets. He has always had quite a bit of cash in his portfolios and it hasn’t hurt his results. Has been able to find some pretty decently valued companies. The overall domestic situation in the US is quite good and there is pretty decent economic growth. They may raise interest rates, but they are not going to start raising them dramatically. It is going to be very data dependent. The businesses he does own, he is quite optimistic about and there are good things to happen. There are probably some constituents in the Federal Reserve that would like to start taking a more hawkish stance, particularly just to maintain their credibility. The Fed is on a trajectory and will stop tapering at the end of October. At some time they will start raising interest rates, but it doesn’t mean they will start raising rates in January. The numbers are good, but there are still lots of warning clouds on the horizon, growth is still very modest and is likely to decelerate again after we’ve had a build up after very weak winter and spring numbers. Problems in Europe are also a bit of a drag. We are not going to see any huge inflationary pressures. There is no reason for the Fed to go and stomp on economic activity that they have tried so hard to foster.

Cash. How much should a retiree have in their portfolio? He is running little bit higher than 15%. Somewhere between 15% and 20% feels right to him. It puts you in a position of confidence when the market corrects and they start to sell off. Also, if you have cash, make it US$’s. He is positive on the US$.

Markets. He thinks we had the economic recovery because we had ultra low interest rates. He is waiting to see what economic performance we get when the FED raises interest rates. 1 in 5 people on the US are still on food stamps, so he is not sure they have fixed anything. If Scotland separates the issue is North Sea oil. The issues are also how much of the debt do they assume and will they have their own currency. There would be brutal cuts to social services. If Scotland and its oil were to leave the UK this would be a problem. Maybe at the end of the day it will not pass. There are all kinds of destabilizing factors linked to this potential event.

Educational Segment. Liquidity trap. October is the last time they are doing QE. They are pricing in the first move by next June. You have to understand what the fixed income markets are going to do. We won’t have the liquidity from the FED, although Europe will fill in some of the lost liquidity.

Markets. You look at the VIX and other indicators and there is not a lot of fear out there. Yet things in the markets are deteriorating. He likes buying when people are afraid. You can’t argue the market is cheap any more. Thinks you could easily see this market down 15%. A 5% correction would create panic and down it would go. In the past you never knew what the catalyst for a pullback would be. You could still have a breakout to the upside where the market goes up in one final frenzy. There are less and less stocks participating in the advances.

Markets. The fall historically starts as the weakest time period of the market. September 16 through to October 9, the market has recorded an average decline of 1.8% and has been negative 18 of the last 30 periods. We’re still seeing very low levels of volatility in the market. The VIX is 14 right now and historically it should be about 24. It could still go much higher. Seeing all the turmoil we are seeing including some of the headlines and the coming elections, there are a lot of catalysts that could lead to a drawdown in stocks. You want to take advantage of this weakness. There are appealing buying levels during the period of seasonal weakness ahead. S&P 500 shows a significant rising wedge pattern. If we break below the lower limit, currently at 1950, there could be significant downside potential. He is expecting that support line to hold.

Energy. There is normally a period of strength for energy stocks at this time of year. Oil tends to rise around hurricane season, but hurricanes have been much weaker than historical norms. Because of this energy stocks have been poor performers. He is not seeing too many positive tendencies ahead to support the trend in energy. The period of seasonal weakness starts from mid-September until about the beginning of December.

Markets. Had thought there would be some kind of time correction as opposed to an actual 5%-10% correction, because there was too much money on the sideline. Because of this, he basically stayed fully invested, which was the right thing to do. Sold a position recently, so now has some cash. Markets are choppy. It’s September and October, so his current short-term thinking is that the market is really worried about the language from the Fed next week, and that maybe they raise rates sooner than they said. He doesn’t necessarily buy that, but it is getting priced in with a strong US$ and a weak Cdn$, weak bonds and weak pure yield stocks. On the other side, banks still do well. Lifecos are also beneficiaries of higher rates, so all those stocks are doing well. If the Fed says rates will stay low for a considerable time, he thinks there will be a bond market rally and you’ll see a Cdn$ rally back to $0.91 plus. Thinks the stock market is more nervous within sectors and he doesn’t think the market moves up a lot or down a lot. From here, we are really driven by earnings growth and/or the lack thereof, stock by stock and group by group. Canada has done very well, better than most G 20 countries. You now have to look at group and stock by stock.

Lumber stocks? Lumber prices have done well generally and the stocks have lagged a little bit. There is a soft 3^rd quarter coming, but he expects US housing to pick up slowly and the 4^th and 1^st quarters to be better. (See Top Picks)