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

Markets. Costs are still being cut, so we are not seeing top line growth as aggressively as we need to. In order to keep margins where they are or improve, we are going to have to see better top line growth. You do need this because, at some point in time, they can’t cut any more costs out of the system.

Markets. The market opened modestly higher today and then got a much poorer than expected retail sales number. It then scooted off to the upside, because “bad news” is still “good news”. We have seen this over the past several weeks because everyone fears the Fed is going to tighten. Coming into an interesting period, with the end of tapering and the Jackson Hole confab next week. Feels that Yellin is going to be dovish for a while, but the market is going to worry anyway. His view all along is that we would accelerate as we move through the year. GDP growth is well into the 3’s and this is what he thinks we are going to get as we move through the back half. That is good for certain sectors of the economy.

Gold. Japan is printing quite a bit of money, more aggressively in relationship to their economy than the Fed did. Europe has threatened that, but have threatened before and not actually done anything. It may be that the Europeans are forced to eventually do outright QE, but he feels they’re going to wait longer than people think and it may well be into next year before we even get some hint of that. This is a positive on the gold radar screen. Most of the things that drive gold are credit stress and inflation, and those types of things are quite low right now. His view is that all the central banks globally are going to find it difficult to escape zero interest-rate policy. As much as the US economy is improving and they are getting off the QE program, the odds are that something bad will happen over the next few years, long before they get back to normal interest rates, and we’ll be back into the printing money game. That is a positive dynamic for the price of gold, but you have to be a long-term holder of that asset. Trading around it on a short-term basis is very, very difficult. To play gold, he feels it is best to favour the miners. At the current level of gold, the miners are cheap. If you think that over the next few years gold can get to a higher level, then you want to own miners that have great operating leverage to that and can finance themselves through to that time. He would favour Yamana (YRI-T) or Goldcorp (G-T).

Canadian banks? Canadian banks have had a tremendous run. There certainly rich when you compare them to other places where you could buy banks around the world. Very high ROEs when you compare them to what you can find in other markets. Their ability to keep ratcheting up the dividend has been phenomenal.

Markets. This year has been a bit of a struggle for a lot of active portfolio managers. Underneath the surface, investors have missed what has been going on. Looking back to March, a lot of the highfliers in biotech, cloud computing, etc. corrected heavily. At the same time, the blue chips were doing not so badly. Then the social media stocks, biotech’s, etc. rebounded very sharply, while some large cap industrials were starting to roll over in June and into July. The net result had been a zero to a +4 in the US. In Canada it’s been masked by very strong performance in materials, a run-up in energy and, Canadian banks have come back into their own. A lot of moving parts. The correction that we have been waiting for has sort of happened in sector and theme, month by month. Feels this is one of the quietest 6 months he has had in the spring/summer in a long time. He is fully invested.

Canadian Telcos? The headwinds they are going to face in September are some hearings that are coming with respect to Spectrum and some initiatives. The government wants to bring in a 4^th carrier, which he hopes happens because there needs to be a little bit more competition. His order of preference is Telus (T-T) as a long shot, BCE (BCE-T) as a Hold and he wouldn’t touch Rogers (RCI.B-T) if his life depended on it. Quebecor (QBR-T) comes up in a lot of research. He would be comfortable sticking with Telus and BCE.

Markets. These markets are aging. They are in year 5. As a market ages, it starts to rotate, which he thinks is happening. We are moving out of high-priced assets or assets that have been working and into assets that have a bad reputation for not working. The current market can go on for quite a while. Watch the 200 day moving averages. Most indices corrected back down and bounced off the 200 day, and will probably continue higher. As long as the 200 day is pointed upward in a rising trajectory, we have a bull market. Financials have not rolled over and are still in an uptrend. The Dow broke the 200, but he doesn’t trust the new Dow. They screwed it up by putting too many consumer stocks in it. In a rotation, you have 1) leading sectors, 2) coincident sectors and 3) lagging sectors. Currently we are going through the coincident sector. We are done with consumers so we are moving into industrial and technology, and then we are going to work into materials, which are coming along too. If he had to pick one sector where he wanted to be now, besides materials it would be industrials in both US and Canada, but particularly in Canada. ETF’s are probably the best way to play this market. If you are a good stock picker, what you can do is pick a sector that you like, and then you can drill into the sector and pick a few stocks.

Oil. The chart on crude oil shows a “short-term” break, which is just a trading break. It could correct down a little bit more. Anything related to crude, he would be careful of.

Gold. He likes gold, because the US$ has had quite a rally over the past 6-8 weeks. Usually a rally in the US$ is going to hurt gold, but it didn’t. It’s very unusual to have both of these rally, and it’s a very bullish sign for gold. Any reasonable gold stock, unless it has a mine in a dangerous place, probably should be held. It is important that from June of last year, we are seeing higher lows. It is just a matter of time until the pivot point of March 2014 will be taken out.

Markets. Feels the developed markets are the place to be right now and is steering clear of emerging markets. They are further along with deleveraging process and you should see better earnings growth, and hopefully, as a result of that, you should see better share price performance. He always sticks to dividend payers, companies with good balance sheets and strong management teams. To see emerging market growth at this point in the cycle, you have to see strength in developed markets, like the US economy, as well as a bit of resurgence in growth in Europe. As the US is our largest trading partner, a lot of Canadian companies will benefit from the strength in the US economy as growth accelerates over the next 2-3 years. There is a bit of concern that Europe is in a deflationary environment. That is why the German 10 year is close to 1%. That tells you there is deflation risk, so you’ve got people worried about prices falling during the next few years. However, when he looks at the European economy in aggregate, you have to keep in mind that the ECB still has a lot of arrows in its quiver. They can depreciate the currency, talk it down and implement additional quantitative easing in the form of trying to increase lending to small to medium size enterprises. Thinks growth well eventually resume and should accelerate 1.5% next year.

REITs. Canadian REITs still represent pretty good value and an excellent source of tax efficient income, so there are still some buying opportunities within the sector. He would be a little bit more leery about some of the energy infrastructure stocks, which are starting to represent full value, really spurred by some of the M&A that we are seeing in the US.

Telecom. Why are the players so volatile when it appears that a 4^th incumbent is coming? In Canada, this is an oligopoly. Government is pretty hell-bent on making sure that we have a 4^th player to really try to benefit consumers with much lower pricing. This is why there has been some volatility in the stocks. If the government steps in, there is lots they can do by reducing roaming charges, reducing domestic roaming charges, by positively impacting the outcome of the spectrum auction. If they wanted to, they really could create a favourable advantage for a 4^th player to come in to take market share away from some of the incumbents.

Markets. Master Limited Partnerships. There are a lot of smart people on Wall Street looking to make money for their clients. This is always a good thing except when the market gets frothy. Master limited partnerships are now a tax hindrance for the US government. Remember when Income Trust rules got changed in Canada? QE: We need the flowing money, globally to keep the global economy going right now. But the massive current debt, globally is also a hindrance to growth. If you see wage pressures come, that is a tell tale sign of trouble.

ETF for oil and gas services. HOG-T is not services exactly, but it is included. It only has a few weeks of price action. This is the closest thing we have. Not exactly like the XES-N.

Oil vs. Gold. Likes parts of the energy story over the next couple of years. Thinks we will pick up market share relative to OPEC. For gold we need inflation to take off. He thinks there is one more shakeout below $1200. Leave gold alone.