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

Pipelines are sensitive to the energy sector which peaks this time of year.

Nat Gas. We had some strange things happen in Nat Gas in the last couple of weeks. It is caught in a range. The best period of seasonal strength is from Oct until Dec as well as around this time of year. It is not a clear picture right now. Trend is up, below 20 day moving average and neutral compared to TSX. You may want to look at it as we get into the fall.

90 day Gov’t of Canada bond. Watch gold and gold equities and after 90 days go with the better of the two, or look at energy or health, utilities or consumer staples. He wants to be prepared.

5 month Gov’t of Canada bond. You want to avoid the volatility until October.

Markets. There is a lot going on in the world like geopolitical risks. Investors are thinking it is time to shift back onto value. It is too early to give up on growth. You want companies that are growing 20 or 30 percent. But when you see a selloff, you should not panic and become emotional. If a company’s growth rate is sustainable, well managed and has a competitive advantage, then it may be okay at a high multiple. There is a peak of M&A activity. Managers are more confident that before. A lot of companies realize they will not get this opportunity for the next 5 years. Disclosure: The guest has no interest in any of the companies he will discuss.

Markets. Investors need to exercise a bit of caution. Markets were good last year and continued to forge ahead, particularly in Canada. 9% in Canada and US 1%-2%, but fundamentals and the economy are not moving forward that quickly. People are looking for 2%-2.5% in GDP growth. At some point the market has to take a pause. When they do, that will probably be an opportunity. We have been in a bull market for a number of years and they just don’t go straight up all the time. People should be prepared for a pause. It is getting much harder to find things that you are really comfortable buying, unless your outlook is extremely long-term. He always looks for a stock with more potential upside than he would see on the downside, usually some kind of ratio 2 to 1 or 3 to 1 downside risk. This is getting more and more difficult to find.

Markets. Prior to the last 5-6 years, everything was moving in the same direction i.e. either risk on or risk off, so if you were a stock picker, it was really hard to generate good returns as everything was moving in the same direction. Over the last 9 months or so, if you were a good stock picker, you were being rewarded. Companies that are coming up with good earnings are getting higher multiples and those that aren’t are getting decimated in the market. This is the kind of market that is going to be thriving. If looking at small/mid-cap areas, whether it is growth or value, you can find areas that you think going to have good returns over the next couple of years. Mergers and acquisitions are starting to trickle down from the big caps because it is cheaper to grow by acquisition rather than organically. There have been a few takeouts in the small cap area over the last couple of months which he feels will continue. He is a bottom-up fundamental analyst so is really looking for companies that are growing earnings, trading at low multiples, very low debt to equity on balance sheets and high ROEs. He uses quantitative screening as well as meeting with many management teams.

Markets. Dividend land has picked up pretty well. We were suffering for the first quarter. The rotation in the marketplace does not affect him much. People are moving to momentum, but he is just collecting his dividends. The TSX is up 8.5% this year so that he thinks it could consolidate at this point. The pause that refreshes. He is at his max for banks and for energy, both of which he is comfortable with. He is adding to his materials weighting. It is a 2015/16 story, but gets dividend that is safe while he waits.

Banks. He is a long term holder. They are good 5-10% a year dividend growers. Half the business is the retail business in Canada. You could pare back over the summer and get back in in the fall if you want. He believes, however, that you should stay in the market to keep getting the dividend.

REITs. He owns very few REITs because his clients normally have one or two properties anyway. But Fed said today that interest rates are not likely to up, so REITs are likely to do well, as they often do in the summer. Yield is usually fully taxable. You have to look at each company and determine the growth prospects.

In a market correction the sectors that have not outperformed (e.g. utilities) will just chug along and will hold their value better than others.

Distributions from trusts are taxed as income rather than as dividends from Canadian sources. This is one of the reasons he avoids REITs.

Markets. All the acquisitions and mergers that are going on at the present time is a positive sign for the economy, for business and for investment banking. Many US companies have a lot of cash on their balance sheets and overseas. A lot of US companies are deploying their overseas cash by going after European companies, instead of bringing them back to the US. Also, feels corporate management is gaining more confidence that this recovery is sustainable. Also, there is pressure from active shareholders for companies to use their cash effectively or will be forced to do something otherwise. Some of the large companies, such as General Electric (GE-N) want to become more focused so are making acquisitions in those particular areas. Thinks profit growth will mainly drive markets upwards from here on.

Markets. Markets are going through a consolidation phase. We had a pretty strong year last year, certainly in the US and certainly in the high beta names. We are seeing that going through a little bit of indigestion. Canada is doing quite well, but is mostly based on energy and, at one point, a bit of a gold move. There will be a lot of consolidation, but what makes him a little bit more comfortable is the PMI indices globally. Above 50 means the economy is expanding. The numbers including Europe, and to some extent, China, are positive. There are a lot of studies that say bull markets only end on a recession. The problem he has with this is, what if we sink into a recession. Doesn’t think this has been priced into this market as effectively as people think. His strategy is to hang onto the good quality names, dabble a little in the high beta, but at any time, he is going to use his Stop/Losses to get out of things when they start to get a little worse than they are.

Markets. The number of jobs report had a great headline number, but if you dug deeper it was not so good. There was a drop off in people looking for work. Labour markets are very, very weak. Fed is not looking at unemployment rate when considering tapering. Gold has its next big rally when inflation takes off, but deflationary factors are more of a factor these days. Labour wage rates are actually contracting slightly. Compared to 5 or 6 years ago, we have double the debt in the world. The Euro has a little bit of risk and you might want to pull some money out of Europe.