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

US presidential cycle. If you break this 4-year cycle down, year 3, following the midterm elections, is by far the best year for the stock market. Quarter 6, which we are in right now, is the worst performing quarter and yet the market has actually been up. We have one more month to go and we’re out of the worst quarter of the 16 quarter period. The next quarter is historically pretty weak, but starting with quarter 8, 9 and 10 (the midterm elections this year) you have your strongest nine-month period for the market, which occurs every 4 years.

Markets. Volumes are down, down, down. Doesn’t think anything is going to change. Perhaps the market is tired, but he doesn’t really feel it is going into a massive correction. Part of the reason is that money on the sidelines is not being put to use. Doesn’t really know what is going on. A few months ago, some people got caught in some of the small caps and bio techs, which really took a hit after a huge run. Health, biotech’s and technology stocks have been the winners. The real growth is in the smaller companies. He has bought one or 2 mining stocks lately, and is optimistic that sometime in the future they will get ridiculous high-strengths again, as you do with everything.

Global Stocks. What has happened this year so far has been quite a surprise. At the beginning of the year a lot of people thought the bond market was not going to perform well. The 10 year yield in the US went from 3% down to 2.5%, but at the same time equities have done reasonably well. Global equities are up 4%-5%. Looking at the 2^nd half of this year, we might see a lot of that reversed. The 10 year yield is likely to turn upwards between now and the end of the year. Stocks will do well in that environment. This year, so far, all the businesses that benefit from falling rates have done well. The utilities is the easiest example which is the #1 performing sector in the US so far this year. From now to the end of the year the yield on the 10 year is likely to go up, which means those interest sensitive names, like the utilities, will do well. However, things like financials, industrials and cyclicals will do much better from now to the end of the year. Regionally he still likes Europe. In the past few years the US earnings recovery has been very significant. US earnings are 20% above where they were in 2007 so they have already recovered and then some, from a global financial crisis. European earnings are still 20% below their 2007 peak. Earnings growth for Europe this year and into next according to forecasts, are likely to be around the highest in the world. Thinks the pressure is on the ECB to cut rates, put rates negative or be more stimulative in some fashion to try and get the economy accelerated further.

Markets. Seeing a slow upward grind in equity markets, but there will be occasional pullbacks. Feels this market is profit driven. There were better than expected 1^st earnings quarters which came in at about 6% year-over-year. Going into earnings seasons there were expectations of flat or maybe 1%-2%, but we are actually seeing positive earnings upwards, which is good for markets. For the year, consensus expectations are that profit growth will be about 10%. We don’t need multiple expansion. The market is trading at about 16X forward earnings, which is reasonable in a low inflation environment. Even if those kinds of multiples are sustained, she can still see markets in a 10% range. We still have a very accommodative policy by all the global central banks, so that is keeping rates low.

Bonds. The performance, especially in the US, has surprised her. She was in the camp that thought rates would slowly start to increase, especially with the fed tapering. There was a rally in the US treasury from the 2.7%, but is now down around 2.5%. There was the weather impact that hampered US growth. There is also questionable Chinese recovery. Also, inflation has stayed quite low. Also, there were a lot of large pension flows that made a lot of healthy gains from equities and perhaps there was some rebalancing, and directed some of the cash flows to the bond market.

Markets. The ISM manufacturing number came in and then the government corrected it. Markets are reacting positively. France is going to be a weak spot for Europe for the next while. Bond yields should be significantly higher than they are, but the bond market is typically right on matters of the economy over the stock market. Inflation is not a big threat right now. High yield bonds are almost the lowest they have been in all of history.

Challenge with commodities in general is the underlying futures markets. But FCG-N and ZJN-T are ETFs that allow you to stay in them for a long time.

Educational Segment. Alternative ETF investments (smart indexing). RBC launched equity based ETFs this year. Focus on dividend leaders. Looks at long term financial risk of companies. Screens out value traps. Does not look at just dividend metrics. You want to make sure short interest is low to judge long term strength.

Markets. Expects a pickup over the second half of this year. Europe has clearly recovered, China has stabilized and for the US it was weather related issues. You have a global synchronous expansion that you have not seen in close to 20 years. It is good for earnings growth. Valuations in stocks are in the middle of the road, in line with historical averages. He is looking at industrials and cyclicals in particular. Not expecting any surprises at the Apple developers conference, no big announcements and in fact he has lightened a little. They are continuing to lose market share in the smart phone market.

Markets. His 1-year return for the Davis Rea Partner Funds was 134%, and over 2 years it was up 68%. Runs fairly concentrated portfolios, and is a high conviction investor. Got his Shorts right. Looked at areas in the US tech market that looked pretty extreme and extended, and started layering in his Shorts early. Got more aggressive as they got to really, really high valuations. On the Long side, his choice of energy investments, in Canada in particular, worked out really, really well. A perfect storm where you get both sides of the trade right. The Longs that he has continue to grow on the energy side particularly, at a phenomenal pace and is quite optimistic about oil/gas prices. The market place in general, particularly if you look at the S&P 500, is trading at about 16X forward earnings, which is about the average, but we are experiencing slower than average growth, but have lower than average interest rates. Things have stabilized from 2009-2010. Investors’ sentiment has normalized which has allowed for an expansion of the price we pay for earnings, so it is trading at a long-term average. For earnings to continue to increase, profit margins are already very high, economic growth globally is pretty modest, and businesses are going to have to continue to improve their profit margins. We are going to have to see continued revenue growth and a modest global growth environment.

Gold. It was a tough year last year, but we started off strong this year, and gave a little bit back lately. The success in other assets has caused investors to sell gold and precious metals and move into other asset classes. Also, ETFs came in at a time when India, the 2^nd largest consumer of gold, was forced to step away from the market when gold imports were banned in order to shore up their trade account. Also, there has been seasonal weakness with a weakness in the 2^nd quarter. He sees a strong Indian wedding season giving a strong uptick in gold demand if the new Indian government relaxes the ban. Currently we are seeing a supply deficit on precious metals. Demand has come off, but supply has dried up from ETF sales and there is mine supply that is struggling to stay constant at spot gold.

Silver. Has not been as constructive on silver as he has been on gold, mostly because of the growth that is coming into the silver sector. There is strong fundamental growth out of mine supply, running at about 5% year. If investment demand and ultimate end demand can’t keep up, you could see a situation where the silver price weakens, which it has done year to date. Silver is a bit of a unique metal in that it has the investment demand, but also has a link to industrial demand. A main things that is in silver’s way, is that people are not weighing in, on an investment demand standpoint.

Markets. S&P 500 and Dow Jones Industrials are at all time highs. Markets are correlated to earnings, and as corporations do well, he would expect that the prices of those corporations would do well. Looking back 10 years ago, earnings of the S&P 500 were about $60 a share. This year we are looking for about $120 a share. Interestingly, the S&P was about half of what it is now. When markets get overvalued, it is not because of absolute price, it is because of relative price against what they are pricing at as earnings. P/E ratio of the S&P is now 17, but P/Es are not something you can look at in isolation, you have to look at them in the environment you are in. The competitive asset class, being bonds, don’t give people much in the way of absolute return. Interest rates as an input to earnings are quite additive because corporations can borrow money at very cheap rates, and utilize that money to produce, so you would expect PE’s would be a little higher in lower interest rate environments.

US Economy. Shrank for the 1^st time in 3 years, and we shrugged that off. Most people are blaming the weather. About 45% of the commentaries included the word “weather”. You have to take it on a company by company, basis to make your assertion.. Certainly weather was an input and you have to expect that most economists expect a pretty good snap back in the 2^nd quarter to give us a 2%-2.5% run rate in terms of growth of the economy. There are sectors that he thinks are well-positioned, both from an economic standpoint and price standpoint. He would put industrials, technology and health care in that group.

How would you invest in Aging Population Stocks? There are different areas that could be selected such as aging, mobility, healthcare, recreation. 50% of discretionary spending in the US is done by people born between 1945 and 1962. Even more alarming is that 75% of the drug expenditures are done by people that were baby boomers. There are some obvious ideas and things that come to mind, but you have to look at each company individually. You can’t just throw some money at the drug companies because there is an aging population. You have to look at it much more closely.