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

Medical device or Pharma stocks?Med-Tech is more expensive right now. Valuations are definitely up at the upper band of their historical forward price multiples. He is okay with that, because they are delivering on their bottom line and there is growth. However, based on valuation, he brought his exposure down to 20% from 25% in January. He does see value on the pharmaceutical side, particularly in the biotech space.

Market. This market doesn’t want to give up. It is an interesting market from a lot of perspectives. He is Long equities, more so than normal, but still has a lot of cash. Doesn’t believe in the bond market. A lot of things have gone right; the volatility index VIX, is at an all-time low and markets are at an all-time high. Interest rates continue to creep up, which is typically is a headwind. Corporate earnings have been good, but are in the areas that nobody is buying. Canada, after having been the best performing market last year, has really lagged, not just in energy and materials, but financials as well. Today he is 80% in equities. Of that 80%, 16%-18% would be in the US.

Market. One of the most pressing issues for Canadian investors is closet index products. There was a report looking at all the global markets, and found that 37% of mutual funds in Canada are closet indexing. If you do the math on the amount of assets in Canada, this is a $275 billion problem, just on the Canadian equity category alone. Closet indexing is when a manager takes a very small bet, differentiating from the market Index relative to what they are charging and claiming to be as a product. For example, say there is a new market opening up on Mars, and a manager is investing in this new market. There is a company that is the largest in the market. The manager does due diligence, and ultimately decides the stock is not going to do well because of many issues. However, they decided to put a 3% weighting in the portfolios. The only reason they own it is because it is the largest stock on the market. If it is a 5% weighting, you own 3% in your portfolio, you are technically underweight the market, and that is your active call. There are a lot of Canadian managers that are hugging underlying index, and not making an active bet, to be different from the market. She only tries to invest in what she thinks will do well. Whether it is a big or small part of the index, whether it is the main sector or not, she is just looking for the best opportunities.

Markets. There was a little bit of sell the news in France, but it was the lowest turnout (40%) and 10% did not mark either party on the ballot. He is pessimistic about it. Political risk has passed a hurtle but has not turned the corner on risk because of the Italian election coming up. Italy is far bigger a risk than France in terms of their debt. Markets have anticipated the victory and the currency has been up over the last couple of weeks. It is the last part of S&P earnings. The last leg is the retailers. News coming out of department stores shouldn’t be that rosy and will put a damper on this earnings season. A lot of good news is priced in. Chasing performance this late in the cycle is a fool’s game. He is in the sell-the-news mode.

Educational Segment. When you invest globally, currency is the most important consideration. It makes a huge difference to your return. He showed a chart of long term returns of international ETFs with and without currency hedges. Currency explains about 70% of the difference in returns. It is the biggest factor over the years. This is not the best time to get into Europe except with a currency hedged, covered call ETF.

Markets. The one stop investing Fad: This time it is ETFs that mimic indexes. Since the bottom of 2009 the ETFs have beaten the value investment managers overall. Increasingly it has become the ‘thing’ to invest in ETFs and forget the value people. Money is ‘gushing’ into index ETFs and they tend to chase the very highly and very low valued stocks. Then what you get is a lopsided structure. The problem is when you get into a bear market and money gushes out. The high valued stocks crash worse. He has been here before. In 1971 he remembers the ‘nifty 50’ stocks that had outperformed all the way up to 1971. But this was the top of the market and these 50 stocks were off 80% by 1974. Many of them never came back after that. Now they are doing it again with ETFs. When the media grasps it and hypes it, then you know you are close to the end.

Canadian Banks. They are reasonably priced. They are not cheap, but not terribly expensive. RY-T is the most expensive, but may deliver more upside. He likes them for their dividend and defensive quality. There is nothing wrong with them and should be a core part of a portfolio. He does not see a collapse in housing prices going back more than a year.

Railways – Canada or US? CNR-T and CP-T are very expensive. The US rails are pretty much there two. CSX-Q is interesting. New management may weave his magic. You should play in this one if you want to go into this expensive group.

Market – A lot of people swear by “Sell in May and go away”. Essentially, on average, you buy the market on October 27 and sell it on May 5, making all your gains from October to May and miss losing money in the summer. That is not completely accurate. Data shows that from May to October, markets generally go up a little. On the S&P 500, it goes up 62% of the time. However, there is a grain of truth to the expression. For the last 20 years, US and Canadian equity markets have gone down and have had greater volatility from May to October, and it is probably going to happen again this year. Every year there is a different reason. Last year was BREXIT. Previous to that it was China. You want to avoid this period of time when you do get a correction in the summer. Also, sometimes equity markets reach a very important low during that period. That gives you an opportunity. The 2 things to watch when you are cautious is volatility. When the VIX spikes, you don’t want to be there. Today it hit a 24-year low. Also, look at the 50-day moving average for major equities like the S&P 500, Dow and the TSE composites. If the index is above the 50-day moving average, there is no problem. If he gets below that level, you have to be careful because that is when you are going to get the correction. Currently everyone of the indexes are above the 50-day moving averages.

Gold? Gold has very, very strong seasonality. Historically, the best times for gold is from around December right through until the end of February. There is another period of seasonal strength runs from July right through until October each year. Gold prices are very closely connected to volatility. If we are expecting to have a stronger period of volatility this summer, look for the opportunity to go back into gold.

REITs? REITs and utilities have very similar kinds of seasonality. They tend to do very well in the summer at a time when people look for places to hide in conservative, high yielding investments. Technically it is testing all-time highs.

Market. There are a lot of things going on in politics, and we are going to have to wait and see how this goes as we move into the summer. Thinks we are going to grind to a more normalized market in Canada. The banks are going to tighten credit restrictions on new housing. This is healthy for a market and will make us more secure than what we are right now.

Markets. We are at a pretty big turning point on economic policy in the US and in Europe. We live in interesting times. Every 80 years the stress in the global economy causes it to start to break. We have a rise in populism in the middle class around the world. People are not happy with chronic slow growth. We have always resorted to war to get rid of excess capacity in the economy. Over production is the catalyst for the oil price. Shale production is here to stay. Low $40s to high $50s is where we will stay. Lots of oil stocks will be value traps, and then there is the possibility of a real estate bubble. Why would you want to invest in Canada? Oil is going to flat line. People will realize that some of these oil stocks are overpriced. It is a big slug to the Canadian economy. He has no Canadian exposure. Investors have to start looking outside of Canada. People probably have an over allocation of resources in their portfolios. People don’t realize the threat there is in real estate.

Auto Sector. He does not have a pick. Autos are now your classic value trap. There are issues with inventory as well as financing issues. It is dead money here. He is concerned about the economic growth in China. It is an overcrowded trade. There is no catalyst to get this thing going. The activist investor that wants to split the stock into two classes does not impress him.

Healthcare. [Should caller hang on?] He typically does not invest in healthcare because it is hard to do fundamental analysis on it. GILD-Q’s block buster drugs are coming off patent. TEVA-N is very cheap, but with health care reform coming on, he is stepping away. Stay away from the sector. The theme of the aging Western demographic has always been there, but he feels there are better opportunities elsewhere.