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

Markets. Markets have been treading water since August. Third quarter earnings season is starting. It should be an infection point for the S&P 500. The strong US dollar has been a headwind, as well as energy. Consensus is negative year over year, but she feels we may get positive year over year earnings growth. You can argue for the higher PEs now based on the low interest rates. Interest sensitive sectors have pulled back, but a rise of 25 basis points in the US will be more of a rounding error. There are some nice entry points in these sectors.

Artificial Intelligence Recommendation. She wants to see strong balance sheets and visibility of earnings. She likes well established tech companies. GOOGL-Q is investing in all leading technologies. GIB.A-T in Canada would play into this as well.

Canadian Banks. She likes the group. TD, BMO, RY are the ones she owns. They may all pull back with new mortgage rules. If we have seen the lows in energy then it would be a positive. She prefers BNS-T. Buy a little bit now and then add on a pullback.

Markets. The minutes of the last fed meeting suggested they were being data dependant and that is what we will see going forward. There was nothing shocking. We have a few more employment reports between now and December. It is up in the air right now as to whether we see a move in December. He thinks the fed policies have failed and it has to come to an end. He does not know if markets can handle it. You will be better in the high quality names, but everyone is hiding there. The defensive sectors have become expensive. Luckily he runs a hedge fund and can go short in the market. There is a lot of cash on the sidelines. He does not want to be dragged kicking and screaming to buy something that is overvalued. A little extra cash in the portfolio (20-30% cash) is not a bad thing.

Preferred Canadian Bank. He would lean more to BNS-T because of foreign assets and for a valuation that is a little cheaper than the rest. They are less tied to the mortgage risk in Canada. He thinks there will be a day of reckoning in the Canadian real estate market. There are still short positions from the US on the Canadian banks.

He is short oil. OPEC oil production came out for September and it is the highest ever. Russia is not cutting back. The US is not cutting back. The others are also going to go at the highest levels they can. He thinks it is setting up for a fall back to the low end of the range. He has been selling his stocks.

Getting back into Gold. He is not as positive on gold as some. You have negative interest rates. He finds it disappointing. It is probably a good hedge in the portfolio. The midsized companies will have more upside.

Market. When looking at the biggest, most popular companies, their valuations and their historical valuation ranges, he is finding that a huge number of them are suffering a disconnect, well above traditional levels, and therefore offering a lot of downside risks. The last time he saw something like this, was at the top of the market in 2000, the height of the high-tech boom, followed by the bust. We are at the precipice now, but what stops you from jumping right out and saying you have to sell everything and run for the hills is the Fed. The Fed has said they are going to do whatever is necessary to keep the market up, in particular focusing on those kinds of companies that keep people having that feeling of wealth. The Fed might be prepared to go out there and Buy those kinds of stocks to help support them in the market, just as the Japanese have done. That borders on insanity. The Fed is not infallible in fighting off these kinds of things. They were not successful in 2000 or in 2008-2009.

Healthcare. The opportunity to invest in healthcare stocks right now is excellent. It is as good as he has seen in a long time. Looking at performance generally, it has been really up until September of last year. The healthcare sector was really led by Pharma and Biotech in particular, and were among the best performing parts in the market. Year-to-date, healthcare is probably the worst performing part of the market, and trades today at about 14.5X forward earnings versus about 16.5X the broader market. Biotech was even more attractive at about 11.5X, but he recognizes the value of buying companies that pay dividends, which traditional Pharma does.

Healthcare. He is really focused on pharmaceuticals at the moment, which is about 52% of the capitalization in the healthcare space. Coming into the US election, there is a lot of displacement; a lot of concern about new legislation, new regulation, and particularly the potential impact on drug pricing. If you unpack that a little and look at how these companies go from year to year creating growth and earnings, a very big percentage of it is just US-based pricing powers, the same basket of pharmaceuticals, but just inflating the underlying price. There is a fear that that capability is going to be lost, which would have a huge effect on earnings. The market has set aside the bio-pharma sector saying there is a big risk that it is going to be fundamentally altered by legislation, but he doesn’t see it happening that way. Thinks any legislative or regulatory risk will be rifle shots as opposed to a wet blanket on the whole sector. That gives us a large sector that is really fundamentally re-rated, some of whom will maintain their pricing power through this election cycle, and those are the stocks he is most interested in at the moment.

Energy. Feels the Bears are slowly throwing in the towel, in that oil inventories have been falling since May/June. The last remaining holdout is the IEA, which really destroyed sentiment prior to the OPEC announcement of the cut. Although the IEA is the gospel for many people, there ability to predict is very, very poor. We have seen the largest draw in US inventories since 1920, in the past 6 weeks. Inventory is falling because demand exceeds supply today. Looking out to 2018, 2019 and 2020, it is highly likely that we are going to have a challenged market in terms of supply. Within non-OPEC, the majority of growth is Brazil and Canada. Next year’s peak rate, Canada is falling and Brazil, at best, is flatlining. Within OPEC there have been 3 pillars of growth, Iraq, Iran and Saudi. It is believed that Saudi’s maximum capability is 10.6 million barrels, and they always bring down production this time of year. Iraq has been flat for 4 months now and are maxed out in terms of export capacity. Iran has only another 200,000 barrels a day before they are at pre-trade sanction levels, and to get above that level they need Western technology, Western money and time. OPEC largely looks tapped unless we get peace breaking out in Nigeria or Libya. He expects to see $60 oil next year and $65 in 2018. The market will continue to be short of oil unless you incentivize US activity, and that will begin at $50 oil. In order for activity to really increase meaningfully, you need it to hit at around $60 oil.

Market. There is always something, and even if it is little, it tends to get built up. The basic numbers are still good, particularly out of the US. The big problem is with their housing and that they can’t get the product out there faster, because they lost all their skilled labour in 2008-2011. That will get fixed. He hopes they increase interest rates just to get it off the table for a while. If they don’t, their credibility is going to be somewhat questionable. However, he thinks it is a non-event. A lot of individual investors are very wary of this market, because it does things that they can’t understand.

Marijuana stocks? He did a quick survey of this, and everybody seemed to be getting in the business. Some of them are quite efficient, but they are all trading with no earnings and high multiples. Too high risk at this point in time. You really want to sit back and let the dust settle.

An oil ETF? He doesn’t recommend any of the oil or gas ETF’s on the Canadian side. Pick an individual player instead.

Market. He is looking at prices, rather than the election, BREXIT, etc. Both bond and equity prices are at all-time highs, which makes him a little apprehensive. The S&P 500 is close to record territory, which makes him a little nervous. He is still very bullish on the US, but there could be a pullback. He actually likes volatility because it allows him to buy good stuff cheap, but is looking at ways of doing a little hedging on portfolios.