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

Low Cost Mutual Funds? If you can find a good, low cost mutual fund, go to town. He has no problems with mutual funds, his concern are the costs.

Optimum number of holdings for a seven-figure portfolio? He doesn’t know if there is an optimal number, but it is a big number, whatever it is. Why he recommends ETFS or mutual funds is that most of them will have literally hundreds of holdings in one name. Therefore, if you have 6 ETFS in your portfolio, even if it is a 7-digit portfolio, you literally have over 1000 names. You can’t reliably replicate that using individual securities.

Gold. He moved most of his clients to having a 4% stake in gold at the beginning of the year. Gold hit its bottom at around the beginning of the year, and has been moving up ever since. He likes it as a diversifier, and believes you should have a little bit, 3%-5%.

Market. Valuations are really high, and it is really hard to be buying. Trump closing in on Hillary is not good. However, stocks are far cheaper than bonds and many asset classes. Thinks we are in a situation where 2 things are happening. We can still have multiple expansion because we are in this low interest rate environment for a very long period of time. Also, we are hearing better news and seeing good barometers, such as FedEx as a bellwether, as well as better volumes on rails. That could be supporting some top line expansion, which we really haven’t seen for the last couple of years. You have to be very careful and selective in what you buy. Stocks are still a good deal if you buy them at the right time. Feels the market still has an upward bias if Hillary still leads in the polls. Of the 2, Trump would probably be in favour of stimulus spending, but both of them will do a lot of that. That is what is needed to get us out of this very low interest rate environment, which will take many, many years.

A vehicle for holding cash while waiting for an opportunity? He would recommend a high interest savings account or a Money market account.

Oil sands pipelines. Native communities just made a strong showing as opposing this. Ultimately that stuff matters, but is not sure that this is going to be the thing that moves the needle. He is of the view that what will drive these will ultimately be the price of the commodity.

Market. He didn’t think anyone really thought the US Fed was going to raise rates. This has re-accelerated the game that has been going on in the market for a long time, will they or won’t they. As we approach the 4^th quarter and the December meeting, people are really beginning to wonder is this really going to happen given as to how cautious they are. Also, the economy seems to be slowing in the US. The economic data started to deteriorate a couple of weeks before, and with the 3^rd and 4^th quarter looking weaker than at the beginning of the year, it may be a challenge to raise rates this year, which would be very significant because it would just keep the uncertainty going. While it has inflated asset prices somewhat, it has also increased volatility. Thinks investors should just keep playing the strategy of trying to find equities that pay nice dividends and try to get a yield that way.

Telcos. If interest rates were to go up, would you sell, and repurchase them later? If interest rates were to go up, yes he would sell them, but with the Fed delaying a rate hike, you could leave this for at least 2-3 months. Maybe sell them in December, because the probability is quite high that the Fed will raise rates finally, and it will be a selloff much like it was last year. He would start selling Canadian holdings first and US holdings a little bit later.

Cdn$ short and long-term? Long-term, it is very highly correlated with oil prices, and for the first 6 months of this year, it pretty well walked in lockstep with oil. In the last month or 2, it kind of divorced from that and did its own thing. Today, there was a very big move. Overall the direction is down. It won’t be dramatically down because it had a bit of a selloff. Thinks we are looking at $1.33, maybe by year-end. It is not likely to improve as our economy is weaker.

Why are pipelines, utilities and telcos affected by interest rates? The reason is, they have very little growth and tend to pay out earnings in the form of dividends. As a result, because rates are so low, those companies, cash flows and dividends have become so prized right now that investors are trading at a premium to the market. In Canada, a 1% move typically corresponds to a 10% reduction in price on pipelines and utilities. However, that doesn’t really impact companies until you get to a certain threshold level of around 3.5% of a bank of Canada rate 10-year.

Markets. He does not know if we are climbing the wall of worry or if things are being inflated by election worries. He does not think we have seen the fallout of Brexit. That is unavoidable. There are always plenty of things to spook investors. There is a definite political trend in effect out there that is not positive for markets. A lot of money is in the stock market and it is very expensive. He is being very prudent. He is going to wait for volatility in the markets to subside before moving into his favourite names.

Market. Thinks people are overreacting to what the Fed is doing. This interest rate increase has been going on for about a year. It is constant, constant, constant. They did have one little brief uptick. He expects there is going to be a lot of volatility going forward. US elections are going to cause some. BREXIT is kind of out of the news now, but could come back in. There are a lot of other countries that are not in good shape, and if they moved back into the news, there will be more volatility again. The key to volatility is to avoid the noise. You have to look past it and through it, and not worry about it so much. Often you can get a stock at a much better price when the markets go crazy, because the stock price can dip quite a bit more. Then if things get really hot, you can get a better price when you are looking to Sell.

Gold. Doesn’t know where it is going to go. It is not cheap or expensive. He sold a lot of the companies that he had. Likes gold to a degree, but it is not as attractive as it was 1.5 years ago. Don’t be seduced by gold, but look at the companies’ balance sheets very, very carefully before investing in them.

Market. In July he registered a volume and breadth thrust, which are pretty rare events, but take up a lot of internal energy of the market. It usually takes 2-3 months for the market to regain its internal strength before moving up to the next level. He started to see some waning momentum in the last month and flattening out a little. Signs are still positive and not turning negative, but he is watching and prepared to make a move if he needs to. He also likes to watch economic indicators. Two that he really focuses on are the ISM numbers, both manufacturing and the services side. Below 50 indicates the economy is contracting, but below 46 there is a high probability, almost 100%, that we are going to enter a recession if the manufacturing gets below 46. It was very close to that number and then there was a rebound up in economic activity. In the last month the ISM Manufacturing number was pretty negative and dropped back below 50. If it gets below 46, investors would want to be positioned for a recession, which is where we typically see the biggest bear market.

Banks? This has been one of the better areas to be for longer-term, traditional low volatility. There had been a lot of concern about credit losses that could potentially come up from the oil/gas side, as well as concerns about the Canadian housing market. That did not transpire. If anything, the banks continue to perform and their provisions for credit losses has actually come in less than what the Street expected, and he expects this will continue going forward. He would initiate a partial position now, and wait for when the market gets scared to buy the other half.