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

Buy silver and sell gold through an ETF. He is not sure there is an ETF to do this.

Educational Segment. The market thinks the likelihood is 18% for a rate hike. He thinks they will go for it this week, however. They have not unexpectedly raised rates since 1994. ’94 was the worse bond market we had for a generation. This will not be similar. It is all about the psychology of how they do it. We will almost certainly get another recession in the next couple of years and Canada and the US will have to go to negative interest rates. Economic numbers are getting worse, but the market has not reacted.

Markets. Investors have been moving into economically sensitive sectors since Brexit. We are seeing signs that US profits are actually going to turn positive after a number of quarters of negative earnings growth. We are finally going to see earnings growth year over year. Stocks are not cheap right now. Interest rates are starting to move up around the world. The negative yields have started to lift and certain areas are starting to turn positive. The market moves ferociously to talk of a quarter point move in interest rates.

Canadian Banks. Definitely one of the sectors to consider if you want a yield, as long as you are willing to think long term. The challenge is that you have to be able to ride up the volatility. The valuations are quite modest. To start buying today you should stagger in over time.

Canadian Telcos. A sector for people who want to invest for yield and income. T-T is the most attractive on a valuation basis and SJR.B-T is most attractive on a turn-around basis. They are doing things that should see the company improve.

Money Markets. The biggest focus is what has happened with money markets over the last few months. Many people have noticed that the TED spread has risen and also the LIBOR OYF spread and is being blamed on the US money mark reform, which takes effect Oct 14. This is a pretty big change. They are requiring prime money funds move to a floating NAV, and potentially “gate” their unit holders. That has caused a lot of money market money to move off into treasury funds, which means it is harder to place commercial paper, and has widened the spreads. Thinks it has nearly tripled the LIBOR rates, which a lot of short-term corporate loans are pegged to. So it has actually caused a tightening in monetary conditions. (These rules do not affect Canadian Money Market funds.)

Jardine Matheson. Safe and reliable? A holding company, and holds a wide variety of assets around Asia. Not a cheap stock, and trades at a significant premium to its NAV. Their assets are largely in emerging Asia, and he has a dim view of the emerging Asia.

Long-term dividend growth sector? As a bottom up stock picker, the last thing he is going to do is to make a general recommendation about sectors. However, utilities, telecoms and REITs have dangerously high valuations, and a lot of selectivity would be necessary with stock picking. Technology is a little different in that if you are looking for some of the strongest free cash flow yields, where the best dividend growth has been, best balance sheet and best margin positions, it is broadly the technology sector. However, telecom is bundled in with technology. Even if you could buy a clean technology ETF, you are buying everything. He would buy individual stocks rather than the sector.

Market. These low interest rate policies have been a giant experiment, and we are going to see unintended consequences for years to come, some of them yet to be identified or developed. Driving interest rates to zero, or even negative, destroys interest income. As a result, investors are chasing after yield and returns, and we have asset bubbles here and there, which we need to carefully avoid. There are many, many overvalued stocks now, and only a handful that are fairly valued, and even fewer that are undervalued. If you bought an ETF or a mutual fund that looks like the whole index, you are buying the good with the bad. It is very important to have active management that only picks the good. If you look under the rocks, you will be able to find good value in Canadian stocks that have their own unique story, and that will do well regardless of what is happening globally.

What will cause oil to drop below $40 again? Wait a few months. US and Canadian economic data has been soft, a sluggish growth. The biggest producers, Russia and Saudi Arabia, both have big budget deficits. Regardless of the price they will have to keep pumping. $37 was a bottom going back to August 2015, and is a minor support. We can test $40, but give it a few months.

Market. Believes the oil market is in the very late stages of a lengthy rebalancing process. The market is fixing itself, and has taken longer than expected. Unfortunately, OPEC has been pretty aggressive in their production, but she feels they are reaching their limits. Given that we have all this supply, that is essentially being exhausted, and a situation where demand keeps growing, this is really the time to be paying attention to the oil/gas stocks. The market is going to turn. People are fighting to figure out which direction oil is going to go, and that is creating volatility. You do tend to see volatility spike at bottoms.

Markets. He prides himself on being able to derive returns from shorts. The market has been as good as it gets for bonds. Japanese or German government bonds are at zero or below in terms of yield. He thinks this is a bubble in government bonds across the globe that is just in the processes of popping.

His Short Selling Strategy. He does not use covered calls as part of his short strategy. He looks for high Cap-x businesses that are also paying a dividend. If amortization is large then it implies there is a lot of Cap-x required to keep the business going. He also looks at shorting stocks when a negative story has just broken.

Sell half your investments and buy gold? Gold is not without its risks. He would want to diversify more. And perhaps have some cash in the mix. Selling half your stocks is not such a bad idea.

Market. There are a lot of things happening over the next little while, such as the Fed meeting, the Bank of Japan meeting and more and more information is going to be coming out of the UK economy is well. The EU Banker is saying he is not going to be doing anything right now. There are a lot of issues facing the global economy, and that uncertainty has led interest rates higher. Not sure rates can go up a lot or that the Fed can increase rates here. He feels they should not increase rates until into January. Inflation expectations are actually lower than the 2% number. If they raise rates, they put themselves in an awkward situation, because if the economy really starts to stall out, they don’t have many options. Time is on their side.