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

Market. We are still in a long-term bull market, and everything is intact, especially technically when you look at the long charts. Looking at earnings forecasts going forward, the preponderance of stocks looks higher, not lower. We are in a transition period, and we have been in these before. We had a 2-year sideways hiatus, which is not unusual, because we have had these before in long-term bull markets. One started after the war in 1946-1947. In the mid-1950s, it went sideways for 2 years, and then more than doubled from that break out. There was the 1987 crash where we mumbled around and then cut back up, and went sideways in the early 90s. Again, we had a huge move off the back end of that. We are now almost 2 years in a sideways move. Once we get past the short term noise of the US election, it is going to be higher. With the shrinking of the breadth of investors, we are getting more volatility, and is something we are going to have to get used to. It is a trend towards individuals giving money to institutions to manage or putting it into ETF’s. He is wary of utilities and high yielding stocks, because at some point bond markets are going to reverse.

Market.The market has been really quiet during the summer, because we haven’t had a single day where the market moved up or down more than 1% since early July. We are finally getting some volatility which no one really likes. It is just getting back to normal. September/October are usually more volatile periods for the market. The US economy has really performed quite well compared to the rest of the world. Every year it seems to have a bit of a seasonal issue, stumbles out of the gate in the second half, so per se, the US economy fully justifies a rate increase, but the Fed has to also look at the global situation. Expects that by the end of the year they will have to raise the rate once, but it is still going to be a shallow cycle.

P/E ratios on gold stocks? You don’t look at P/E on gold companies. They are capital intensive businesses and have to spend money for years and years before they see gold flowing. A better measure is either a price/net asset value or a Price/cash flow if they are operating. Something between 10 and 15 times tends to be a good range. In a bull market when things are really hot, you could get up to 20 and 25 times.

Forestry stocks? The lack of an agreement with the US on softwood lumber is an overhang for all these stocks. The longer it drags on, the worse it gets. Eventually there will be an agreement and a lot of the duties may be refunded to the companies. You should look at the fundamentals of the market such as the US housing market, which he believes in, along with exports to China.

Market. Feels we have ultimately begun a bottoming process in interest rates, and that the bond market has made a turn and rates are likely to go higher. For 30 years rates have been coming down. When people get very used to an asset class doing well, they pour a lot of money into it. Over the last 10 years, that was accentuated. As rates “slowly” work their way higher, money slowly comes out of bonds and into equities. He believes we are in a long-term bull market for stocks. As those changes take place, you are going to get moments of dislocation and sloppiness, but ultimately all of the pieces are falling into place to support that, and this can go on for years.

Why should Canadians invest in Canada? As you are living in a home currency, the Cdn$, there is some reason to have assets here. However, the Canadian market is relatively small on a world basis. Canada is very attractive when you are in a commodity cycle, which he doesn’t believe we are. He would prefer to be in the US, because the economic backdrop is pretty constructive and solid, but would also look at some other countries. He is about 25% Canadian stocks in equity portfolios, and about 40% in income portfolios.

Why is there fear of a .25% increase that the Fed is supposedly going to make? Emotion comes from somewhere, in markets over the last several years have had lots of volatility. Starting in 2000 investors lived through 2001-2002, through 2007-2009, and a big correction in 2011, etc., etc., and all the while below trend growth. A body of pessimism has been built around markets that has been born out of many years. That has happened lots of times before. The obvious reason why Central Banks are careful about raising rates, is that they have felt that the economy and the economic recovery was somewhat fragile and halting, and so people want to make sure that they don’t choke that off. By the time a central bank does raise rates, no central banker wants to be blamed for derailing an economic recovery. Amongst market strategists, the supposed experts, there is almost uniform bearishness, negativity or caution on behalf of them, but if you go back over the last 30 years, and any time there was such a consensus view, the market was up 100% of the time over the following 12 months and averaged 27%. A tempest in a teapot. They should get the rate reset done.

Stop losses. He uses stop losses on all his positions. There are many ways to do that, such as a moving average or a percentage. Every equity has its own personality, some much more volatile than others. He tries to identify inflection points where, due to changing behaviour, it is obvious that something is changing. He uses a “point and figure” price chart.

Market. We had a very robust summer after BREXIT, when all the central banks stepped in and adopted a very accommodative monetary policy environment. Then there were some hawkish comments from the Fed, some weaker economic data indicating that things were possibly faltering a bit. Also, if rates have to start moving up, will that foster the recovery? She doesn’t think so. One month does not make a trend.

Markets. The mixed signals about an interest rate hike for the US last week were from a non-voting member so were downgraded by the market. But the markets will now be hypersensitive for the next couple of weeks going into the US election. Oil dipped below $45 today, but for the next couple of months we are into the shoulder season for oil. Last week we had a big shock in oil inventories as storms delayed imports of oil. Inventories should continue to rise into the first quarter of next year. Oil equities should track oil to a greater extent with the increased market volatility.

ETFs and Liquidity: How do they liquidate in a panic? They are no different than a stock. ETFs have the liquidity of the underlying stocks.

Gold, now that we have volatility in the markets. He has been trading gold in the current range. Gold is starting to break down a little bit. If gold breaks $1300 we could see a dip to $1200. You want to start buying dips. In ZJG-T, there is support at $10. If we get a break below that we will get a lot of panic selling. Consider buying into the panic selling. There is upside in gold over the next year or so as a flight to safety.

US Interest Rates. There is a moratorium on Fed chatter from members themselves 1 week before the announcement. The Fed has not for many years, raised rates if the market was not anticipating them by at least 50%. The market feels there is a 28% chance of an interest rate hike.

Distribution of Capital. It usually means that something happened in an underlying stock. Perhaps a merger and a capital gain. It could be you getting some of your own money back.

Educational Segment. Increased Volatility Coming to the Markets. There are lots of ways to measure it. One way is to use the Bollinger bands. It uses 20 days, or about a month. The spread got down to below 2% for the longest period in decades recently. We had ultra low volatility. In history all the times it has fallen below 2%, we are in for a period of a market correction. It does not help us to know how long the correction will be. He believes it will be at least a couple of months.