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

Markets. The POT-T and AGU-T merger will be exciting. The commodities have been hurt. They want to put together their mining assets and distribution assets. They may have to sell off some assets to keep regulators happy. The farmers may not be happy, feeling prices may go higher. If we get synchronized global growth, then metals can pick up. Gas and oil have positive fundamentals. Supply and demand are starting to balance. In 6 months we should be balanced. Saudis have not increased exports in the last 6 months as they are simply consuming more internally with air conditioning and so on.

MLP stands for master Limited Partnership, like the Royalty trusts we had in Canada a few years ago. They are obliged to pay out all their earnings except for ongoing operations and Cap-X. They are high yielding and stable vehicles. You are paid an income that is not treated the same in Canada. You are having US tax withheld. You lose a third of your distribution. You would have to file taxes in each state the MLP operates in, in order to get your taxes back. Not good for a tax sheltered account. The guest’s company has a plan that can convert it to a return of capital.

New pipelines impacting existing pipeline infrastructure. Pipelines are a big part of our economic engine. They will get built. Takeovers will happen and increase economies of scale.

Market. We had a very relaxing placid summer and school is now back. The markets are in full swing again. Expects this volatility to continue right into the US election. There are too many things in front of us. People don’t realize that there is another US budget deadline for the end of September, there is an OPEC Summit, and the first presidential debate coming up at the end of the month. These things are going to really shake a lot of confidence. He would urge most investors not to jump the gun and get out too soon. He thinks that with the consolidation over the last 6 months, and for the most part in the last year, the markets have really been going sideways outside of oil and gold. Feels that the “wall of worry” is extremely well pronounced. Doesn’t think everybody is fully committed to this market as much as they would like to be. People don’t really believe in it and are taking profits fairly quickly. Things are not superb, but also are not extremely bad. He sees no signs of recession, and history shows that most markets collapse on recession worries. Central Banks alchemy have created a very strange and murky place to be. Uses risk management tools in portfolios to keep his weightings from getting a little too far. He doesn’t have the stomach for large weightings in energy or gold.

Markets. Until interest rates start coming up, people are going to be stuck with stocks, and they may even bid them higher. Thinks stocks are going up, despite slow growth, because people are looking for yield. People will flock to the big dividend payers, especially the safe ones, and stocks should continue to do well. This is math that many people don’t understand. You buy a $100 stock with a 5% yield. The dividend doesn’t go up, but in a year, investors who have been pushed out of the bond market, could be willing to accept a 4% yield from the same company. If they buy that stock from you at a 4% yield, you are actually making a 30% return. You’re getting a capital appreciation of $25 plus a $5 dividend. We are probably in for a generation of low rates because of aging demographics and technology, which is putting a lot of people out of work. With no wage pressure and no buying power, and with people getting older and demanding yield, he doesn’t see any reason for rates to go up for a long time.

Gold. Gold should do quite well, because he feels there is going to be more negative interest rates. All this money printing is not going to go away. It is basically a proxy for destroying currency. If currency is being destroyed, gold should do well.

Market. It has been very expensive, especially in the US. He has been looking forward to the market selling off so that he can take advantage of it. Short term moves don’t bother him as he takes advantage of them. As a long-term investor, if there is weakness in the near term, it doesn’t bother him and he likes it. Thinks the Fed is way behind the curve and are at least a quarter of a point behind from where they should be right now. Doesn’t believe if interest rates are raised a quarter or half percent, the whole US economy comes to a grinding halt.

Maximum percentage of one equity in a portfolio? He believes in selling losers to minimize losses and let the winners run. For some reason a lot of investors tend to do the opposite. If the stock gets up to about 10% of a portfolio, he’ll cut it back to a 5%, as long as he considers the fundamentals still good.

How is South Korea’s Hanjin shipping going to affect Canadian Pacific (CP-T) and Canadian National (CNR-T)? Hanjin just declared bankruptcy and it has ships in the water that are languishing. Some of its cargo will eventually work its way in, and some of it could go bad. This will affect these 2 companies to a small degree. Eventually those products will come in and will move.

Markets. He does software modeling for institutional investors. Utilities are probably still okay, but generally speaking the market is getting richer and richer. Materials and Energy are at premiums to invested capital or book value. Look for stocks with a low premium. Oil stocks look inexpensive to him. He does not try to predict where oil is going.

Dividend Stocks. With interest rates having come down so much, many investors are looking at low risk dividend paying stocks as an alternative to buying bonds, which offer such a low return. An analysis of the S&P 500 on the difference of the price earning ratio between high beta and low beta stocks shows that the difference is very, very wide, indicating that defensive stocks are quite expensive now. Interest rates in North America have been driven mostly by what is happening outside of North America, especially Europe and Japan. Most Central Banks are doing everything they can to stimulate growth, and it is not really working very well. In the US, they are trying to raise rates and normalize monetary policy, but it is very difficult to achieve in a world with such sluggish growth. If rates keep coming down and the monetary policy keeps loosening globally, it is going to continue to drive asset valuations higher, but when looking at multiples at about 19X on the S&P 500, it is becoming a bit challenging to see a lot more upside.

Criteria for dividend growth stocks? The first thing he cares about is a strong business model. You want one that is durable, gives good visibility, and good re-investment potential. When a company generates strong cash flow, you want them to be able to deploy those cash flows with good returns. A cash flow metric is very important, because that is what dictates the capital return policy. Free cash flow divided by the stock price is a key metric for him.

Markets. There are some dividend names he is a little cautious on. There is a bit of complacency out there, particularly in a number of some of the expensive defensives. He builds a portfolio on a bottoms up basis, making sure that everything he owns he truly likes. He would rather own management teams that can be opportunistic and do things when it makes sense. A lot of valuations are not low, and now is not the time for companies to be buying back aggressive amounts of stock in many cases. A very important point; DRIP programs at the end of the day are simply issuing more shares. It is very important to not just look at yield, but look for companies that are giving a better total yield, not just a high dividend yield.

Market. The Bank of Canada governor indicated they are not changing interest rates, still staying at .5%. He also made comments about the economy. It is a slow growth environment, but getting better. What wasn’t said was that Canada wants to see what the federal reserve does, and react to that. Although we may look to the central bankers globally, history tells us that they are as wrong as any of us. It is a very, very difficult thing to get ahead of the curve. Central bankers, for the most of the time, tend to be reactive. This is a very, very slow growth environment, which will take less pressure off the Cdn$, because the US will not be raising interest rates as aggressively. We are left with a slow growth environment, and we have to look for companies that have a catalyst, something that is unique to them that allows them to grow at a faster rate than their own historical performance, their peer group, and the economy as a whole. If you find that, along with proper pricing, then you settle into a good portfolio and be patient.

Oil. There is a risk that we will see lower oil prices over the next few months. There is the summer driving season, which is a strong period of demand. Then you go into a shoulder season of September, October and November, and demand falls by 1-1.5 million barrels a day worldwide, (maybe half that in the US). In 2014, we fell from $100 down to $50. In 2015, we went from $51 down to $35. He thinks the decline will be potentially down into the low $30. There was a 2.3 million-barrel production increase last week in crude stocks, 4.5 million-barrel in overall stock, and the week before it was 2.6. There should not be inventory building now, it should only start the 2^nd week of September. He is bearish on oil prices for the next quarter.