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

Markets. He is meeting a lot of super cautious people that think the end of the world is coming. When the market is undervalued and the individual investor is afraid to put their money to work, private equity steps up, the corporations step up and jump into the void and take advantage of that. The last time we were at these valuations, interest rates were 5% higher than they are now. If you apply Capital Asset Pricing Models (CAPM), multiples should actually be quite a bit higher. Because of that, you could make that the market is undervalued. Companies are looking at this and can borrow money at very low interest rates to make undervalued acquisitions. Investors don’t have to Buy the market. There are a bunch of stocks that are trading at single digit PEs, so you are not paying up for the stuff. It people are willing to spend the time, dig and find the value they can outperform the market over the long-term.

Market. Thinks the market is still positioning for rate hikes this year and that the Fed is going to do their best to get one hike in this year. The US$ is the one chart to watch, because it is such an important indicator of the global macro trend. If the US$ is going to strengthen like it did in advance of the rate hike, that could put pressure on crude oil, commodities and Canada. We have reached peak dovishness in terms of interest rates. That has pushed all the bond look-alikes, utilities, REITs, telcos, etc. to very high valuations. His biggest concern is more sector risk. When valuing stocks, he looks for 3 things; price momentum, valuation and volatility, and wants to buy stocks that have the best combination of those 3.

REITS. The sector is up 16% year to date. August was a bit of a dip. There is a fair amount of interest coming into the sector. In September REITs will have their own sector and won’t be under “Financials” any more, and he thinks there will be a bit more interest. Any surprises, of rising rates, is going to put negative pressure on the REIT sector. However, if there was a dip, he would be buying into it.

Markets. He does not focus on dividend yield so much as on dividend growth. The US equity market has been in a profit recession for 5 quarters. First quarter this year was the worst quarter for earnings growth. But improvement in earnings for the fourth quarter is largely priced in. Telecom, utilities, energy and materials are the top sectors. He is typically in consumer staples, consumer discretionary and financials. There is a real risk in stocks with a high dividend yield.

Economy. The manufacturing number out of the US was kind of weak, and then all of a sudden people began to think maybe interest rates would not be raised in September or December. Every single data point seems to switch the market. The Fed is trying to fight unemployment and inflation. Their employment looks like it is at pretty good levels, and inflation is nonexistent. If we start to see wage inflation, that could be the impetus to put pressure on rising rates. Food in the US is at the lowest prices in years so you have food deflation. Energy prices are at low-level’s also, so the US consumer should be spending lots of money. Portfolio managers globally are not earning their returns in fixed income, so that is why people are going into stocks.

Bank preferreds? He would rather buy the stocks rather than the preferreds. There is no point in buying preferred shares because you don’t get any of the potential upside. However, he would have no problem in buying any of the big 6 banks.

Market. Doesn’t believe the US Federal Reserve will pull the trigger on an interest rate increase in September. She doesn’t expect a rate rise until the November or December meetings. We are still running well below inflation targets. The big number is going to be the jobs report this Friday. Because the rate increase has been expected for so long, if it happens, she wouldn’t expect as much of a shock or pullback in the market. In the 4^th quarter, she is expecting double digit earnings gains.

Effect of a strong US$ on the price of oil? A stronger US$ makes oil more expensive for other countries, because oil is US dollar denominated. However, the real impact is the supply chain. What might be more of an impact than a stronger US$, is foreign revenues. When foreigners want to repatriate all the money they have made, the impact is going to be less. About 40% of all revenues for S&P 500 companies come outside of the US, and could create some headwinds when it comes to Company’s earnings. $40-$50 oil does not make these companies terribly profitable. They still have another year of recovery, and she would say oil should be underweighted in a portfolio until there is some true stability in the upper $40.

Gold miners? Gold is really a defensive play. You can see it do well when we are very much in a “risk off” scenario. Right now, she just doesn’t see that on the horizon. She doesn’t see any fear in the market that would propel gold too much higher levels. Unless we see a real risk in the economy, or some sort of big shock, she would prefer staying in the equity markets.

Economy. GDP figure was disappointing today, but was a little bit of a rebound from June. A lot of the GDP numbers and data points coming out, are really supportive of this “lower for longer” self-fulfilling prophecies put forth by Central bankers. Although there is hope that we can have better numbers, but the real big issue is our export numbers. They were down considerably in Q2, and he doesn’t know if we are going to have our manufacturing sector pick up the slack. He sees a series of headwinds, that have formed and continue to form, for the Canadian economy. When looking at his total return portfolios, he is compelled to look stateside for opportunities.

Market. We have had a good move in oil and oil stocks, and thinks people are waiting for the next couple of months to play themselves out to get more conviction in terms of shorter-term direction. He’s been calling for $60 oil for next year. September is usually a poor month for energy stocks and oil. Now we have the distraction of having an OPEC meeting at the end of September, whether it be a freeze or no freeze. Whether they formally agree or not to increase production, is a bit of a joke, but the market has really gotten caught up in it. We have also seen speculative net length in oil itself, increase pretty materially and at the same time there has been a huge drawdown in the Short interest in oil. The oil price must really be high enough that allows US industry to drill enough to grow production once again.

Oil or gas? This was topical earlier this year when people were bearish on oil, and then everybody piled into the natural gas names, and not inflated the multiples. He would say that natural gas names are relatively more expensive, so his predisposition would be to buy oil names. Gas is capped whereas oil you could have a pretty significant spike in the next few years. However, he prefers looking at this through individual companies.

Telecom for an income investor? He likes the telecom sector. It is interest rate sensitive, because typically they are a lower growth sector. The whole idea of whether interest rates go up or not is open to debate. He is very skeptical that rates will go up. Would be inclined to stick with US holdings, and lighten up on Canadian holdings, because valuation is cheaper in the US.

Markets. The biggest cost to the US government for the next 20 to 30 years is healthcare, but you don’t get the development of drugs from companies without the profits. We need to watch the IBB-N biotech ETF. He thinks it might re-test the lows. He sees a 40% chance of a rate hike in September and a 63% chance in December. Don’t think the fed will not raise interest rates in front of the election. They have done it before. He thinks the US$ will rise from here as we have challenges in Europe and Japan.

Educational Segment. The US$. The market changed dramatically after the Fed said the rates were to go up September and December both. The Euro is 57.6% of the US dollar index, so it matters what Europe does. The notion that currency doesn’t matter is wrong. It is the most important factor when investing. A rate hike will put downward pressure on commodities and upward pressure on the US$. He thinks we re-test the Brexit lows over the next couple of months.