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

Do you trim preferred or common shares when you need to lighten up on equities? Perpetual preferreds trade more like bonds. They may underperform in the next while whereas rate resets may do better. Common shares will have even more volatility. So he would sell these when rebalancing.

Sell a losing stock or a winning stock when you need to lighten up on equities? He would crystallize the loss. But it all depends on the particular situation, whether it is a taxable account and how it is diversified.

Markets. We are in the early stages of secular bull market for the US$. We are going to hike rates in the US for September and that is bullish. Unless we get the right data point between now and the third week of September the raise should happen. An increasing US$ brings earnings down when repatriated. He thinks attracted investment into the US will counteract it in valuations. Canada is SO overvalued. It is crazy – all assets – housing & markets. Canada topped out in earnings in 2011. Canada doesn’t look good.

Where to park US$ for 6 months? No equity is a safe haven. Verizon would be the closest he could find . He has a $52 model price and it has a 4% yield.

Market. We have seen the Canadian market bounce off the post BREXIT lows, but thinks there is more fuel in the tanks. The TSX Composite is not expensive right now, trading at about 1.9X BV, which is pretty modest compared to 30-year historic average of 2.1. On an earnings basis, it trades at about 19X this year’s earnings, which is pretty much exactly in line with a historic average. This is all occurring amidst the backdrop of earnings that are still cyclically depressed and about 17% below trend.

Favoured sectors if there is a rate hike? An overwhelmingly, knowledgeable choice would be the financial sector. Canadian banks have managed to mint record profits, even in the very, very low interest rate conditions. If we get rates going up, and ideally a yield curve steepening, that could be a tremendous tailwind for their net interest margins.

Market. In the very near short term, he is uncertain as to how things are going to go. September and the first part of October are usually choppy. However, in July there was a volume thrust and a breadth thrust, which are pretty unique situations, and they used up a lot of the short term energy to occur. Longer-term they have historically produced great numbers in the market. It is going to take a little while for that to build up. Once we hit that seasonally strong period of November-May, the market should make fairly good progress. One of the relative signals he looks at is growth versus value, and each of those individually versus the market. In the last 3-4 weeks, he started to see a transition where growth stocks are starting to gain a little momentum in the overall market, and value stocks are starting to lose a little momentum. At the same time, momentum on some of the yield stocks have started to wane. It’s too early to tell if this is a direction change.

Market. To bring valuations down, we are going to need more earnings growth for the back half of the year and into next year. The markets are elevated in terms of valuations. The S&P 500 is trading at about 18.5X forward earnings, and the TSX is trading at about 19.5X forward earnings. The historical 10-year average for forward PE multiples is about 14X. He is pretty constructive and selective of NA equities. Low interest rates are still there acting as a safety net for equity prices. We are getting some hints of more fiscal stimulus from the fiscal side, which might help equity markets and the economies. From a technical perspective, we just broke out of an 18-month range bound market and broke above very key levels in the S&P 500. Historically this is a softer part of the year, so we may see some volatility going into September after the Labour Day weekend. That will provide investors with an opportunity to selectively Buy on dips.

Gold? His portfolio actually held silver as a precious metal, and he just sold it. The prospect of rising interest rates now is a bit closer, so things like gold and silver may start to come off a little. If next week’s jobs numbers are not so great, then interest rates moving higher will be pushed even further, and maybe gold will start moving higher.

Markets. You have several factors that the markets are ignoring. The markets are not sensitive to values in them. Oil has decoupled from the markets. With XRE-T and other ETFs the share price appreciation does not justify the price.

Market. Believes interest rates have been at an ultra low rate for too long, and that the central banks globally have painted themselves into a corner. They would love to have interest rates at around 5% in order to have wiggle room to go either way. The latest craze is that all the Hedge funds want to Short the volatility and go Long the junk bonds. They are making 5%-6% yield on the “less than investment grade” bonds and trying to pick up points all the drop in volatility. We’ll probably see volatility start to rise in September. This has happened before with hedge funds. You can’t have non-volatility for an extended period of time without something happening. Investors should be making sure that they have a fully diversified portfolio and assets not correlated with each other. If 1 goes down, 2 in the same industry, the other is going down with it. The way you can offset your downside is to have non-correlation in the portfolio, make sure your percentage weightings are in line and diversified by industry, country and asset size.

Deflationary threats? Central bank policy is monetary policy where they really control the short end of the yield curve. The QE that the US brought into play, which everybody else decided to jump on board, is only part of the equation. The bigger issue is that the governments are not initiating fiscal policy with a “want to spend”. Central banks are using tools that are 20-30 years out of date. Without a monetary policy in place to get people working again and retirees looking for yield, we get negative interest rates. At some point, the string has to break.

Gold? This is going to be pretty much based on where interest rates are and where the US$ moves. He would prefer gold wafers as opposed to gold stocks. (See Top Picks.)

Market. He uses a multifaceted indicator that looks at about 13 factors. It tries to measure risk versus return. A number of factors are still positive. The markets are above their 200 day moving averages, but there are a few things such as the VIX indicator, sentiment indicator, some momentum indicators. He got a Sell signal this week.

US$ to the Brazilian real? The long-term chart shows it has broken the downtrend early this year. He looks for levels of resistance, and you want to make sure that markets get through those levels. It looks like there might the something coming in at around $17.50 or so, and then from there just under $20. There are higher lows and higher highs, so he would stick with this.