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

Market. Nothing seems to be stopping the market, which is a quandary for a lot of people, especially for a value oriented investor like himself. It has had negative earnings over the past 6 quarters, and very low growth on the economic front, and yet the market just ignores everything and continues to march higher. Normally, when things become irrational and exuberant over some point in time, it usually ends with a bubble bursting. It is hard to say if we are in that type of mode right now, because valuations are not excessive. There is a Goldilocks’ view that the US economy can continue to grow at 2%+, with ultra low rates that stay here, virtually forever, so that the markets can go endlessly higher.

Utility stocks? Utilities in general will probably trade more off the 10 year rates, versus the short term rates, because they are considered a long-term hold in the growth of their dividends and the payout ratios.

Markets. He looks for companies that can produce consistently high returns on equities, greater than 20% for 3 years running. The number that meet that criteria are relatively small. A lot of people are attracted to high dividend players, because the alternative in the fixed income market is getting lower and lower, and interest rates are getting pushed down. Prefers companies that don’t pay a dividend. If a company has an ROE of 20%, he would rather they take that net income and reinvest it back into the business. Has been very leery of the central bank manipulation of asset prices, namely through artificially low interest rates and quantitative easing coming out of 2008. It is difficult to get a sense for what the true price of stocks, bonds, fine wines, etc. should be after all the stimulus from Central banks. At some point, when rates do rise or the quantitative easing programs are pulled, he thinks we will get a sense for what the actual prices are. The problem is, none of us know when this is going to happen. Given that rates are so low, we are forced to go further along the risk spectrum in order to generate returns.

Markets. We are not going to have a rate increase, and we are stuck in a rut. They tried to kill inflation in the 1970s, and succeeded so well that nothing will move anymore. He thinks the market will be much the same. It will be patchy and subject to revival, particularly in Canada, in its very special powerful sectors just as mining, particularly gold and silver, have gone. Oil/gas is being quite constructive in several different ways, and at some point that sector will rise again.

Precious metals. The sector is not too expensive and still has room to run. Charts indicate there is still plenty of room on the upside. The companies, through the desperate times, have reconstructed themselves. Many companies in the gold sector are seeing decent cash flows, and are able to acquire scarce assets.

Markets. There are always sectors or companies that are trading below market and offer more attractive valuations than the overall market. He looks at Canada and the US. Healthcare, small tech, and Alberta. He is finding more opportunities in the US. He looks for the promise of increasing dividends, stable cash flows, and recurring revenues that are regularly reinvested into the business. He likes oligopolies. Those and those like them tend to get higher valuations. If the market over reacts to something negative, then he can invest in it. A strong balance sheet is paramount.

Senior Living REITs – which one? These are part real estate and part operating companies. We have a growing aging population. He owns and prefers CSH.UN-T. There has been speculation that certain companies will likely be bought, and he prefers CSH.UN-T for this reason.

Credit Card Companies. C-N and MA-N are the two dominant networks. V-N made an acquisition of their European operations. He prefers MA-N. V-N is an excellently run company, however.

Hold Cash or invest in this high market. See his Top Picks today. Pullbacks happen all the time. They happen with regular frequency. He looks for companies that pullback too much.

Markets. We are still living on the Brexit tailwind. The VIX is exceptionally low. The S&P call numbers are pretty high. Investor sentiment is fairly high. These conditions can stay for a while. There is less experience on desks and low volumes, so events can create a big swing. We don’t have any catalysts right now. Earnings kept us muddling along. The market is slowly getting tone deaf. Investors are going to start to pay more attention to the granular level, results for individual companies.

Resistance level – recent vs. long term. There is no difference. As the price gets to some level of resistance, it is significant.

Market. He is a little cautious. Economic data has been mixed. It is likely that we are near the beginning of a rate increase cycle, and the market’s rationalization for fairly high levels of valuation, and a lot of that is predicated upon a low interest rate environment. If we start to see a change, that could be a headwind. There are a lot of macro economic data points that are neutral at best. Market valuation bubbles are high, so he is a bit more defensive and selective. An area that has been depressed for some time are financial stocks, banks in particular, so the US financial sector and banking sector is an area he is looking at. Balance sheets are in the best shape they have been in a long time. In many cases they have a very nice dividend yields, and are trading at pretty low historic valuation levels. If rates move up, some of the banks should do well. Technology is another area that is interesting, and are trading at valuation levels a little below historic averages. On the other hand, things like REITs, utilities and staples are trading at big, big premiums because of the low rates, so he would be avoiding these.

Markets. Early to mid-2015, the Fed started playing chicken with the market, in a sense that it began its attempts to raise rates. The market was pretty convinced that with global weakness it wasn’t ready for that. They finally moved in December, and in early January they talked about doing 4 hikes. The market went into free fall. Because of this, emerging markets collapsed, commodities collapsed, high-yield spreads blew out, and all the financial indicators blew apart. The game of chicken ended in late January, early February when the Fed backed off. The Fed needed to stay on the sidelines for the time being to let things start to recover and to start to heal. We had another binary event when the BREXIT came out. We needed to get past all these things, and confidence needed to be restored in global markets. The Fed is not in charge of the long end of their curve now, it is really the global markets and global central banks. When confidence comes back, the long end of the curve is going to steepen, and that will be the market’s signal that the market is ready for rate hikes finally. For investors it means a lot, because every economic recession in the modern era, has been caused by a reduction in credit. Every time the yield curve inverts, credit shuts down and the banks stop lending, and the economy goes into a recession. He is very constructive on what is going to happen going forward. At the bottom in February, commodity prices globally had terrific rebounds. High-yield spreads have narrowed right in, to the point where they where last summer. Credit growth in the US is growing at about 7%-8%. Global confidence, with the exception of BREXIT, has been on the rise. Emerging markets have been some of the best performing markets this year.

With the US$/Cdn$ exchange, is this a good time to buy US stocks? Yes. His outlook is for oil prices to recover. Anything below $55-$60 has caused US production to drop about 1 million barrels a day. When production comes off, it means prices globally are not high enough to get oil companies to reinvest and to grow production. Oil, unlike any other industry, has a natural decline curve of about 5%-7%, so it needs investment to at least stabilize production for the longer while. Oil prices should make their way higher, which provides strength to our balance of payment as we export a lot of oil. The offset is that the US economy is probably stronger than ours. He thinks you are fine to buy US stocks here.

Central bank policies on deflation? On the issue of deflation in general, there is a really good piece at www.economicprinciples.org which talks about long-term debt cycles.