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

Markets. Markets have been quite strong and have been going up. All global equity markets have been on an upward trend, and there does seem to be complacency, which you can see when you look at the VIX. Investors are comforted by the fact that all Central banks are going to either cut rates, or keep them very low, a positive drop back for equities. With yields being so low, for anyone that needs any sort of income, they are almost forced to be back in the market. She would much prefer the US economy to recover. Job data has been very strong. Also the US consumer is very important for the US economy, as it accounts for close to 70% of GDP. REITs have to eventually move up, and she feels it will be at a very measured pace. Inflation is not a pressure right now, so it gives some room to move very slowly. The Canadian economy is definitely lagging. There was a negative GDP number, which is not surprising given what has happened in Fort McMurray. She doesn’t think the Canadian economy goes back into recession, but we will see the positive impact of the rebuilding process in Alberta. We’ll eventually see a positive impact of export activity. Also the federal government is adopting a more fiscal stimulus policy.

Market. He separates the economy from the market. The US economy right now looks very good, and it has a lot of positive data points. On the markets, we are looking at 18X forward earnings, which is pretty pricey. He would be much more comfortable at 16X. He looks at utilities on a yield basis for the most part, and they are yielding 6%-7%, which is good. However, if rates move on you, you have to be quick to react. Has a reasonably big weight on consumer stocks. Also likes industrials, some of the telcos, and utilities.

Canadian Banks? These are trading at around 11 or 12 times earnings. Doesn’t feel that you are in jeopardy with huge price swings. You might consider using an ETF.

Markets. There is an index (Case Shiller) that tries to smooth out the earnings cycle. It is the smooth PE (10 year average). It had a peak in the 2000 tech bubble. If you draw the line back historically, anything above 22 is in the top decile. If you look at forward average earnings in the 10 years following a point in this top decile, the average real return is about 1% for US equities. If you buy when the index is high then you get 1% over 10 years real return. The average return on the market now will be lower over 10 years based on historical norms. Trump gave his economic speech last week and then went out and suggested someone shot Hillary. He cannot believe this guy is running. He thinks it is almost certainly that Hillary will win and so you start to decide what areas will do well under Hillary.

Precious Metals ETF. In the US there is a silver stock ETF (SLVP-N). For other precious metals there isn’t one. There are ones for base metals but now is not the time for them.

Educational Segment – Fewer and fewer stocks are lifting the markets and this should concern investors. Market breadth is an important concept. He looks at stocks making new 52 week highs. 100 or more stocks is a lot of stocks to make 52 week highs. The top 10 holdings in the S&P are 18% of the market and can lift it. He showed a chart of the number of stocks making new highs over time. The market is going up and the percentage of stocks making new highs is low compared to 2013-2015. This is not a broad based rally but late cycle. There are big risks for downgrades in the fourth quarter. He compared the consumer cyclical and retailing. The latter is not doing well but the big names are doing well and lifting the index. You should look at what the whole market is doing. It is not a robust trend 8 years into a bull market. It is not a broad based rally so don’t chase it.

Markets. The markets are anticipating some pretty strong earnings growth in the second half of this year. In the third quarter this year earnings are expected to be 18% higher and 38% in the fourth quarter, both compared to a year earlier. He is worried this won’t happen. We will just have to wait and see. To justify this sudden rally it has to be more than low rates. People should get concerned if we start to see estimates guided down. The safety trade has been the most popular this year. As safety gets too popular, it become somewhat dangerous. GOOGL-Q is trading at a lower multiple than a utility.

House prices. A 10% drop has been predicted by one of the banks. It is possible because of the tax out west for foreign buyers.

Banks? They have run up and are at 12 times (usually 12 to 13.5 times historically). Banks trade at lower valuations. You can own them at this level if you don’t have any.

Market. The market is going higher, but when you look at the underlying fundamentals, there are not a lot of good reasons. 5 straight quarters of down profits, probably heading for 6. Some of the economic data is slipping again. Japanese numbers, problems in China, Europe is slow. A lot of people were bearish and there is a lot of money sitting on the sidelines, and there weren’t that many alternatives. As the market goes higher, more people feel they have to buy in. If the stock market takes the path of least resistance, he thinks the path of least resistance in the short term is “up”, which is not a great reason to buy. Doesn’t think it is going to last. A lot of well-known major players are very bearish. Market is factoring in a pretty big improvement in earnings in the next couple of quarters, which he doesn’t think we are going to get. He is doing a lot more selling than buying lately. Has a lot of Short positions. Telco valuations are high, but the dividends are safe and growing. Canadian banks have lagged generally in this move, and are probably fine to hold. Areas like consumer staples, utilities are more risk.

Canadian Banks? These have been out of favour for a while. They’ve underperformed this year with the run in the cyclicals. Well capitalized and they have the dividend yield. Despite the problems in Alberta, the slowdown and the risk in the housing market, wealth management continues to grow and a lot of them are doing accretive acquisitions in the US.

Long & Short Strategy. Over the last 8.5 years, he’s been about half market exposure, but at any given time, has about half the portfolio going Long and half going Short. He is largely agnostic to what the market does because of the Pair trading. These aren’t great market conditions, because he always has insurance in place in the form of Short positions. When the market rises, the Long positions go up but the Short positions go up as well. Because he typically tends to be Long “quality”, Short “lesser quality”, in this kind of a market it is actually pretty tricky for him. It surprises many people to know that he actually likes the growth of ETF’s as it makes his job easier. Essentially ETF’s invest passively. People running an ETF fund look at what the index weighs in the stock and try to replicate that percentage in the most efficient way possible, and try to be as tight as they can with the index. As a consequence, they are really price takers, so the more people that are using ETF’s, the less people that are engaged in active investing, which involves price discovery. The less and less people that are giving that price discovery, ironically the better returns from the research that the people can go out and establish what the true intrinsic value of the stock should be. One restriction is, he doesn’t do any resource stocks.

How do you match a Short position with a Long position? On a Pair trade, it is very rare to have conviction on both the Long and the Short side. It is usually only one or the other. If your focus is on the Short side because of a Short thesis on the stock, you then have to decide how you are going to take out market specific risks and industry specific risks. You then narrow it down to company specific risks. He also factors in dividends, as a Short seller is liable for that.

Medical marijuana stocks? He is not very keen on marijuana stocks. Canadians have a tendency to follow the sexy sectors. People need to think twice about following the fast money into the sexy sectors. Generally, people do not make money in those.

Markets. NASDAQ, S&P 500 and the Dow had new highs. A lot of investors don’t have much alternative. The bond market is now the high risk market. The moment we see rates drop, a lot of the people with ETF’s and fixed income mutual funds, are going to get a sudden unpleasant surprise. You can also lose money with bonds. One of the surprises of the market is that bearishness is also at high levels, and there is a lot of cash on the sidelines. Thinks it is some of the bond money spilling over. Thinks that BREXIT, if it happens, is going to happen in a very modified way, and that the UK is going to remain as part of that whole economic package.