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

Market. He remains positive on the market, as he feels US earnings have turned the corner. As we get into 2017 and possibly into 2018, you are going to see an acceleration of earnings. That is going to result from a number of thinks such as continuing consumer spending, CapX picking up and exports, which will be retarded a bit because of the recent 3.5% increase in the US$. Looking into 2017, once we see oil prices having some stability, then we will start seeing a pickup in activity in Western Canada, which will start the earnings flow. He is pretty fully invested, but will pick out names that represent great value, and if necessary, will sell something in order to buy it. Sees good value in the banks right now, a potential for energy stocks which can go up a lot more, and the cyclicals that benefit from capital spending.

Energy. He doesn’t necessarily believe $60-$65 for 2017. If we see a good base at $50-$55, there will be a good follow-up improvement.

Percentage of gold stocks a portfolio should have? He likes to use 2% or 3%. It’s a good asset class. (See Top Picks.)

Resources.

Oil has been an energy that was chronically oversupplied for the last couple of years. He is happy with the trends on the “supply” side, especially on OPEC’s and primarily in the US. A little disappointed on the “demand” side, not quite what he expected like in 2015, but still growth year-over-year. Now you have the Algiers “sort of” commitment to at least try and formalize an agreement of production for OPEC. He hopes that is the “line in the sand” to say that $50 is the floor, and hoping for something closer to $60-$65 by the end of 2017.

Natural gas in the short-term, is more likely to go up. There has been a big reversal. With less injections over the summer, the supply side has kind of normalized.

Zinc looks good from here. It has come off from its lows earlier this year, and is now over $1. There is some momentum as the market continues to digest the coming shortage. Through 2017 we could see prices approaching $1.20-$1.25.

Copper seems to be stuck just above $2 a pound, and justifiably so. There are a number of projects still getting built and coming on over the next couple of years, which creates that overhang over copper prices. He is assuming that everybody builds everything more or less on time, and that supply comes into the market and should keep prices in the $2-$2.25 range.

Market. Stocks may not be cheap, but they look better than other investments out there. The TSX is trading at around 19X and the S&P is at around 18X. Not cheap, but cheaper than bonds. We are still in an environment where you can still have multiple expansion, but what is going to happen is that earnings are starting to come back. They are getting better in the S&P, and will probably get a lot better in 2017. Energy alone could take your earnings from about 120 to about 132 next year in 2017. Markets are expensive, but with higher earnings you are going to have a cheaper market. Thinks interest rates are only going to go up once, expects Hillary to get in, Republicans are probably going to get the House although they might not get the Senate, and markets like gridlock.

For safer dividends, Telco or Banks? Banks. Their payout ratio is about 48% and trading at above their 5-year average. Telecoms are much higher than that and are basically bond proxies.

Oil or pipeline stocks? Pipeline stocks are enablers and are a lot safer. They are going to earn money over the next couple of years, almost regardless of where the price of oil is. A lot have guaranteed contracts. Oil companies are different, but he thinks we are in an exciting place for the Canadian oil patch. The stocks are still expensive on $50 oil, but at $54 oil (his price) the valuations are getting pretty good. On pullbacks, lower than these levels, you can start adding to your oil positions.

Split shares? These can work well. It depends on the mechanism they are using. In some cases, they take the capital of the bank, and do a 2 for 1, and take the dividends and give them more to the preferred shareholders. If it is done in a corporate finance way, the fees are not too bad. If you get the direction you are looking for, they can work very well. The problem is, if you got a double on the common without the dividend, and the bank stocks don’t go up quickly, then you can amplify your losses.

Short-term bond ETF? You could look at iShares DEX Short-Term Bond ETF (XSB-T) or iShares 1-5 year Ladder Corporate Bond ETF (CBO-T). These are great instruments for asset allocation and there is a lot of liquidity there.

Markets. When volatility enters the market place for equities, it means you have increased dispersion. Not all stocks are correlated in one direction or the other. With market neutral investing you are on the right side of the market. Until the last month it was pretty much a straight ride up except for the Brexit dip. November 8^th is a wild card and the Fed meeting in December is an even larger wild card. Canadian foreign ownership limits on housing will definitely have an impact. A housing slump in Canada could come from an increase in rates and a recession on the demand side. Frankly we need a pullback on the housing market.

Banks. The banking system here is more regulated than in the US. We have the big five. The risk is that consumer debt levels are at ratios where the US was in ‘05/’06. There is more risk over the Canadian banks than the US ones.

Market. Expects continued directionless activity until the US election. The markets have put in a nice rally post the BREXIT vote, but since then it has just piddled sideways. Thinks the market is waiting for the eventuality and finality of the vote in the US on Nov 8. A Trump victory would be a negative shock to the market, simply because that is not discounted at this point. A Clinton win would have that uncertainty behind it and move forward, but there will be some sectors, such as pharmaceuticals, that probably won’t respond very well. On central banks, he equates it with musical chairs, just waiting for the music to stop. You don’t want to be the person without a chair. We are in an environment where one central bank says one thing and another says something else, so there is speculation on what central bankers will do. A difficult environment in which to manage money. He likes to think of stocks responding to their fundamentals, whereas now we are seeing the market as a whole responding to the whim of Central bankers. However, all signs point to continued stimulus and continued relaxed monetary conditions, which in itself has some risks and some unintended consequences that we need to be mindful of. Also, history shows that we tend to have a recession every 7-10 years, and here we are 8 years hence from the 2008 recession. His leading indicators indicate we may be looking at a recession in the US towards the middle to the end of 2018. We know that the average equity pullback in a recession is 40%, so something he wants to keep an eye on. Typically, we see equity markets predict a recession 6 months in advance, so he would start getting concerned towards the end of next year. For now, he thinks we are okay. He is not a big believer in wide diversification, simply for the reason of being diversified. The marginal level of diversification starts to drop once you reach about the 15^th to the 20^th position. He advocates and runs relatively concentrated portfolios in companies that meet his selection criteria, but he bounces off the risk and volatility with varying degrees of fixed income, but the fixed income space is not where he is going to get the big return, it just acts as a ballast for the portfolio. In a 2008 environment, those government bonds and treasuries will rise in that environment.

Gold? One of these asset classes that is responding to the whim of Central Banks. As we get closer to the possibility of a rate rise in December, he expects we will see gold come off. Wait before making a purchase, as he expects there will be weakness in gold closer to a rate rise. As we get to the next recession in the US and we see the Feds ram interest rates down to zero (even maybe negative), you would want to own gold. Whenever he has owned gold, he has done it through an ETF that has physical gold.

Market. The BREXIT vote is something that investors should pay attention to. If you are a blue-collar job and haven’t got any benefit from globalization over the last 15-20 years, the “elites” don’t have much interest in doing anything for you. Obama care can be thrown into that basket. By the end of October next year, you could have completely new leadership in the 4 largest European economies.

Energy. Oil has been interesting, because it has been breaking out. The new normal seems to be $50-$60, but thinks $60 seems high. The correlation between oil and the market has broken down over the last 2-3 months. Thinks oil is well supported here. He is still skeptical that the deal proposed by OPEC will actually hold, but for now it seems to be working. You have to be cautious on energy, because even though we are seeing strong energy prices now, oil prices are not going to be well sustained.