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

Markets. The US market is near highs and yet we have tepid earnings. The perception is that the Fed has the market’s back. It will be a slow, grinding process higher. The US election is something the market does not like – not knowing. The most recent example of political factors is Brexit – the market got it wrong. The British pound has come down due to economics and now after the US election, the markets will evaluate the consequences. He wants to purge these political/macro events and see what will actually drive companies over the long term. He looks at it daily. Earnings have been tepid. Consensus says they should be down 1.8% in the US this quarter. He would be surprised if that happens because of surprises and so on.

Market. There were some pre-announcements before orders started that pushed the market down a little. We are in a little bit of “no man’s land” right now. REITs are up, golds are up, utilities are up, industrials are up. Overall, the market is up. Every year he looks for tax loss selling in Canada, and could only find 26 stocks that were down this year on the TSX. Usually he has about 50. Feels that people are not over invested in the market. Expects an OK Q3, but doesn’t think it is going to be good enough that people are going to expect to get to the 134 next year. We may be a bit ahead of ourselves in terms of valuation. Thinks we are going to have the 2^nd positive/improving earnings on the TSX, but not good enough to say that we are off to the races. His portfolio has been a little more conservative. Feels people should look for a little bit of protection. Look for stocks that you like and have them on your Buy list, with some options in your portfolio to hedge against a downside correction. We have gone through an unprecedented time of asset inflation, and we might see a little bit of asset deflation as people get nervous.

Markets. Last summer in August one of the catalyst was China devaluing their currency. We are back to levels we have not seen in 6 or 7 years. Every one watches Chinese FX reserve numbers. But the market is not looking at it right now. It will come back and bite us. In the US they are having the worst economic recovery in their history. He thinks after December they will not raise rates for another year. US Banks are a lot less profitable now. He thinks this will continue to play out and a rate increase is not a reason to rush out and buy banks.

Canadian/US Currencies. Oil is not going to take off from here so there is downside short term and this is bad for the CAD$. He would be selling US$ at 74-73 cents. He thinks you can buy at 78 cents a little later in the year.

Covered Call ETF Strategies. BMO writes on only half the portfolio and one standard deviation out of the money. ZWB-T is the better way to own Canadian banks for their dividends. He would look at ZWU-T as even better than banks. Why not own some of both of them.

ETFs vs. Closed end Mutual Funds. The main difference is that ETFs are open so they create more units of the ETF as necessary. A closed end fund cannot ever get bigger. The costs involved in a closed end fund are much higher than an ETF. He does not recommend closed end funds to clients.

Gold. Fed policies are very bullish for gold. He has been nibbling on gold recently.

Markets. Buy and hold investing is no longer available. He is focused on financial analysis. He likes good fundamentals combined with a catalyst or event. This year has been a strange year so far. It is important sometimes to do nothing, but continue to validate the thesis on your stories. There are a host of Chinese online companies where their moves are not justified.

Should we still short and can he recommend a good ETF for it. For a number of years we will be in a sideways market. From time to time you will want to either hedge or make money on the down side. SH-N is a great vehicle. HIU-T and HIX-T as well as RWM-N. HDGE-N looks for worse quality companies and shorts them. In a retirement account you cannot short, but these ETFs are RRSP eligible. There can be slight tracking errors over the long term.

Educational Segment. ‘Smart’ ETFs. A Beta of 1 means ‘market’. They researched factors back to the 1950s and if you screen for these factors you can do better than market weighted portfolios. You can pay a bit more, but you get a slightly better return. Smart ETFs are rule based rather than actively managed. This is the fastest growing area in ETFs.

Market. The market came back from what was supposed to be a precipice of a recession in February. It rallied back and made a new all-time high in the S&P 500. Since the end of June, it has basically been range bound in a very tight range, which was very frustrating for people. It gets boring and they would like to see some action. However, the reality is, that is just perfect. For the market to have a big move, and then to consolidate that move, is remarkable given the news flow and the concerns around what is going on politically, etc. He sees some very clear leadership themes in this market. There are some sectors that are behaving quite poorly. That is healthy. When market correlations are low, some sectors doing well and some doing poorly, that is the market behaving like a market, not one that is obsessed with “risk on” and “risk off”. The percentage of stocks performing well globally has been remarkably stable with very little deterioration. Given that we are 2 ½ months through the 3 toughest months of the year, the market has absorbed an awful lot through the last 3 months, and it looks very good for the 4^th quarter.

Stop losses? These are very important, as they are a discipline. He uses them because he is trying to recognize a change in behaviour. A security has its own personality in the way it trades. Prefers point and figure charts, which help in a black-and-white way to recognize a shift from higher highs to lower highs. You could also use a moving average. A longer-term investor should use something like a 150 day moving average. He looks for $3 worth of upside for every $1 of downside that he takes on.

Health Sector? We are 3 weeks from the US election. Those who have been concerned about a Democrat in the White House, have probably been sellers through this period, so there has been recent pressure on the group. What has been happening has been creating some great opportunities. He would probably not be a seller at this point.

US Market. Feels the market is heading towards a peak, even if you think in terms of cycles. Our last downturn was in 2008-2009. Before that it was 2000 into 2002. Before that it was 1993. The current market has risen for the most unbelievably absurd reason of all, i.e., nobody can get yield safely, or income safely by just putting your money in the bank. Everyone, in Europe, Canada and the US, have been forced into equity markets which is very dangerous. Think about what companies have been doing. They haven’t been improving their Earnings per Share quarter over quarter. It has actually been decreasing in single digits, but it has been a negative number each quarter. Companies are not making money. They have been increasing their dividend yield, and have been borrowing money and retiring stock, so it makes their Earnings per Share look better. We haven’t seen where we have had real true growth. Instead it is a lot of financial engineering.

Market. You would think that with the bad day China had, it would have a negative impact on the Shanghai index. However, one of the strongest indexes of the developed countries right now is the Shanghai index. There has actually been strength in the index for the last couple of weeks, and has to do with seasonality. Historically, all major markets in the world, have a bottoming seasonality right around now. Markets tend to go higher from about the middle of October through to around the 1^st week in January. Yesterday the Dow and S&P 500 both came down very sharply and broke key support levels in early trading, but then seasonality started clicking in and both came roaring back, ending in a small profit. During the last 20 years, both the Dow and the S&P 500, have hit their low on October 15th. This year there is good reason to believe that we hit the low yesterday. From here on, markets will go higher. Historically the election has caused volatility right through until just before the election itself, and then markets go higher from there.