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

Exchange Traded Note, vs. An Exchange Traded Fund. He won’t touch an ETN because it is illiquid. He is not interested in that market.

Investment for an account with no withdrawals for 10-15 years – ETF recommendation including a drip. Pretty much all ETF providers will do a drip. You could buy an S&P 500 ETF.

Moving to US for more Liquidity in Options. There are a lot of Canadian stocks that are interlisted in the US and Americans tend to pay higher option premiums, so you could consider these.

Covered Call Correct Value when stock is not actively traded. You can use the Black Scholes model and that gives you the correct price, but it does not say you are going to get it. It does not tell you what the market maker is going to give you. That is one reason he deals mostly with the Canadian banks where there is huge volume.

Markets. The Bank of England just cut interest rates, which was no surprise. Given the situation in the UK where there is a lot of uncertainty over the next 2 years, he expects to see slowing growth over the rest of this year, and probably into next year. There are going to be low rates there for a lot longer than people think. Brexit is a complicated issue, and the issue of very low rates has very big implications globally, and people are not thinking about that. That also has real implications for life insurers.

Switch from a bond fund to an equity fund? A bond portfolio acts as a stability to a volatile equity portfolio, because bonds are not as volatile. This is the decision you have to think about when you want to switch. When the equity market is down a lot, bond portfolios always do well. Having equities with a bit of bonds, really makes a difference, which is what you have to think about.

Markets. The market does not like uncertainty or the knowledge of a troublesome event. As long as it is a known, the market can digest it. We have gone through Brexit, which surprised the market completely, and yet it digested it and moved on. In our current situation, we have to look at valuations being historically a little high, but on the other side the US Federal Reserve, in the market’s view, has its back. The Fed wants to maintain orderly markets with a degree of asset inflation, which gives investors comfort. US earnings, so far, seem to be pretty constructive, but the bar has been lowered. This is the 5^th quarter in a row that we have seen falling earnings year-over-year, and there is no question that we are in an earnings trough. However, there are signs, especially on the revenue side, we are moving out of that and it is a little more constructive. Expects a better earnings picture over the next year. Technology and telecom has been doing very well. Healthcare has been in a correction phase, but offers good opportunity.

Markets. He would be more bullish than bearish. The amount of negativity out there is palatable. Everyone is worried about something, and of course markets always have something to worry about. Whether it is the election, Brexit, etc. there is always something to worry about. If you look at the 2 main components of the market, interest rates and earnings, they are not that bad. Earnings certainly are falling, and that wants to be turned around over the next couple of years, but they are not bad. Most companies are beating expectations. Also, interest rates, lower for longer, is an ideal market for valuation changes. You have companies building up cash on their balance sheet, you have companies increasing dividends, and there is a lot of acquisition and merger activity, so the corporations themselves are not really worried. Investors are looking at what could go wrong. If you look for what could go wrong, you are always going to find something. There are managers sitting on 40%-50% cash. You have people on the sidelines saying they had no idea what is going to happen in the election. Of course they don’t.

Commodities. The super cycle lasted over a decade. Feels the easy money was made, we have now corrected and the industries have gone through the necessary changes to readjust to the reality of what things are going to look like in a more normalized environment, where supply or demand is not taking off. It is about focusing on companies rather than if a company is going to double this year or whatever the expectation is. It is about what companies can excel in a more normalized environment over the next 5-10 years. Oil really ran ahead of itself a couple of months ago, and Short positions are playing a major role in terms of exasperating the fall, but he wouldn’t consider that as the fundamentals, although it plays a periphery role. For him, the rebalancing has started, and began in the middle of last year as the US supply has been steadily declining. Expects that balance will probably be completed by the middle of next year. $50 is a realistic number to be expected at around the end of this year. He still likes gold companies. Last year, and at the beginning of this year, margins were basically negligible in terms of whether they were really making money. All of a sudden they have gone from something like $50 margin per ounce to $300-$350 margins, so that easily justifies why these stocks have doubled.

Markets. It has been fun evolving the coverage over the years from primarily Canadian centric to global, which has forced him to stay on top of a lot more things in a lot more areas. Everybody looks to Japan and says “the lost decade” and extrapolates that to North America, China, Canada, Europe, etc. There is a little more subtlety to it than that. He is actively looking geography by geography to try and find opportunities where he can ignore the deflation concerns, either because he doesn’t think it is going to happen or because it is priced in. He invests in companies where they can clearly explain what they are doing. Has found most of his mistakes was in businesses where he wasn’t getting the 1^st principles of understanding of the business from the management team, where they were hiding behind jargon and acronyms. His company has designed most of its mandates to be very flexible, and able to invest across geographies. He is looking for growth where others don’t anticipate it.

Markets. Crude oil came down below $41 this morning. Everyone is watching the 200 day and seeing if it holds. It seems to have held so far. The inventories of Gasoline are a concern. Inventories are high because demand for fuel oil last winter was weak. Over the next couple of months refineries will go down as normal and normalize demand. This is a short term impact. Production of oil is down around the world. Summer is typically a crummy time for oil. He calls for $60 crude in 2017 and $65 in 2018, by which time the world will be short oil. He is going to deploy cash he is sitting on this fall.

Markets. People are thinking the equity market is more attractive than the alternatives of fixed income and dividend paying stocks, and have been putting money in. It is interesting that the markets most hit, particularly in Europe, have actually been some of the better performers this month. Feels the Fed has turned less dovish, and are hoping to raise rates, and he anticipates one hike before year-end. He’s been looking at some of the stocks that have been beaten down. There are some high dividend payers that may not have met expectations, or are seeing some declines in earnings, and those have been punished quite a bit. He is also looking at some, where growth is coming but not visible in the next 3-6 months.

Sell before ex dividend date or after? The finance theory is basically that the market actually prices in the dividend when people are pricing out the stock. He back tested and found it made no difference at all on the earnings.

A reasonable high this year for the TSX? That would be a question of what we see happening with gold prices, which has been a huge contributor to the overall returns to the TSX. Gold prices have not moved nearly as much as the stocks, many of them have doubled. Energy has gone up, but oil prices have come down by about 20%, yet energy stocks are generally holding in pretty well, having fallen off by about 7%. It wouldn’t surprise him to see another 3% from here.

How much do interest rates have to increase before high dividend payers, like REITs and utilities, get hit with selling? If you got one move by the Fed, it could easily lead to a 5%-10% selloff.