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

Markets. Sees pretty weak tepid economic growth globally, but does see a bit of recovery in commodities. The market is more skewed towards the back half of 2016. Expects a bit of volatility heading into the summer which leads to potential opportunities. That would be followed by a better and stronger back half of 2016. Valuations are where they were in 2015, not necessarily cheap. He likes energy on the TSX, technology and healthcare in the US.

Markets. Thinks this is going to be a cruel summer. There are so many events that have yet to transpire over the balance of the year. We have Brexit in 2 days, further announcements from the US Fed, China is slowing down, and Japanese currency issues. All these things are reason enough to have some level of anxiety going into the summer. Rather than “Sell in May and go away”, it may be more appropriate to Sell in May, but stick around in case there is added volatility that creates opportunities. Accessed information is so much more ubiquitous now, so the level of volatility the market reflects as a result of these added benefits of information create a lot more swings in terms of sentiment. Thinks the markets are a little expensive right now. Trading at 17X 2016 earnings, and if you push that out further by a year, it is still 16X on a PE basis. That is not very rich, but not very cheap either. With added volatility thrown into the mix, there are brief moments when companies are cheap enough for you to be able to pull the trigger.

India. One of his favourite places to invest, because of the potential for economic growth through their phenomenal demographic profile. The chart, showing the Indian rupee falling versus the US$ for the last 40 years, shows it has basically been a persistent decline. There have been periods where it has been relatively stable for a decade or more, but generally in the last 10 years, it has been towards a weaker rupee. You could lose 3%-4% a year just on the currency.

Gold? Sold the last of his holdings (bullion) when gold was at around $1300. He likes gold when it is below $1100, which is when there is value. Gold has its place, but it yields nothing. You could buy it on dips as a trade, but doesn’t know why you would want it here.

Educational Segment. Brexit? Feels Brexit is probably not going to happen. Generally speaking, the undecided voter speaks for the status quo. What is happening globally is the anti-establishment vote. More and more people are upset. He doesn’t think Europe works in the common currency and in some of the things they are trying to do. Loves the idea of the EU and Europe working together, but the reality is that these countries did not meet their criteria and debt is a problem. A chart on the British pound shows that it broke down in January at about 1.48-1.49 when this really started to get in the mainstream. The long-term multi-decade support of 1.39-1.40 is the range. If the British pound gets above 1.49 or below 1.39 that is going to tell you how things are going to play out.

Markets. One of his concerns is the Chinese banking system. That is a story that started in 2009. The big global stimulus that came with the recovery in the financial meltdown really started in China, which was a massive spending program for a number of years. They spent to keep capital going, keep people employed and to keep their economy going. When you look at it, it was unproductive spending, and was done mostly on borrowed funds. There is a day of reckoning for that kind of expenditure. When you look at the amount of debt that powered up in China in the past number of years, you are at about 250% of their growth domestic product. It is sort of where Greece is, and we know what that situation caused. Because China is an opaque government, you don’t really see what is going on in the banking system. He thinks that a lot of this stock lift has had to do with extremely low interest rates. People like stocks because earnings are going higher, but they are not; because of the growing economy, it is slowing down; valuations are low, but they are not.

Gold. The best case for gold is low interest rates, but more importantly is the anti-currency. When everybody is rushing to depreciate the value of their currencies, that should get some rise out of gold. The problem is, it is a psychologically driven asset, and the stocks are harder to value. He would be inclined to have no more than 5% of your portfolio in gold, as a little bit of insurance.

Markets. After Janet Yellin’s dovish statements, growth projections have come down. Even the most hawkish Fed Governor doesn’t think the Fed is going to be raising rates for the next few quarters. Probabilities are still below 50% all the way through to the end of the year. These are reasons to be more constructive on stocks, and to use any weakness now to stay invested. He is finding his portfolio of stocks, on a weighted basis, are getting below 11X earnings. It’s as cheap as his portfolio has been in a long time. If you don’t believe we are going to go into a recession in Canada or the US in the next few months, then stocks are going to do extremely well. He is finding good value in this market in a lot of areas where the companies are doing well and revenues are growing. He looks for stocks that have good operating momentum and price momentum, and that look good on the charts and operationally. He is about 95% invested.

Markets. If Britain votes to leave the euro zone (BREXIT), it will create economic uncertainty. Investors have an opportunity to invest for the next week and beyond. We have a combination of multiple expansion and financial engineering that has really propped markets up for the last several years. If you are in too much cash, it is really to your peril. There are so many good companies on the TSX, 3%-7% dividends with dividend growth and earnings per share growth, that are priced well below their peers.

Gold. Thinks gold has proved itself to be okay and viable again. He would prefer to be in the big Cap names. Expect we are in a flat interest rate environment for some time, and that is a good environment for gold.

Markets. The BREXIT fears seem to be dominating the whole market. Yesterday you had the US$ being strong, the British £ being weak, both British and European stocks being weak, and commodities being down. This is because the US$ has been strong. With the shooting of the British Labour MP, things swung more to the “stay” side, so the £ started to strengthen, the US$ came off and commodities started to come up. It is all connected to what is going to happen with England. Thinks the market has overblown this, because it is not a binding vote, it is a referendum. The market views this as a crisis, and crisis equals opportunity. He has some cash and will be buying.

Markets. Janet Yellin is determined to get the US back into inflation. Technology, globalization and innovation are deflationary. We have been fighting inflation, the wrong war, since Paul Volcker got into power, so inflation needs to be created. The way that is done is to keep interest rates down. He would like to see Janet Yellin as bold as Paul Volcker was in the 1980s, and stop doing this incremental independent dance that she has been doing with the market. Stand aside and let capital get to its true valuation. Let’s get inflation. Let’s get growth going, and then they can raise interest rates.

Gold. $8.3 trillion of sovereign debt globally have negative yields. Gold has no yield. It is a diversification away from sovereign debt. There are very prominent economists suggesting to the emerging-market Central Bank to own at least 10% of their FX holdings in gold. He thinks gold is just getting going.

Efficient market hypothesis? This theory is that every security already reflects the information that is out there. It is a theory that was based on the 1960s, and we shouldn’t be using it. He doesn’t hold to this, because people make mistakes and they are emotional. There is no perfect hedge. There is a huge opportunity to generate alpha, or outperform, by not adhering to this hypothesis. He would argue that the market is not pricing everything efficiently, and he takes advantage of that.

Converting Cdn$ to US$ with a 6-12-month time horizon? What you need is to find a manager that is willing to hedge that position. Doesn’t think the Federal Reserve will move until after the US Federal election in December. Feels the Cdn$ is going to appreciate in value once we get through BREXIT.