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

Educational Segment. Earnings Season. Brexit and so on will get pushed to the back burner temporarily. The focus will be on earnings. Revenue is important. The S&P is expected to decline in earnings for the 5^th quarter in a row. It is expected to be down 0.8%. Next year the expectation is that revenue growth comes back. Technology and financials are expected to be bad for Q2/16, but to grow a lot in 2017. Price to sales ratio. In ’98 to ’00, markets doubled. The price of the S&P vs. its revenue got to a little over 2. We don’t have that same economic tailwind now. The current ratio is 1.9. When the price to sales ratio is this extreme, companies miss all the time in earnings. There is a risk of a 10 to 15% correction.

Markets. The S&P went into an all time high today. It is not unusual this time of year to see the TSX go into a double dip. It usually bottoms around the end of October. We will probably reach a seasonal peak at the end of this week. In presidential years it is a little bit different. These reach the high in early June and then peak again at the end of July. This might be as good as it gets until the middle of the fall. The markets have already anticipated earnings numbers. The question is what they will do with future results. Stock prices should move lower into this fall due to declining earnings. There is always something that happens in the summer to drive markets lower.

US vs. CAD$. Performs best around Mid Feb. until end of April. After that it is pretty random. On a technical basis, it has been trading in a range. Anything could happen. He thinks we are testing the bottom and if it breaks it then we are looking at a cliff down to the $0.74 level.

Markets. There is a big disconnect with S&P 500 hitting an all-time high, and a lot of investors sitting on the sidelines concerned about what the true fundamentals are telling them. He is trying to navigate the direction of the market going forward. There are all the uncertainties of the BREXIT, the presidential elections, and earnings that are going nowhere. When you have no growth in earnings, but an S&P that is trading at multiples of 18X, that is a disconnect. The consensus earnings estimate for this year for the S&P, is somewhere around $120. Next year is where the big divide comes. If you call for oil prices hovering around $60, you’ll get a lift in terms of prices for energy and the earnings coming back from energy companies, which should lift it a few dollars. Then other people try to normalize for other things, and get it to maybe around $130, which is where you get that 7%-8% lift. Most people are coming to the view that we are going to have really low rates for a long time. As a value investor, he looks at some of the staples, telecom and utility stocks that have extremely high valuations relative to their history. Also, we have never had zero percent interest rates on the one hand, and negative interest rates elsewhere in the world. That is the uncharted part, so maybe 20%+ multiples are correct on staples and utilities.

Banks and mortgages? If a person is getting a mortgage and has less than 20% down payment, they have to get CMHC or some type of insurance. There is still a little risk that the Bank is somewhat involved in, in terms of taking on risk. The concern about the housing market is really kind of all the knock-on effects and the loan growth ability of the banks. If housing doesn’t grow or prices come down, there will probably be no mortgage growth. If the banks don’t get mortgage growth, then their loan growth in their portfolio won’t grow either. Banks valuations historically are not super high, but if you do it relative to its current perceived growth rate, you could say it is high. He is expecting low single digit earnings growth, and with a 4% dividend, you get maybe 6%-7%. Multiples are at around 10X PE. Canadian valuations will always stay higher than the US, because it is such a big part of the index, and one that you can kind of go to sleep on.

REITs. REITs have really gone up, but you have to remember that they started really, really cheap. A lot of this has just been a recovery back to proper pricing. There has been a lot more interest coming into the space. People are getting comfortable with a lower for longer notion, along with all the good and bad that that implies. When interest rates go up, that will affect REITs, but it doesn’t look like that is going to happen anytime soon. Real estate really shouldn’t be about catching swings and cycles. Real investors should just focus on buying quality companies and collecting the income stream. If you are planning on making a big move into REITs, just put part of the money in now, there is always a pullback. Real estate is currently under the Financial sector, but at the end of August will become its own real estate sector (GICS). It will have its own label, but no more volume will be created. Just moving from the left-hand to the right-hand, but is creating interest as maybe people didn’t own any because it was hidden under banks, financials and insurance companies. The large caps are getting expensive, but mid-cap’s and smaller caps are still showing some good value.

Artis Reset Preferreds? He doesn’t use preferred shares, because they are very illiquid instruments. If looking for an income source, they do have a pretty steady yield. This company’s has been down in the dumps because of its Alberta exposure. He thinks you are fine on this. You just have to be comfortable with the outlook going forward, that really isn’t great.

Private REITs? Has looked at some of these in the past. The challenge is liquidity, and for him visibility. Public REITs put out financial statements that are very clear and very easy to understand and simple to compare with each other. Accessing information on private REITs is more difficult. The biggest question is on liquidity. You have to be comfortable with management. Real estate has had a great run. He doesn’t know when rates are going to go up, but at some point they will and the sector will face more headwinds. You don’t want to own a Private REIT in that scenario.

Markets. US stocks are very near a record, back to 18,000. This is a funny market, because Value guys can say there is not that much value, but there are also trillions of dollars sitting on the sidelines. The bond market looks like a trap, and he thinks quite a few people are going to lose money in bonds. Where do you go? Do you sit in zero? Do you go to gold? If you can, pick a good dividend paying stock and just take your chances. Wishes the Fed would increase rates 25 basis points. Doesn’t feel BREXIT is a big enough hurdle that they should hold back. Wage inflation is between 3.5% and 3.8%, which is high these days. Looking at the last employment number, it doesn’t look like it is going to stop. Also, some of the benefits of low energy costs are going away and thinks $50+ oil is a reasonable level. That is when the DUCs, real but uncompleted wells in Texas, come in. The benefits of the drop in energy is behind us, and now we are going to see that come back and bite a little bit on the inflation side.

Gold stock or ETF? GLD-N would be more of a way to go. He hasn’t jumped into the gold market. The really big positive for gold is if we see inflation coming back. He would wait a little longer to see how it is going to work.

Which country to invest in? We are fine in the US even if we are in for a minor correction. You should revisit and rebalance regularly.

UK Bank Stocks. If you have room for risk, then these work. The time for them to pay off is unclear. Hold for at least a year to a year and a half.

BREXIT. His guess is that the UK is not going to leave the EU. The political chaos is quite overwhelming. There is no prime minister, the leader of the Labour Party is beleaguered. 80% of his caucus wants him to go. Somebody has to introduce legislation in Parliament, usually that is the government. He would say that the betting people feel the next prime minister is a “remainder”, not a “leaver”, and she will not be wanting to introduce that legislation. He also feels nobody really wants to do anything before the French and German elections that are coming in the fall of 2017.

Markets. They have been range bound. He is looking at the situation in the bond market with interest rates going down and down. The US 10-year bond is under 1.4%. The Cdn 10-year bond broke the buck; it is 99 basis points for 10-year money. He would question why you would not want to own a Canadian utility, a Trans Canada, a Bell or a bank where you have a dividend of 3.5%-4% tax advantaged, compared to owning one that pays you under 1%.

Toronto Dominion (TD-T), Bank of Nova Scotia (BNS-T) or the ETF (ZEB-T) for a 5-7-year time horizon? He is bullish on the banks. When you buy an ETF, you get the good, the bad, and the ugly. He prefers to analyse in order to differentiate and pick the ones that he thinks are better than others. He would never own all 6 Canadian banks, and certainly not equal weights.