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

Markets. It seems to be whipsawing back and forth, but the way he has his portfolios structured is that he always has Longs and Shorts in place. Thinks of the Shorts as portfolio insurance. When the market moves up or down, the portfolios can react. Tends to care less about these types of nuances, partly because he uses Pair Trading. With this method he can take out 3 of the big investment risks. 1.) Market Risks where the markets go up and down. 2.) Industry specific risks and 3) company specific risk. He tends to be company specific, so is agnostic as to what sector he invests in. The only exception is that he doesn’t do resources such as oil/gas, mining, agriculture or forestry. He typically has a 1-3 year time horizon, and doesn’t sweat out the day to day fluctuations.

Market. Underneath the surface, there is a lot of good value in the marketplace. The drug industry has been under attack and has been a political issue, and getting closer to the election those kind of issues will be set aside. Technology stocks lost their leadership last year and a lot of them are trading at pretty good valuations. Metals/materials stocks had a big, big run. It’s a bit of a grab bag, but in the end, investors are still confronted with the issue of what they have to do with their money now. In the end, investors have to earn a return. There are individual investors which are increasingly investing through ETF’s, and then there are big institutional investment funds that have rules and they have to invest for the long-term, and have to take a very long, long term approach. There are a lot of good companies that are paying decent dividends. Earnings growth is okay. The US economy is doing fine. Interest rates remain very low, which is good for consumers and for business. The Federal Reserve Board remains very accommodative. Employment growth in the US is pretty good.

Correlation between Gold & the US$? This is two very different markets. If you look at the correlation over a very long time frame, there isn’t a strong correlation at all. The US$ is going up because investors see it as a safe haven and a high yielding currency compared to European currencies. A lot of people that buy currencies do not buy gold. A lot of Gold is a store for people, sometimes speculative. It is also a very small market so it gets pushed around a lot.

Markets. It is hard to be an individual stock picker in this environment. It has become much more of a trading market as opposed to an investment market. He is looking at some of the unintended consequences and some of the long-term trends that are occurring in this environment. First of all, interest rates are very, very low, and concludes that the longer they stay lower, the worse it gets. It is also changing people’s view on risk and return. You have to be very, very careful of utilities, staples, telcos, etc. because this trade gets more crowded every day. Doesn’t like the bond market, which is rewardless risk. Finding really attractive 5%-5.5% yield in the preferred market, and it is post all this reset that caused all the problems. Gold is interesting and is starting to act like a currency again.

Reset Preferreds? This has probably been the least understood area of the market. Coming out of the financial crisis, banks, utility companies, energy companies, etc. were looking for capital. The world was afraid there would be a spike up in interest rates, and they set the yield on the preferred shares as a margin over Canada 5-year bond yields. At the time, no one expected Canada bonds to go to 0.05%. The only way you will get your par back is if interest rates go back to 2.5% on a 5-year. You have a tough decision here. You either take a capital gain and look for income elsewhere, or ride it out as a low income yielding vehicle.

Markets. He has been negative on the markets for quite some time. There are persistent issues such as high valuations, global debt, excessive debt that he feels can never be repaid, and now the issue of negative interest rates proliferating around the world, which is a very serious problem for financial markets, which will spread. Eventually we are going to see a tightening up of lending, resulting in weak economic growth. Investing in equities has become an exercise in handicapping Central bankers, which is a very, very difficult thing to do. The TSX is probably the best performing equity market globally, but it is largely attributable to the rising price of gold, and is not representative of economic strength.

BREXIT. The reaction to this, despite the down and the spike back up, is very interesting in that you have a Pavlovian response that everything will be fine and Central bankers will be left out. This is an opportunity to Short names that are appealing, financials being one of them.

Gold. He likes gold and wishes he had more Long positions. A lot of the gold names have really run a lot and are not cheap anymore. Given the issues in the financial sector and negative interest rates, etc., gold is an asset that he thinks is very much worth owning.

Shorting Canadian Banks? He is not Short any Canadian banks, because they are fairly tough to analyse. Especially in Canada where it is a very protected environment in a heavily regulated industry. There is less risk in the banks than there is in the life insurance industry.

Utility stocks? The utility space is very, very expensive. They are incredibly expensive and sort of being used as a bond proxy, given that they are yield names and investors are hungry for yield. He has chosen to go into a sub of the utility space, which is the independent power producers in the renewable space.

Markets. The Brexit will play out over the next year or two. It depends on when they invoke article 50. Everyone is speculating right now and no one knows. The FTSE-100 is now higher because of the lower currency, but don’t get confused by it because overall British stocks are down. The May US jobs number was way down. The message is that the US jobs growth has been great, but has been starting to slow on the margin. Most new jobs are not full time. The job picture still isn’t good and is turning down. The end of next week is the start of the US earnings season and that will be the focus of the markets.

Technical Analysis and the Effect From More and More People Using It. Are markets reacting more to technical events? More and more eyeballs are looking at averages and trend lines. 20 years ago people were asking the same question. It is all about how you use it. To him it is just another tool to evaluate market risk.

Negative Interest Rates – Why loan? Banks don’t do this unless their source is even more negative. He does not think you will see lending at negative rates. Some bonds are bid so far up that it equates to a negative interest rate. For insurance companies, the rule is that they HAVE to buy bonds so they do so at negative interest rates.

Is there a Canadian Inverse VIX? Horizon has one – go to their web site. There is a whole list. He does not use them.

Banks. They have had a good run and we made money in the insurance companies. Where do we go for the same great dividends? There is no great answer. The banks will continue to grow as they are moving to fee based services. There are not a lot of great choices with a similar amount of risk. Utilities are trading so much higher than long term values. Covered call strategies are the way to go. ZWB-T, for example. ZWU-T is utilities.