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

Negative bond yields? The entire spectrum of Swiss bonds/government bonds has negative yields. With this flight to safety, it shows that people are worried about equities.

Markets. You would think that VIX would be spiking up today in a big way. There was a big spike on Friday because the BREXIT results were not expected. However, today with the markets down as they are, VIX is not spiking again. Either markets are a bit complacent or there is much more to come. He is leaning on the side of much more volatility to come. We will get trading rallies, but those trading rallies are not something you want to get excited about just yet. There is a lot more downside, right through to the US election.

Buying US$s now? It depends on how you are buying. If you are going into the bank branch and paying 2.5%, and then 2.5% the other way, don’t do it. If you have some US$ exposure in your investment account via an ETF, the answer is yes. It really depends on what your cost of trading is when you are trading foreign exchange if you want to do that.

Dow Jones, how low? Thinks we stay weak generally heading into the US election. There will be trading rallies, but probably failed ones. At a minimum, equity markets need to retest their February lows from this year, over the course of the next few months. It could go down to 15,000.

Educational Segment. Brexit. At the end of every Bear cycle, if you are still bearish you make no money, markets rally. At the end of every Bull cycle, the Bulls have to feel some pain when things go down. Every correction we have seen in the last couple of years has been 1 month or 2, and then a recovery. Thinks BREXIT is enough of a catalyst, that this time it is going to be more painful, taking out the lows that we have seen earlier this year, and in the middle of last year. He showed the STOXX 600 Banking Index (European bank index chart). It showed the 08-09 lows, and lower lows in 2012. Today we are at about 6% from those lows of 2012. Those lows need to be tested and probably to be taken out at a minimum before we see people confident about coming back in to European banks. He then showed the STOXX 600, which is like the S&P 500 of Europe, a benchmark of all the European countries including the UK. Chart shows a long upward trend line from 2008, and we are sitting on the trend line now. If it breaks where do we go. Retracement levels are where you look for where the market might come back to. The trend line is almost certainly going to break, and that adds to the broader European markets of another 10%-15% downside. On fundamentals, looking at the last 5 years of the earnings, earnings have been going down. Negative interest rates don’t work, they are toxic. He doesn’t know how they stabilize things, and there is more downside to come. Fundamentally we have to go down lower, there has to be some pain. The US and Canadian markets are going to come down in sympathy. They probably retest February lows, and let hope it holds.

Commodities. Everyone is focused on Brexit and how the UK is going to play out over the next couple of years, but the real risk and the real fear is the contagion from that. The UK vote to leave is going to possibly trigger votes in other European countries, which will bring the euro into question. That will become the bigger issue. A stronger US$ has a strong impact on energy, but on other areas of the market such as gold, the US$ is typically weak, but the dollar is rising right now because of negative interest rates in Europe, as well as the risk premium that is being demanded by investors. There are other areas, such as China, that are much more significant. As long as the contagion doesn’t spread there, he thinks it is going to be relatively contained.

Interest rates. With the European situation, low or negative interest rates are going to be lasting even longer. Most economic models rely on having a risk-free rate, but those models don’t work with negative interest rates. What people have been saving for retirement is kind of irrelevant now. That is going to be the bigger impact if negative interest rates continue for a longer period of time. We need zero or positive interest rates around the world. We also need economic growth to pick up, so countries in Europe and Asia will be able to allow their interest rates to flow back up towards zero.

Lithium? This has taken off by the increasing popularity of electric cars. There are very few deposits globally that are actually producing lithium which is refined and put into batteries for electric cars, and there has been a rush towards junior players. There is a lot of lithium in the world and major producers can increase their own, so there is not going to be a supply issue, and a lot of projects are going to get over inflated.

Canadian Banks? Most Canadian equity funds have 6 banks in their top 10 holdings, and his firm tries to offer something a little bit different that represents Canada. However, there has rarely been a bad time in history to Buy a bank, so when you have a pullback, it usually makes a little bit of sense to buy it. They are very stable and tend to have very strong monopolies in a bunch of different industries, asset management included. They pay very healthy dividends and they all have room to grow their dividends. Thinks the Brexit impact is quite low, as they are Uber focused on the Canadian economy. However, they will get hit by contagion. Now is a good time to buy them, but the focus should be much more on the energy patch and the exposure they have there, and also where interest rates are going. He would wait more towards the end of the year or the 4^th quarter with a focus on seeing what the Fed is going to do.

Precious metals. If you are favourably disposed to the precious metals group, it always makes more sense to buy the companies. Typically, there is about a 3 to 1 leverage ratio, so if you get a 10% in the commodity, you get about a 30% in the stocks.

Markets. His initial reaction on Brexit is that they have to negotiate for 2 years, and then there is probably another year on top of that because they have to get 27 remaining EU members to ratify to whatever was agreed to. It then goes back to the UK Parliament. We are looking at 3 years and it is far too early to say what is going to happen. There is a big question mark as to whether they will go ahead. First of all, the referendum was not legally binding. It has to be ratified by parliament and there is a strong Stay movement in Parliament.

Market. He did not make any strategic changes going into the Brexit vote. This has not been a wonderful year. Today he is buying the stocks that he thinks are down too much. The UK pound is falling which means it is going to cost them a lot more money to import goods, but it makes going to the UK cheaper, and the impact could be nothing. Nobody knows what the short term impact is going to be. Any analyst that has more than 10% of their exposure to Europe and are down 3%-5%, with maybe their profits being impacted to zero, that would be the stock to buy. A lot of the ones that are down today are the US financials. Those are the kinds of stocks he is attracted to today.

Volatility ETF’s as a swing trade? You are probably better off going to a casino and playing the roulette wheel. The outcome is absolutely random. Just because you get it right doesn’t mean you are smart, it just means you got lucky.

Gold stocks? Has bought gold stocks in the past, but wouldn’t buy them now. Doesn’t see any reason to own these types of companies. Has no idea what gold is going to do a year from now.

Market. Britain decided to leave the EU. It is a pretty big deal, an unprecedented and uncharted territory for the markets. From a Canadian investor’s point of view, he doesn’t think the impact is going to be overly material. A lot of Canadian investors’ portfolios don’t have much exposure to the European market, so doesn’t see them taking a huge hit. A lot of companies that trade on the TSX don’t have a lot of revenues that are generated from the European markets. Probably the biggest exposure is in the financial sector. This is a great opportunity to pull out your watch list, and for those that you have been waiting for, a more attractive entry point. You need to expect volatility for the next few weeks.