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

Oil or gas? This was topical earlier this year when people were bearish on oil, and then everybody piled into the natural gas names, and not inflated the multiples. He would say that natural gas names are relatively more expensive, so his predisposition would be to buy oil names. Gas is capped whereas oil you could have a pretty significant spike in the next few years. However, he prefers looking at this through individual companies.

Telecom for an income investor? He likes the telecom sector. It is interest rate sensitive, because typically they are a lower growth sector. The whole idea of whether interest rates go up or not is open to debate. He is very skeptical that rates will go up. Would be inclined to stick with US holdings, and lighten up on Canadian holdings, because valuation is cheaper in the US.

Markets. The biggest cost to the US government for the next 20 to 30 years is healthcare, but you don’t get the development of drugs from companies without the profits. We need to watch the IBB-N biotech ETF. He thinks it might re-test the lows. He sees a 40% chance of a rate hike in September and a 63% chance in December. Don’t think the fed will not raise interest rates in front of the election. They have done it before. He thinks the US$ will rise from here as we have challenges in Europe and Japan.

Educational Segment. The US$. The market changed dramatically after the Fed said the rates were to go up September and December both. The Euro is 57.6% of the US dollar index, so it matters what Europe does. The notion that currency doesn’t matter is wrong. It is the most important factor when investing. A rate hike will put downward pressure on commodities and upward pressure on the US$. He thinks we re-test the Brexit lows over the next couple of months.

Do you trim preferred or common shares when you need to lighten up on equities? Perpetual preferreds trade more like bonds. They may underperform in the next while whereas rate resets may do better. Common shares will have even more volatility. So he would sell these when rebalancing.

Sell a losing stock or a winning stock when you need to lighten up on equities? He would crystallize the loss. But it all depends on the particular situation, whether it is a taxable account and how it is diversified.

Markets. We are in the early stages of secular bull market for the US$. We are going to hike rates in the US for September and that is bullish. Unless we get the right data point between now and the third week of September the raise should happen. An increasing US$ brings earnings down when repatriated. He thinks attracted investment into the US will counteract it in valuations. Canada is SO overvalued. It is crazy – all assets – housing & markets. Canada topped out in earnings in 2011. Canada doesn’t look good.

Where to park US$ for 6 months? No equity is a safe haven. Verizon would be the closest he could find . He has a $52 model price and it has a 4% yield.

Market. We have seen the Canadian market bounce off the post BREXIT lows, but thinks there is more fuel in the tanks. The TSX Composite is not expensive right now, trading at about 1.9X BV, which is pretty modest compared to 30-year historic average of 2.1. On an earnings basis, it trades at about 19X this year’s earnings, which is pretty much exactly in line with a historic average. This is all occurring amidst the backdrop of earnings that are still cyclically depressed and about 17% below trend.

Favoured sectors if there is a rate hike? An overwhelmingly, knowledgeable choice would be the financial sector. Canadian banks have managed to mint record profits, even in the very, very low interest rate conditions. If we get rates going up, and ideally a yield curve steepening, that could be a tremendous tailwind for their net interest margins.

Market. In the very near short term, he is uncertain as to how things are going to go. September and the first part of October are usually choppy. However, in July there was a volume thrust and a breadth thrust, which are pretty unique situations, and they used up a lot of the short term energy to occur. Longer-term they have historically produced great numbers in the market. It is going to take a little while for that to build up. Once we hit that seasonally strong period of November-May, the market should make fairly good progress. One of the relative signals he looks at is growth versus value, and each of those individually versus the market. In the last 3-4 weeks, he started to see a transition where growth stocks are starting to gain a little momentum in the overall market, and value stocks are starting to lose a little momentum. At the same time, momentum on some of the yield stocks have started to wane. It’s too early to tell if this is a direction change.

Market. To bring valuations down, we are going to need more earnings growth for the back half of the year and into next year. The markets are elevated in terms of valuations. The S&P 500 is trading at about 18.5X forward earnings, and the TSX is trading at about 19.5X forward earnings. The historical 10-year average for forward PE multiples is about 14X. He is pretty constructive and selective of NA equities. Low interest rates are still there acting as a safety net for equity prices. We are getting some hints of more fiscal stimulus from the fiscal side, which might help equity markets and the economies. From a technical perspective, we just broke out of an 18-month range bound market and broke above very key levels in the S&P 500. Historically this is a softer part of the year, so we may see some volatility going into September after the Labour Day weekend. That will provide investors with an opportunity to selectively Buy on dips.

Gold? His portfolio actually held silver as a precious metal, and he just sold it. The prospect of rising interest rates now is a bit closer, so things like gold and silver may start to come off a little. If next week’s jobs numbers are not so great, then interest rates moving higher will be pushed even further, and maybe gold will start moving higher.

Markets. You have several factors that the markets are ignoring. The markets are not sensitive to values in them. Oil has decoupled from the markets. With XRE-T and other ETFs the share price appreciation does not justify the price.

Market. Believes interest rates have been at an ultra low rate for too long, and that the central banks globally have painted themselves into a corner. They would love to have interest rates at around 5% in order to have wiggle room to go either way. The latest craze is that all the Hedge funds want to Short the volatility and go Long the junk bonds. They are making 5%-6% yield on the “less than investment grade” bonds and trying to pick up points all the drop in volatility. We’ll probably see volatility start to rise in September. This has happened before with hedge funds. You can’t have non-volatility for an extended period of time without something happening. Investors should be making sure that they have a fully diversified portfolio and assets not correlated with each other. If 1 goes down, 2 in the same industry, the other is going down with it. The way you can offset your downside is to have non-correlation in the portfolio, make sure your percentage weightings are in line and diversified by industry, country and asset size.