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

Markets. We are in a mild deflationary period, and when we get these deflationary shocks, all asset prices spike down and the US$ responds in a very violent upward motion. We had that at the beginning of January/2016. It has been relatively peaceful since mid-February, and the markets are going to be boring until we get another deflationary spike. Had thought Brexit could have been a potential for deflationary spikes. The US election in November could be a spike. Feels the US$ is the place to be.

Markets. When you look at what the British pound has been doing over the last couple of days, and also that we had a big move in the marketplace, he thinks investors are voting with their money and saying that the status quo will likely remain. Hopefully tomorrow there will be a little bit of a solution so that we don’t need to use the word Brexit anymore, at least for some time. Looking at the S&P 500, we are trading at 18X forward earnings, and 19X on the TSX. In the last 10 years they have both traded on an average at about 14X, so we are at a bit of a premium. Interest rates have acted as a bit of a safety net or tailwind for equities, but really the key variable is to see an improvement in earnings growth at some point in the back half of this year and into next. The S&P 500, pushing above the 2100 level 3 times, seems to be a serious area of overhead supply. We are there again right now, so let’s see if we can break through that. Based on valuations, he is a little cautious that we can break through that. We still have some more geopolitical issues which are happening globally.

Markets. He has been sitting at about 15% cash for a while, and is going to be a buyer regardless of the outcome of the Brexit tomorrow. If there is a No vote, and it remains as is, he will allocate about 5% cash to the market. However, if there is a Yes vote, he will be looking to allocate more capital, between 7% and 8%. Although the Yes vote will shock the system for short-term and equities will sell off, over time it has a way of working itself out. If you are a value investor and have been looking for an entry point, this can be a blessing in disguise. We will continue to live in a world where growth is scarce, and investors should not expect double-digit returns, but the 2^nd half will show us an environment where there is less uncertainty and less risk than what we have seen over the last 12-18 months.

Derivatives or hedging products to protect against a Brexit? It depends on your view as to which way the vote goes as to what kind of derivative products that you can or cannot use. The way to play this is to have some cash on the sidelines, and be ready to buy whether it is a good or a bad outcome. If they decide to stay in, that is one less worry the market has to price in, than it has had to deal with in the last few months. If they accept, that will create a buying opportunity.

Demographics. Aging demographics is one of the most permanent, non-cyclical investment themes, and is going to be so over the next decades, out to 2050. Right now it is a developed market phenomenon. The key he likes to look at is the amount of cash being spent in places like the US per capita. The 45 and under cohort is about $4000 per person, so not only do you have an aging population, but the amount of cash that is spent is exponential, growing to $18,000 when you are over 65.

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.