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

Markets. The BREXIT fears seem to be dominating the whole market. Yesterday you had the US$ being strong, the British £ being weak, both British and European stocks being weak, and commodities being down. This is because the US$ has been strong. With the shooting of the British Labour MP, things swung more to the “stay” side, so the £ started to strengthen, the US$ came off and commodities started to come up. It is all connected to what is going to happen with England. Thinks the market has overblown this, because it is not a binding vote, it is a referendum. The market views this as a crisis, and crisis equals opportunity. He has some cash and will be buying.

Markets. Janet Yellin is determined to get the US back into inflation. Technology, globalization and innovation are deflationary. We have been fighting inflation, the wrong war, since Paul Volcker got into power, so inflation needs to be created. The way that is done is to keep interest rates down. He would like to see Janet Yellin as bold as Paul Volcker was in the 1980s, and stop doing this incremental independent dance that she has been doing with the market. Stand aside and let capital get to its true valuation. Let’s get inflation. Let’s get growth going, and then they can raise interest rates.

Gold. $8.3 trillion of sovereign debt globally have negative yields. Gold has no yield. It is a diversification away from sovereign debt. There are very prominent economists suggesting to the emerging-market Central Bank to own at least 10% of their FX holdings in gold. He thinks gold is just getting going.

Efficient market hypothesis? This theory is that every security already reflects the information that is out there. It is a theory that was based on the 1960s, and we shouldn’t be using it. He doesn’t hold to this, because people make mistakes and they are emotional. There is no perfect hedge. There is a huge opportunity to generate alpha, or outperform, by not adhering to this hypothesis. He would argue that the market is not pricing everything efficiently, and he takes advantage of that.

Converting Cdn$ to US$ with a 6-12-month time horizon? What you need is to find a manager that is willing to hedge that position. Doesn’t think the Federal Reserve will move until after the US Federal election in December. Feels the Cdn$ is going to appreciate in value once we get through BREXIT.

Markets. The BREXIT is coming a week from today, which may create volatility for a while. The issue is that the bond market is telling us something that is very different from what is going on in the world. It is telling us that we are slowing down, the US, the UK, everywhere. The market seems to be telling the Fed what to do, and that is not what is supposed to happen. Negative rates has a huge impact on the banks, insurance companies and savers, but people forget that it really affects the savers. The vast majority of people are not in the equity market, so that really does hurt people. We have to get to some kind of world where rates are a little higher. Also, a lot of people are not thinking of what happens if the UK leaves the euro zone.

Markets. The Fed lowered the expectation for future rate hikes, and the market didn’t like it. It clearly said it was worried about the economy. Historically the Fed has had a very, very poor record of being able to anticipate what the economy will do. He does what he has always done which is to create balanced portfolios for clients. The process is not to expect to be right all the time, it is to minimize losses to a point where you outperform markets, or the opportunities that other investors have versus yourself. If you can do that, then you will add value, the buying power will be better, and economically their life will be better.

Markets. Both US and Canadian markets have had a pretty good run from their lows. TSX was up 20% from January lows, and the US about 16%. It isn’t surprising that we are getting a bit of consolidation or pull back. Markets seem to be wanting to find a reason to pull back, so everyone is focusing on BREXIT, which has been an overhang for the last few days. It looks like a lot of the official agencies are calling for a quicker pass to rebalance supply and demand on oil. If crude hits $50-$60, that may be enough to have some additional supply come on stream in North America. Doesn’t think the Canadian economy will go back into recession, given that the US economy is recovering, and we are their largest trading partner. Banks have had a nice run from the beginning of the year, and are still very well reasonably priced based on historical valuation levels. They are yielding over 4% and are continuing to increase their dividends. Pulling back a bit, so now is a good chance to get in if you don’t have exposure.

Markets. This is a really interesting market. Everybody is peering around every corner for what could derail the market. There are lots of jitters. The percentage of bullish advisors in the US is still hovering around 20%, not much above the 30 year low that it hit a few months ago. Also, Brexit is coming up, there are concerns about China, concerns about other countries in Europe, so there is no shortage of things to worry about. Yet we are at about 2.5% from the highs in the S&P 500. He runs a model that tracks the percentage of securities in a particular market that are performing well technically. Since February there has been a slow steady improvement. Even in the last 10 days, where the market has been wobbling around, there has virtually been no damage to that indicator. Money is working its way into stocks despite all the big concerns. As we go through the summer, stocks can actually probably go a lot higher. When you look at the return they are generating on their capital, versus where you can go to buy a piece of fixed income, the risk premium you are getting paid as an investor is very significant, not to mention the yield. The markets looks pretty attractive and we just have to get through some of the noise. There are all kinds of great companies that are better than the market, with really strong balance sheets and very strong dividend growth, north of 10%, and you are not taking on that balance sheet risk of buying a government bond at no yield. We are in a secular bull market for stocks where you tend to get better returns on the long-term average.

Elliott wave theory. Not a big proponent of this. It is only after the fact that we can we evaluate whether it worked or didn’t. The conclusion is that nothing works all the time, and it is about managing risks.

Consumer staples? Portfolio managers have to stay fully invested, and want to get defensive if they think markets are going to pull back. They go into lower volatility names like utilities, some healthcare like big Pharma (if they are not too expensive), and consumer staples. You could use SPDR Consumer Staples (XLP-N) in the US or iShares S&P/TSX Cap Consumer Staples (XST-T) in Canada. Alimentation Couche Tard (ATD.B-T), Loblaw’s (L-T) and Metro (MRU-T) are the big weights in the latter. These are more defensive and likely to fall a bit less when markets correct, but not likely to go up when markets go down.

Educational Segment. Downside of negative interest rates. Negative interest rates are really stealing money away from pensioners and savers. Did a little heat map of the term structure of interest rates going 2 to 30 years in the various countries. Canada, US and UK still have relatively normal yield curves, although yields are pretty much as low as they have ever been. However, in Europe and Japan you’ve got negative interest rates. There are over $10 trillion of government yields with negative interest rates. Last week the ECB started buying corporate bonds, and there is a good chance that some corporates are going to be able to issue bonds with negative interest rates. He showed a 2006-2016 chart of the total returns of the entire US market comparing the history of stock and bond returns. When stocks go down, bonds are generally the offset. The problem in the pension world going forward is that interest rates are so low that in order to get that balance return of 6%-7%-8%, you have to use stocks, but only if you can handle the ride. The volatility is very, very different. If global bonds are going to yield 1%, in order to get your 7% in a balanced portfolio, you have to get 14%-15% in stocks. Where valuation is today, that is not doable. A passive “buy and hold” portfolio is going to be very challenging.

Markets. When looking at both US and international markets, she is always concerned about valuation. She has a very long-term investing style. Right now, the US equity market is looking a little rich. It has hit all new highs for the S&P 500. Has crossed above $17,500, which is the first time since the 90s. That tells her the markets are very vulnerable to any type of disappointment, whether it is of concerns in Europe or China. Valuations are so high right now because the US is the best house in a bad block. Britain looking to exit the euro can be a big concern for Europe. Europe is looking for a big earnings contraction this year, and are not expected to have growth until the 4^th quarter this year, if they are lucky.

Markets. There is a global rally in government bonds, and that is very concerning because there is $10 trillion of sovereign (US$) that are trading at negative yields. That is a significant issue because we have never really been there before. Many people, including himself, think it is because the banks are running out of ammunition. They have done everything to lower rates, even going to negative rates in Japan, which has created a huge problem, and a bubble is essentially forming. We haven’t had rates this low in 500 years of recorded history, so it is hard to see how this ends well. The poor jobs report has set back expectations even more substantially than what they were set back already. The bond issue is something that will affect us all at some point, because we don’t know how it is going to unwind. He is fully invested, but on both sides of the market, and is looking to be more aggressive on the Short side in the cyclical names. Also, starting to pick away at some gold names.

Forestry sector? Stocks are cheap and have been trading down. If you are willing to take a longer-term perspective, at least 6 months, they are all attractive. Expects there will be a solution to the softwood lumber dispute. There is some evidence that the millennials are forming households.