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

Educational Segment. Growth. The ECRI have some great free stuff on their web site. Dips in the GDI below 0 mean we are in a recession. Less than 2% is a period of stagnation and is where it has been for the last couple of years. We can expect this to continue and it depends somewhat on who wins the election and what they do with minimum wage laws. Another great indicator is a 20 country coincident growth diffusion indicator. Below .50 is contractionary and that is where it has been over the last couple of years.

Markets. He does not sell in May and go away. He sells when his opinion of value changes or he finds something better to buy. He is fully invested. In the short run rising interest rates could be lousy for stocks, bonds and preferred shares, but we have been expecting this, so some of it is baked in. It does not change his opinion. He does not see interest rates in Canada going up any time soon. Own companies that will do well in a rising rate environment as well as owning ones that will do well with a lowering rate environment. Don’t sit in cash or bonds. He is comfortable with his US holdings.

[There was a fire in the studio which cut the show short about 2/3rds of the way through.]

Markets. The year started with a lot of volatility in the market with a lot of fear for the 1^st Fed hike, last December, and people didn’t know what to do. There was a lot of stabilization by mid-February, and since then we have been slowly marching upwards. Not exciting, but clearly pretty good markets here. Investors should always be vigilant, especially at this time of year. Expansion since the bottom of 2009 has been 6+ years running. Expansions do reach an end at some point, so investors should be keeping a lookout for that. Perhaps it is going to drag out to be a slow, steady, longer expansion than what it was, with inflation and interest being lower. A different type of cycle than what we are used to seeing post the 2^nd world War. Central banks in general want to normalize interest rates, however, they don’t want to rock the boat either. An interest rate hike may occur in July, or maybe later. In this kind of climate, investors want to look for undervalued areas in slow growing, top line situations and devalued or organic growth.

Markets. US$ has been the chart to watch for the last year or so, but especially this year as he thinks the trend has reversed. The strong US$ has become the weak US$, which has really put legs to the commodity trade. It started in earnest in Feb/March. There is still plenty of room for this cyclical value trade to play out. A weaker US$ is good for Canadian equities. There is good market breadth, which is a good sign, and yet there is a very bearish market. Any time the indicator on this dips below 20%, you have positive returns 95% of the time, and you get about 12% of positive returns over 6 months.

Markets. 650,000 jobs were created in the US, an increase of about .05%. Historically April typically gains 7/10 of a percent. We were shy from the 50 year May average increase, but are still seeing employment growth. Looking at the year-to-date trend, all it has done is come back to trend. We are not seeing a recession or anything like that. More data is needed to confirm that. Right now we are about 0.3% higher on the year, in terms of employment. What concerns him is the creation of the jobs in low paying areas. The S&P 500 has been in a long-term trading range, between 2,040 and 2,130. It is a massive area of supply, so whenever it gets up there, people are selling and grooming their positions. Now we are testing those highs once again. There are a number of catalysts that could move the market either way. Investors should keep an eye on the S&P 500 to see which way it breaks. For the TSX, the trend is still positive. It broke above 14,000 and is now increasing on. It is staying above its trend line and is being supported by both its 20 and 50 day moving averages. We are right at the seasonality point now where there could be a selloff. Between now and August/September, trading is pretty flat.

Markets. It is difficult to predict the Sell in May and Go Away effect. He would not trade off of it. The market is paying attention to oil and not earnings. It is confusing for earnings. Don’t trade that stuff. Stick to your portfolio allocation. He backed out of Europe even though he was only at 2%. Oil is geopolitical. There are a number of disruptions around the world. You really don’t know where the price of oil is going. Much of the rise is probably temporary. He would just as soon sit back and wait.

Max exposure to ETFs in a portfolio? ETFs give you only sector and market risk, not individual stock risk. He recommends them for smaller portfolios.

Dividend ETFs. He would look at them. They got beat up by the price of oil. Watch the MERs.

Hedged or unhedged. Buy unhedgd when the CAD$ is high and hedged when it is low. You could have a bit of both. He is concerned about deficit spending. He has reservations about the Canadian dollar. He thinks it might come down.

Markets. We have been a long time since the last major correction. Thinks the markets are getting tired, but this is a point that he really enjoys, a stock pickers market. North American markets just continue to climb the wall of worry, and yet investors have become so focused on what the Fed is going to do with interest rates. If they do raise rates, it will be a sign that the economy is strong and robust, and there is some evidence of that. If a signal comes out, and if the number is disappointing, chances are the Fed will defer raising rates again. Do they really want to raise rates seeing as how strong the US$ has been over the last number of years? They have to be very careful about what they do. In Canada we have been fortunate. We have had some recovery in a number of commodities, and have seen our market advance. On the other hand, a lot of the worries that exist in the US also affect our market. If they raise rates, the Cdn$ is going to plummet even further. He likes to position himself in companies he thinks are going to do well.

Value versus Growth? As a value manager he tries not to pay too much to growth. Growth managers tend to pay a lot more for the unseen than what value managers do. Occasionally he has had a value stock that has turned into a growth like stock, and the multiples tend to go up. In cases where he sees actual tangible evidence of volumes and business picking up, he will hold on up to a certain limit and take profits along the way as it grows.

Canadian Banks? In order to buy these today, you need to have a 3-5 year time horizon, to allow dividends to increase and let the next cycle take hold, in the event we do go into a period of slower growth. He likes the Canadian banks because he believes they are well capitalized and well-managed. (See Top Picks.)

Markets. Feels the US market has been in a stealth bull market for 2 weeks. The majority of “experts” love to be bearish, especially heading into the summer months. S&P is down about 1% over the last 12 months. In that 12 months, there have been 2 corrections, after not having a correction for 4 years. Sees a lot of underlying strength starting to pick up now, and believes we are on the verge of a major break out on the S&P 500 and the US stock market, which will be the next big leg in this bull market. Taking a look at the new highs versus the new lows, up volume versus down volume, they are so much stronger now than they have been the last few times the market has tried to break up, which tells him there is more bullish breadth, more stocks trading at near highs than there has been, which means we can break out because there are more sectors pushing the market up.

Market. For a little while he had thought the market was quite toppy, certainly the US markets. He now feels they are getting ready to go higher. It has stayed in a range from 16,000 to 18,000 and has always come off dramatically. It hasn’t done that this time, but has built a very nice trading base in the high 17,000, and thinks it is ready to roll. Volumes are higher now and earnings are OK. Stocks haven’t had the volatility they’ve had over the last year, but have really hung in. He has been calling for the TSX to go higher, and it has had a great rally. With the oil and gold runs it is sort of a 2 headed monster. Thinks gold is ready to go higher, but doesn’t think crude is. He would stay out of the auto sector.