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

Markets. He only buys half as much as he is considering buying these days because we had a bull market for 6 years. If you take out extraordinary items we are at 24 times and that is where we are usually at at the height of a market. Free cash flow is declining because revenues are declining. Once you get over 30 stocks you are not reducing risk by holding more.

Markets. He is more of an active trading oriented manager, and this is the kind of market that he likes. He came into the year fairly heavy net Short the market worried, and then it sold off pretty dramatically and he jumped back in pretty aggressively in late January, and then was sort of selling again into the end of March. Worries about the overdependence we have on the large banks, like the dovish comments from Janet Yellin last week. Thinks there would be greater confidence in the economy if they started to normalize rates more. Economic growth is slowing down a little and earnings have peaked and are rolling over a little. Valuations are back to the high end of the range. He has checked back and took some profits, and raised his cash position. Everybody seems to be in the bearish camp, and he hates to be on the same side as everybody else. Still worries about China, not the growth, but their banking system.

Energy. Has gone from Long to Short on oil. Oil is rallying, but it is hard to buy in the short term. There is going to be no production agreement from OPEC.

Favourite Canadian bank for income? For income this is the time to look at these. You are fighting some US short selling, who think we are into a repeat of what they went through in 2007, but he doesn’t think that is happening. Canadian banks give you better diversification. Loan books are so much stronger than in the past. National Bank (NA-T) sticks out as being really cheap. Also, likes Bank of Nova Scotia (BNS-T) for the International play. The whole banking sector looks interesting to him. The valuation on the Royal (RY-T) is higher, so he would prefer others.

Why has natural gas gone up from $1.60 to $2.03 lately? This could be called a bit of a trading bounce off extremely low levels, because of the US$ starting to roll over. All commodities are basically tied to the US$. It is hard to get excited about natural gas which has an excess of supply.

Gold? Keep 5% in a portfolio? He averages in the range of 3%-5% in gold related stocks. Right now it is at the low end. The bigger call is getting the US$ right. Thinks the Fed will eventually start raising rates, and the US$ will firm again, which will be a bit of a risk for gold. However, it is a good to have a bit of a hedge in your portfolio. He stays away from political risks, so would stay with domestic assets, and single mine companies, maybe in the mid-size, and has some production growth with the possibility of being taken out. 2 of the big ones in this category are Detour Gold (DGC-T) and Kirkland Lake Gold (KGI-T).

Market Call Tonight is focused on Income Taxes, not investing.

Economy. There could be 5 years of muted economic growth. We are looking at world growth slower than it has been historically, and demographics is part of the reason. Once you get the slower growth with the GNP, you are going to see that going back through the markets. Also doesn’t think there is going to be upward pressure on interest rates. His advice to investors is to look for good quality dividend paying companies.

Markets. There was carnage in the markets at the beginning of 2016 after the rise in interest rates. Mid-Feb they revised their outlook and we went up. We are still struggling to take out the S&P highs of last year. The Fed are watching markets and markets are watching them and so there is an paralysis of analysis. He is out of the bond market because you get nothing. Negative interest rates are bit of an ominous indicator.

Preferred share resets. The preferred market in Canada has been crushed by rate resets. CPD-T is a Canadian preferred ETF and PFF-N is the US equivalent. The same thing has not happened in the US. They got popular in 2009, but then rates did not go up in Canada so preferreds have really gone down. They are great for the companies that issue them.

Market. TSX has come back pretty strong, maybe a little overbought, but is probably at a level where you can still be constructive. Feels we are in a sideways environment. Not a lot to get excited about economically. Even the US is still showing pretty anaemic GDP growth this year. However, there are plenty of pockets that investors can win in and you can be constructive. If you can get a 3%-4% dividend with nice 5%-6% growth annually, combined with 5%, 6%, 10% per share growth over the next couple of years with pretty good visibility, that really beats a 10-year bond of 1.74%. Dividend stocks are still compelling. He is not Long on energy companies yet.

Gold? Gold bugs had themselves a 12-year run, but all good things come to an end. The question is, is this latest move for real. For gold to win, we need lower rates, and we are likely going to have them. Thinks gold can do okay in this environment. He would start with something like Gold Corp. (G-T). For gold to win, everything else has to lose, or everything else has to be kind of status quo yucky. It is probably still too overowned.

Markets. Doesn’t think we are going to see volatility go away this year. There will be a lot of people speculating about when and if the Fed raises rates again, maybe in the latter half of 2016, and potentially earlier, depending on inflation. That will create a lot of sector rotation. Given that we are in the mid to late stages of the business cycle, investors should try to focus on those companies that have good, visible earnings growth. This is not the kind of market where you are going to necessarily see value outperform, so you want earnings visibility and predictability. In addition, you want companies that have relatively strong balance sheets, because what we saw earlier this year was concern about low commodity prices, global growth, and the credit market come under a lot of pressure.

American mortgage REITs? These are really tough to get a handle on. The dividends aren’t really very sustainable, because the underlying nature of the business is borrowing money on the short end of the curve, and lending it out on the long end. There are a lot of underlying hedges to insulate the portfolio, but it is hard to get your head around. Typically you want to buy these when they are trading at .8X BV. He is not comfortable with the changes he is seeing in the yield curve.

Economy. To some extent, central banks globally, including the US, have an on/off switch and turning it on seems to be the only policy. We have negative interest rates in 18 countries now. What are we going to do when the next real crisis hits? There is way too much debt in the system and something has to happen. Because of that, he is staying cautious. Another catalyst is the rise of Donald Trump. At the beginning he thought this was going to be entertaining. People attracted to Trump are the US middle class, which is really losing out more and more and becoming economically depressed. We now have a system where the rich are getting richer and the poor are getting poorer, and the middle class is depreciating. This is what happened in Latin America, and it is not a healthy society. He has always encouraged people to have some gold in their system.