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

Markets. The Dow and the S&P 500 have been hitting new all-time record highs. There was a knee-jerk reaction to BREXIT and that negativity was quickly reversed. Feels the market may be a little ahead of itself. Going into earnings season it is really important to focus on what the companies are saying, and how they are seeing the different geographies. It is really too early to know what the impact may have on the UK, the US and on the global economy. When looking at fundamentals, Europe is not getting worse, but is bumbling along and the US recovery is on track. We had that really strong halo number on Friday, but it is probably not sustainable. With all Central Banks indicating they are going to keep rates low, especially the US Fed, (the only central bank that was going to raise rates) the US economy is on track, so it seems rates will stay lower for longer, which she thinks may have been the catalyst for this rally across all markets. Inflation is one metric we have to really watch carefully, but so far she doesn’t see it rising sharply. As long as inflation stays benign, there is no urgency to raise rates. Thinks the markets are going to be sensitive to any economic releases that come out.

Canadian Banks? She likes the banks as a group, although they were more attractively valued a few months ago. While our economy lags that of the US, it is slowly going to start to improve. That will be beneficial for the banks. Most banks are yielding 3.5%-4%. Earnings growth is kind of mid-single digit range, and she thinks the dividend growth will track earnings growth. She would initiate a half a position, and not buy it all here. If we get the general market pullback, the banks will come back as well.

Markets. They are having a referendum in Italy in October. If Italy goes, the whole thing falls apart. If France goes, the whole thing falls apart also. Gas prices are pointing to weakness in crude oil. Usually refiners build up inventories for the summer, but the demand has not been there. We are 10-15% below averages and this is negative for West Texas oil. He thinks we will see a dip below $40 this fall in the price of oil. Energy stocks should fall off 10% and this would be your next buying opportunity.

MOO-N and COW-T play in the agri-space. Some are food processing and some are agriculture side (potash and so on). Some of these stocks will come down over the next year. You could nibble now.

Silver. He looks at gold and silver together. We should test the recent break out in the near term and that is where you could buy on a dip.

Educational Segment. Earnings Season. Brexit and so on will get pushed to the back burner temporarily. The focus will be on earnings. Revenue is important. The S&P is expected to decline in earnings for the 5^th quarter in a row. It is expected to be down 0.8%. Next year the expectation is that revenue growth comes back. Technology and financials are expected to be bad for Q2/16, but to grow a lot in 2017. Price to sales ratio. In ’98 to ’00, markets doubled. The price of the S&P vs. its revenue got to a little over 2. We don’t have that same economic tailwind now. The current ratio is 1.9. When the price to sales ratio is this extreme, companies miss all the time in earnings. There is a risk of a 10 to 15% correction.

Markets. The S&P went into an all time high today. It is not unusual this time of year to see the TSX go into a double dip. It usually bottoms around the end of October. We will probably reach a seasonal peak at the end of this week. In presidential years it is a little bit different. These reach the high in early June and then peak again at the end of July. This might be as good as it gets until the middle of the fall. The markets have already anticipated earnings numbers. The question is what they will do with future results. Stock prices should move lower into this fall due to declining earnings. There is always something that happens in the summer to drive markets lower.

US vs. CAD$. Performs best around Mid Feb. until end of April. After that it is pretty random. On a technical basis, it has been trading in a range. Anything could happen. He thinks we are testing the bottom and if it breaks it then we are looking at a cliff down to the $0.74 level.

Markets. There is a big disconnect with S&P 500 hitting an all-time high, and a lot of investors sitting on the sidelines concerned about what the true fundamentals are telling them. He is trying to navigate the direction of the market going forward. There are all the uncertainties of the BREXIT, the presidential elections, and earnings that are going nowhere. When you have no growth in earnings, but an S&P that is trading at multiples of 18X, that is a disconnect. The consensus earnings estimate for this year for the S&P, is somewhere around $120. Next year is where the big divide comes. If you call for oil prices hovering around $60, you’ll get a lift in terms of prices for energy and the earnings coming back from energy companies, which should lift it a few dollars. Then other people try to normalize for other things, and get it to maybe around $130, which is where you get that 7%-8% lift. Most people are coming to the view that we are going to have really low rates for a long time. As a value investor, he looks at some of the staples, telecom and utility stocks that have extremely high valuations relative to their history. Also, we have never had zero percent interest rates on the one hand, and negative interest rates elsewhere in the world. That is the uncharted part, so maybe 20%+ multiples are correct on staples and utilities.

Banks and mortgages? If a person is getting a mortgage and has less than 20% down payment, they have to get CMHC or some type of insurance. There is still a little risk that the Bank is somewhat involved in, in terms of taking on risk. The concern about the housing market is really kind of all the knock-on effects and the loan growth ability of the banks. If housing doesn’t grow or prices come down, there will probably be no mortgage growth. If the banks don’t get mortgage growth, then their loan growth in their portfolio won’t grow either. Banks valuations historically are not super high, but if you do it relative to its current perceived growth rate, you could say it is high. He is expecting low single digit earnings growth, and with a 4% dividend, you get maybe 6%-7%. Multiples are at around 10X PE. Canadian valuations will always stay higher than the US, because it is such a big part of the index, and one that you can kind of go to sleep on.

REITs. REITs have really gone up, but you have to remember that they started really, really cheap. A lot of this has just been a recovery back to proper pricing. There has been a lot more interest coming into the space. People are getting comfortable with a lower for longer notion, along with all the good and bad that that implies. When interest rates go up, that will affect REITs, but it doesn’t look like that is going to happen anytime soon. Real estate really shouldn’t be about catching swings and cycles. Real investors should just focus on buying quality companies and collecting the income stream. If you are planning on making a big move into REITs, just put part of the money in now, there is always a pullback. Real estate is currently under the Financial sector, but at the end of August will become its own real estate sector (GICS). It will have its own label, but no more volume will be created. Just moving from the left-hand to the right-hand, but is creating interest as maybe people didn’t own any because it was hidden under banks, financials and insurance companies. The large caps are getting expensive, but mid-cap’s and smaller caps are still showing some good value.

Artis Reset Preferreds? He doesn’t use preferred shares, because they are very illiquid instruments. If looking for an income source, they do have a pretty steady yield. This company’s has been down in the dumps because of its Alberta exposure. He thinks you are fine on this. You just have to be comfortable with the outlook going forward, that really isn’t great.

Private REITs? Has looked at some of these in the past. The challenge is liquidity, and for him visibility. Public REITs put out financial statements that are very clear and very easy to understand and simple to compare with each other. Accessing information on private REITs is more difficult. The biggest question is on liquidity. You have to be comfortable with management. Real estate has had a great run. He doesn’t know when rates are going to go up, but at some point they will and the sector will face more headwinds. You don’t want to own a Private REIT in that scenario.

Markets. US stocks are very near a record, back to 18,000. This is a funny market, because Value guys can say there is not that much value, but there are also trillions of dollars sitting on the sidelines. The bond market looks like a trap, and he thinks quite a few people are going to lose money in bonds. Where do you go? Do you sit in zero? Do you go to gold? If you can, pick a good dividend paying stock and just take your chances. Wishes the Fed would increase rates 25 basis points. Doesn’t feel BREXIT is a big enough hurdle that they should hold back. Wage inflation is between 3.5% and 3.8%, which is high these days. Looking at the last employment number, it doesn’t look like it is going to stop. Also, some of the benefits of low energy costs are going away and thinks $50+ oil is a reasonable level. That is when the DUCs, real but uncompleted wells in Texas, come in. The benefits of the drop in energy is behind us, and now we are going to see that come back and bite a little bit on the inflation side.

Gold stock or ETF? GLD-N would be more of a way to go. He hasn’t jumped into the gold market. The really big positive for gold is if we see inflation coming back. He would wait a little longer to see how it is going to work.