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

Markets. Doesn’t have a strong general outlook for the stock market, but does find that governments globally are adding so much debt to their balance sheets that it is going to create problems. It is debt and leverage that creates major, major difficulty. This whole idea of negative interest rates is stupid. You are trying to force banks to make people borrow money, which doesn’t make sense. Effectively a lot of governments are adding risk to the system, in a system that is already highly leveraged. At some point, you can only kick the can down the road so far, and it is going to be a major problem. Debt levels in Canada are at an all-time high. At same time, there are also a lot of positives out there. He sees a lot of stability. You have slow growth which he doesn’t think it is necessarily bad. Oil prices are low, which are hurting certain parts of the economy, but is helping others. Gold prices are staying in a range. Inflation is low.

Markets. US corporate profits are likely to start turning up in the back half of the year, which is likely to juice the equity markets. Earnings year-over-year for the 1^st quarter will be down 7%-8% largely because of energy and currency headwinds, along with a moderate decline in the 2^nd quarter. The US$ seems to be finding a range here and she is not expecting the appreciation that we saw in prior years. Energy seems to be consolidating in the $40 range. Eventually energy prices will improve. Those 2 factors will be beneficial to US multinationals. The S&P 500 is trading at about 17.5X forward earnings, so we do need profit growth to come in order to keep equity markets moving forward, and thinks that will eventually come through. Wouldn’t be surprised at a bit of a pullback, but the earnings season is turning around now in the US. You have to watch the tone of what companies are saying in terms of their global growth. The “Sell in May” adage may not be as strong this year.

Gold? As an asset class this is pretty low on her portfolio. It has recently rallied. Gold tends to work in an environment where there is inflation and where the US$ is weak with a lot of volatility and uncertainty. For the last couple of years this has been a very low weight for her and we really haven’t reached the inflection point.

Markets. He structures portfolios that are relevant given the current market climate, so it is really important to understand the macro environment and that you don’t have to be invested all the time. We got to extremes in the 1^st week of February. The percentage of stocks that were performing well got to the lowest level, which had happened only 5 times since 1998. Since then the percentage of stocks performing well has expanded, money is being allocated to equities and realistically, with bond yields at close to 1000 year lows, the return was to be had in equities. The S&P 500 exceeded the highs from 2000 at the end of 2012, and 2.5 years in we had a 12% correction. After the beginning of the last secular bull market in 1981, the market pulled back 7% over 2 months and then rallied 150% in the next 2 years as people under invested had to chase it. The same thing happened in 1953. As at the end of last January, there were fewer bullish advisors than any time going back to the crash in 1987. In January/February the PMI (economic data) came in ahead of expectations, so people had a very negative view. To him it looked like there was an inventory correction through 2015, the first slow down in a new bull market. It was a correction, not a bear market and he re-accelerated. Not only has it rallied 16%, but it took out the most recent high, which negates the fact that this could just be a rally back into resistance. You still have to buy companies that are good and getting better. You need to see price in securities doing what it should be doing, so he looks for longer-term upward prices. You only need 40 great companies to build a portfolio, and there are 66,000 to choose from.

Converting euros to Cdn$? Longer-term, he would say the Canadian dollar is a little weaker than the US, but the euro can continue to appreciate. Very often, in the early cycle, the US$ will be strong, but as the rest of the world starts to catch up you will get strength in the euro and the yen. He is making a call to have some exposure to Europe and the euro. Would be more inclined to be more euro-centric than Canadian centric.

Stop losses? When investing money, the thing you get fired for is losing money. You can’t recover from a big mistake. He has always had a premise that if he uses stop losses and ratchets them higher, he will stay in a winning position until the stock doesn’t work, but then you have a small loss, not a big one. He uses point and figure price charts that identifies inflection points.

Markets. China is slowing. You can’t fight that. They are going to continue to do stimulus. It is the second biggest economy in the world. Slower growth is the message. There is more downside risk than upside risk in the markets. You want to come in and buy the dips.

5% limit on any equity in your portfolio. It takes 30 stocks or more to be diversified enough. An ETF with more than 30 stocks is okay, but you need to be diversified globally as well as between sectors.

Euro vs. the Canadian dollar. A lot of what the Euro will do will have to do with what happens with the EU economy. He thinks it will break up within 10 years. The US dollar will still be the strongest currency in the world. What the Canadian dollar does will have everything to do with oil. Canada vs. the Euro should do a little better than against the US$.

Educational Segment. An agreement among stop producers did not happen. They were talking of freezing production. But if he was running Iran and had been under sanctions for 5 years, he would pump as much as he could to get his share of the revenue. Probably the highs we have seen recently are all we are going to see for now. 5 years ago OECD did not have a clue what fracking would do. Right now they are expecting no material increase in production in North America for over a decade. The XEG-T trend line is up, but we have to watch for it to break down. We have 10-15% correction risk. ZJO-T is energy and juniors would have 15-20% correction risk.

Markets. He has a list of reasons why he is bearish. There is always risk and always reward, depending on the market. The potential upside is 3-4% of the old highs. On the lower side there are the summer lows of last year. We are at the top of the lid on the market. We are in a high PE situation with mediocre earnings. The VIX is very low, showing that people are too complacent. He is hedging. And then there is the saying, ‘sell in May and go away’. He reduces each year and is doing so early. The transport stocks on the S&P are not matching the industrials. Look at CP. It has been in a downtrend.

Selling in May with respect to income stocks. He continues to hold the income stocks. He only goes to max 50% cash for the summer. He moves into lower volatility.

Market. We seem to be in a netherworld. On one hand you have the Fed trying to push rates higher, almost as if it’s a credibility issue, and Central Banks trying to use stimulus. In the next few months, expects we’ll see a rationalization between how much can the Fed lean into the wind all alone, and how much will data come back to them and get them back to talk again about their negative interest rates policy and all the things that have crept up in the last couple of months.

COMMENT. His targets are always in terms of a year. If you don’t get action towards them within the first 3 months, they probably don’t manifest themselves.

Gold? Right now there is a dichotomy of 2 opposing forces. The gold ETF (GLD-T) and the actual spot bullion. He has a much lower target for spot bullion of around $1,175. On the GLD he has a $163 target, which would translate to about $1,600. There has been a base from last November, which is quite positive. If we can get above $1,375-$1,380. There is a lot of air space to about $14. Producers will always lead the commodities, both to the downside and to the upside. Looks pretty good in here. (See Top Picks)