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

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.

Precious Metals. Within his portfolio, he is starting to rotate a little bit out of gold and into silver. Since December, gold has had a really, really good move and went right to its 600 day moving average of around $1200-$1250. Right now it is holding, and silver is just getting to its 200 day moving average, so silver has to move.

Market. This rally, in large measure, is featuring beaten up stocks coming back as well as Short coverings. You can see this both in the equity and the commodity futures markets. This is the fastest shift on record in terms of oil futures from a speculative perspective over the last 6 weeks. As the speculative short position has gone to a long position, both in equities and in commodities, we have seen the worst performing stocks and commodities over the last few years. Over the last 6-7 weeks in this rally, they have been the best performing companies. That is typically not a sign of a bull market. In a bull market, you want the leaders to lead. Another key factor is that companies who have large hedge funds and are most Long have underperformed companies that are most Short by about 70%. It reminds him of the summer and fall of 2007, when there was the quant crash. Thinks we are seeing a shift from a bull market to a bear market. The bigger problem is the debt situation globally.

Market. The market has a toppy feel to it right now. We have put in a low for the year in Jan/Feb. It is difficult to invest because it is so central bank driven. The Fed came out today and was as dovish as possible, and he was very surprised. The way to prosper now is to be a little more defensive, have a solid stable dividend, and look for something that is very strong on the value side rather than the growth side. What worked in the previous cycle isn’t likely to work this time. Look for things that are deep value and conservative and that has a well-established brand, and trading at a material discount to its peers. There are not a lot, but there are a few.

Markets. Larry showed a chart of the outstanding short positions on oil which have been declining significantly. A lot of the recent move up in oil was driven by short covering. He thinks that more likely, they will add to short positions in the near term going forward. It looks like futures contracts are stalling in the $40s. He thinks they will not agree to cut production in April (Arabia et. al. meeting). The market is not pricing in even one tightening by the Fed this year. It will depend on jobs numbers. Personal income and personal consumption data came in and was revised significantly lower. Consumer demand is not strengthening. If you increase income of a 65 year old with zero interest rates they will not spend more because now they need to make their money last longer.

Natural gas – best way to invest for the long term. A lot of people think they can hold ETFs for a long time to get exposure. You often can’t because of the underlying rebalancing problem when held long term. ZJN-T for juniors or FCG-N for large caps are the best ETFs for Nat Gas long term exposure. They are straight one to one exposure.

CPP & OAS. The government can no longer afford to pay these benefits given that they have to pay out the benefit so much longer than when they started them in the ‘50s. We need to have plans in place so the pensioners still get their benefits, which they deserve. But the system is boarding on bankruptcy.

Markets. The rally has seemed to have stretched some valuations. He had some bids in and had to pull them off the table. Anything could cause some cascading and backwardation of the markets. In the long term you are looking for valuation. He has taken a step back as the market has rallied and will see if things fall within his sphere soon. The US has been carrying the weight of the world on its shoulders but that cannot go on forever. The US dollar has been pricing them out of many global markets. Their competitiveness has gradually been going down and that will be reflected in their industries. The emerging markets are still a question mark. How fast can they raise rates in a relatively slow growth economy without putting the brakes on it? The strong US$ is hurting international earnings. Oil is forefront in investor’s mines, but he does not know if it is primarily driving the markets. Investors should not confuse the economy with the stock market. The stock market is more of a popularity contest. Canada’s economy has auto parts as a very strong part of the economy, but a small part of the TSX.

Educational Segment. Fixed income. Spreads in credit are far more a leading indicator than the stock market. The bond guys understand a lot better what is happening in the economy than the stock guys. Corporate bond spreads vs. treasury ETFs: They have been widening. They have come back to the same levels as in ’08/’09. They are telling us the economy is not healthy. European banks: EUFN-N and the FTSE Europe ETF. The banks have dragged everything down. There are big risks in credit spreads. Portuguese bond spreads have widened dramatically and a lot of refinancing has to happen over the next 5 years so that is the next big risk to the European economy. You don’t go all to cash. You have to understand asset allocation.

Markets. He is having no trouble finding good quality dividend players for his portfolio. Canadian banks continue to increase their dividends, many of them twice a year, and are doing exceptionally well with a 6% profit growth in 2015. If current conditions stay the same, he is expecting further profit growth in 2016. Thinks they are trading at depressed valuations. In the US, there are healthcare companies and technology names where he is expecting increases. There are lots of great companies with beautiful balance sheets, making a lot of money with high profit margins.

Eliot wave theory and Brookfield Asset Management. (BAM.A-T) The problem is where do you start the count. What you need is a bellwether. You can use BRK.B-N or HON-N, but here he suggests Brookfield. The Eliot wave depends on three things – the advancing wave and correcting waves – three pairs of them. The question is where do you start counting – 2009? Look for a significant low. We had had the rebound bull, then the corrective wave. It did not make a new low. Once we exceed the last high, then we know that was the first wave. Then we know we are into the second wave advance. After three advances and two declines, it is over for that stock. The fourth wave is normally long and confusing. That is what we are at now.