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

Sell in May? Seasonality is one of the disciplines in tech analysis. There are valid reasons behind it. He needs to rely on more additional information. Which day in May do you sell? Volatility is being enhanced by technology and by central banks not knowing what they are doing. Intraday or intra week volatility can exceed seasonality.

Market. Some indicators are becoming very positive, especially as they relate to the consumer. The recovery of housing prices, hours worked, total income available and the increase in the workforce. There is money available for housing and autos, the 2 main drivers of the US economy. There are some negatives, but even though you drill down into the industrial production, which was down, you suddenly realize that the manufacturing production was up and the mining and utility index was way down, which had put it down. We are not going to get any clarity on oil for 2 reasons. 1) we don’t know how long the impact of the wildfire in the oil sands area is going to last and 2) there has been a major change in Saudi Arabia and the indication is that they will not want to put a lid on production.

REITs or utilities? He would lean towards REITs, which have lower price to cash flow ratios. The wild search for yield on utilities has gotten way out of line. The focus is going to be on yields, which will keep the price to cash flow ratios higher on utilities than what they should be. From a risk point of view, REITs are in better shape.

Markets. Thinks we are probably worrying too much, but when people stop worrying, that is when you want to sell everything. We have seen Short Sell positions go up, cash positions go up, a lot of worry about China, US elections, healthcare, etc., etc. On the big picture earnings are okay. They are probably going to go down in the US this year, but the market has already adjusted. Dividends are increasing. We are seeing privatization and takeovers. It really is not that bad. If you can get 3% in a dividend stock, that has the potential to grow and grow its dividend, why get 0.5% in a GIC. He is not convinced that this rally is for real.

Markets. We are entering a period of seasonal weakness. It is not a great economic back drop for investing. It will take a huge catalyst to move the markets higher. We are moving into 6 months that are typically weaker. The average is a loss of half a percent since 1950 in the summer. You tend to get some big drops in the summer sometimes, which brings the average down, even though the market is up over the summer 82% of the time. You are exposing yourself to increased risk over the next six months. There are lots of opportunities in the summer also. Gold tends to do better.

Small Cap Seasonality. From Dec 19 to Mar 7 they do well.

Gold. Seasonal performance is just one of the factors that affect it. Silver’s period is from January 1^st to end of March. Gold is from July to September. He trades it every year.

Market. US earnings numbers looked terrible and expectations became very low, but then everybody kind of beat expectations. Looking through those numbers has been very difficult. A lot of the big tech stocks had very negative numbers, and those sectors tend to be the ones that are growing. Apple’s numbers in China were terrible. The one positive thing is that margins stayed pretty level, and that is because they are cutting a lot of costs. When you see big companies like that miss, it tells us that we are in a much more difficult environment than what people are really thinking about. Big sectors, such as utilities that people are very comfortable with, have done poorly in these last earnings numbers. This indicates that the overall economy is not able to grow as quickly.

Rails? He owns and prefers Canadian National (CNR-T). Rails are a great story. This is a business that has been consolidated. Have moved sideways over the last while simply because of the commodity cycle. As the world plods along here, rails do incredibly well. They are more environmentally friendly for shipping things. The commodity cycle is turning a little bit here, so they are going to be better off. In Canada, we still cannot figure out what we are going to do with pipelines, and the only way to move oil really is through rail, and that will continue to happen. As a sector they are not expensive at these valuations, although the Canadians are more expensive than the US ones.

Energy. There was a sharp rebound which was a little overdone. A little bit of short covering, but as the period where oil has peaked is now approaching about 2 years, he is starting to look at companies that have right sized their spending and CapX, and cut their dividends. On down days, he is looking at certain names.

Markets. He thinks the market is still a buy. Interest rates are going to remain low. The US dollar will continue to ease. A lower US$ means firmer S&P earnings and higher commodity prices. The world is not a great place in terms of economy, but stocks are much better than the alternatives. Cash gives you the opportunity to buy at lower levels. Things can happen. He thinks the market will be higher three months out. 70-75% equity is his recommendation. He thinks Canada is awaking. It has underperformed for 5 years. He thinks capital is flowing back into Canada.

Canadian Banks. Banks don’t cut dividends, payout ratios are low. The stream of income is safe. The banks are a buy right now. TD-T underperformed the group because of the US$. It has a lower dividend.

Markets. We are on a teeter-totter in the sense that stocks are not cheap, but earnings are not that good either. We have seen earnings fail to outperform the previous year, 4 quarters in a row, and the next quarter is predicted to be another of those. We are in an earnings recession and are not seeing great earnings. The market has moved up modestly and is pretty much sideways, which is the way it should be. You want to reward good earnings. The correlation between earnings and stock price is the greatest predictor of where things are going. He is comfortable in a seesaw type of market, where good stock picking is rewarded. We are not totally rolling over as an economy. The economy is slow growth, but progressing. What really affects earnings are energy prices and foreign exchange, which tend to be transitory, not permanent. When that starts to turn around we’ll start to see a positive progression of corporate earnings. (You can look at a blog on his website at www.goodreid.com, where he discusses investing for the long-term.)

Canadian Banks. They will continue to struggle. In the last quarter, delinquency loans went from 10 basis points to 30 basis points, an increase of 3 times in a one quarter period. They’ve gorged on lending consumers’ money, which has been a very good business. He is concerned that with increased capital requirements the banks are being forced to adhere to, their funding costs are going up and margins are very low. He has no exposure to Canadian banks, and a very small allocation to Canadian financials, with none to international.

North American Rails? He doesn’t own any. There are 2 areas that are really hurting the rails right now. 1.) Coal shipments are down substantially and that will be in a long-term terminal decline. 2.) In oil by rail, you are seeing fewer oil cars shipped. That had become a very large component of a lot of the railways in the last 5 years. The only area firing on all cylinders right now, is cars being transported by rail, and at 18 million units per year, you have to wonder how long that will continue.