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

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.

Markets. We have seen a nice rebound, but a lot of it has to do with oil. Oil drove the Cdn$ stronger, drove a lot of stocks in Canada, helped the metals as well, and also there was a good jump in the banks. All this happened very quickly in the last couple of weeks, so he expects there will be a pullback. Is oil going to trade at $45 when people in the shale business feel they can bring on capacity at between $50 and $40? Oil also went down because inventories were 3X higher than expected. The issue is still around, but we are not seeing the equilibrium factor settling down, so there is going to be more volatility. That will create a weakness in the Cdn$ along with weakness in other sectors in Canada. He was taking profits in some of the recent strengths, bringing down his oil positions a little. Expects oil to settle down at some point in 2017, and then you want to own them. We have a very robust energy industry in Canada, and owning the right stocks you could do quite well. Hopefully the world will start to grow in 2017-2018 and we will see a better number in oil. A terrible problem in Canada is that you cannot get the governments together to create a flow of oil across the country. That has to be sorted out. At some point he can see oil sitting at $50-$60 which probably works reasonably well for large companies in Canada.

US Banks? J.P. Morgan (JPM-N) and Wells Fargo (WFC-N) are 2 of the best banks and incredibly well run. They have some of the best management in the US. They are also the most expensive banks on a Price to Book and PE basis. 2 different types of banks. Wells Fargo is relatively a domestic retail bank with a growing, but small investment banking franchise. Their real business and energy comes from growing their retail business and getting more share of a person’s wallet. J.P. Morgan is a global bank with retail, investment banking and corporate banking.

Global Markets. The US is his major focus. In the global market, it is 50% of the index, and really drives the economy for the whole world. The US economic situation is fairly benign, i.e. it is slow growth that we will continue to see for the foreseeable future. The big question mark going forward is what the Fed will do. At first it was to be 4 to 6 hikes, now it’s down to 2 to 4, and he expects it will be 2. Doesn’t think it won’t be too aggressive because of the impact it would have on emerging markets, China in particular. Knowing what is going on in China is critical to his analysis. The Chinese government is now going through a stimulus program that has raised some eyebrows, but in a positive sense. He is fairly optimistic on Europe with fairly robust auto sales. Their banks need to be healthier in order for the economy to be healthier.