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

Oil. He thought it would bottom in the $40s, not the $20s. He got in early. He is not inclined to do more at present. There could be bankruptcies in the oil space in North America. If you have not stepped in, then wait.

Markets. The S&P should post its biggest earnings decline in 7 years. The forecast for 2016 is for an over 3% decline. This should lead to a decline in US employment. There is a potential for a decline in the US economy. The NASDAQ is at a 15 month low. Many stocks are trading at high PEs. He expects a broad decline in the US markets.

Educational Segment. How to make Smart Monthly Withdrawals. 0.8% is the monthly average return of the S&P over history. Look at the percentage difference between the current S&P price and the 21-day moving average. If the current monthly return is twice as much as the average monthly return, it is time to take money out of the market.

Markets. People tend to think of a Hedge Fund as a higher risk, but if it is done right it can help reduce volatility in a portfolio. On a day like today, you want to protect capital. The usual way people do this is by moving from securities into cash. Then when the market starts to rally they feel they are being left behind and they move back into securities. This means they have 2 market timing decisions. Market timing is something investors can’t do well on a consistent basis. Pair Trading helps to minimize some of that risk. There are 3 different types of major risks in investing. Market risk where the market goes up or down, industry specific risks that affects all companies within the sector equally, and finally company specific risk. On a Pairs trade he goes Long a position within the same sector, and Short a stock within the same sector. Think of this as a fraction with the long position as the enumerator and the short position as the denominator. The market risk, industry specific risk and company specific risk are in both the enumerator and the denominator. Like a fraction, you can cancel out the market specific risk on both sides and you can cancel out the industry specific risk on both sides, and you are left with company specific risk over company specific risk. He likes to isolate those factors as it is a much more precise way to invest. Decided about 3 years ago not to make any direct investment in resource, long or short. In a non-resource name there is a much better ability to understand a company. Both his funds were up last year.

Bitcoins? He is very cynical about the bitcoin space, and thinks it is very ripe for Short opportunities. Some of the names out there are not big enough to Short. If you are thinking about going Long, there are a lot better places to put your money.

Markets. We are in a lower growth environment and people are going to have to ratchet their expectations down. The Canadian market has been dramatically affected by the oil price, not only affecting the auto sector, but bank stocks as well. Thinks we are in to a new era where we have a lower growth. We are in an aging demographic where people are saving more. He loves dividend paying stocks. Rather than the volatility, he prefers more of the good old steady Eddie, and dividends are a big focus for him. Likes technology for finding safe value companies, especially in the US.

High-yield ETF Bond Funds such as XHY-T or ZHY-T? These have come under a lot of pressure recently because 20% of these funds are in oil/gas related industries, and there is a lot of concern that these companies are going to fail and not be able to make their payments on their debts. He has not seen any evidence of that. Default rates are not anywhere near high levels. This is an area that could do significantly better if oil prices stabilize.

Markets. The US dollar trade is probably the most crowded trade around. The US economy is the only game in town. If the US$ continues to go up, then all assets will go up. He questions what China will do with the RMB (their currency), with it being pegged to the US$. It is very expensive for them. The current rally is because China announced they would not devalue the RMB. He does not think the Chinese will have to let their currency devalue. He thinks the US dollar with go 50% higher.

Market. January was a shock for everyone; how suddenly it fell, followed by a great deal of volatility, and Japan going into negative interest rates. Feels it is almost a global restructuring of markets, industries, etc. We came out of a fairly long period of a good bull market, but there had been some excesses built into that, a lot of it fed by low interest rates. Now a lot of companies are in stress, especially with low commodity prices. We are beginning to see a realignment of industries. Although it is painful, especially with the volatility, it presents quite a few opportunities for investors. This is the time you really should be looking to upgrade holdings in your portfolio as to where you can get positions of the better quality companies. He has been picking away at some positions buying a little bit, and if it goes down, maybe averaging down. If he puts in a bid and it doesn’t get a hit, he doesn’t chase it.

Gold? A lot of people have had a connection between gold and inflation, and yet the correlation between the 2 has not been that strong. The thought that we could be heading towards a deflationary situation, has made something like a hard asset like gold look more attractive. As a value investor, gold companies are very tough investments to buy, as they always trade at extraordinary multiples. However, if you look at them over a business cycle and what you are paying for them at any particular time, you can do pretty well. He always limits gold exposure in his portfolios to 5% or less. He would look at the strong primary players. His favourite would be Goldcorp (G-T) right now, and Agnico-Eagle (AEM-T) has some interesting projects coming online.

Real Estate. There was so much growth in commercial properties, so every year it was worth more and more. A lot of that was thanks to low borrowing costs. Feels the market is saying to the Direct Property Market that it is topped, and if it is not going to expect higher values, then it is going to have to have a higher yield. The only way for yield to go up is for prices to correct. That has happened and we are now at a point where you are able to enter in and lock in a very attractive yield.

Markets. It has been a very rough start. He is not upset as he is carrying substantial cash. Had felt valuations had got extended, especially in the US. Looking for a correction so that he can start to spend some of his cash, not only in the US, but in Europe and in Canada. Only buys companies that have strong balance sheets, and ones that pay safe dividends. One area that is pretty safe is in integrated stocks, and is looking for bargains overseas in integrated companies. A lot of sovereign wealth funds have been liquidating stocks because the countries’ budgets are out of balance and they can either raise taxes, cut back on what they are giving their citizens, or sell some assets out of their sovereign wealth funds.

S&P 500. Sometimes there is a good time to own an index, and sometimes not. When markets are roaring, indexes are great to own because they are fully invested all the time and the professional investor can keep up with the index because they are always fully invested. When this is not happening, they are not always the best things to own. Even though the index holds 500 stocks, it is really only 4 stocks that have been propelling it. The valuation on those stocks are ridiculous and the S&P looks vulnerable.

Markets. On the longer-term view of the S&P 500 there was a bottom in 2009 which was followed by a long uptrend. That multiyear trend line has now been broken. In the bigger picture, taking out the summer low and taking out the trend line, he is a little concerned for the intermediate term. Believes we have entered into an intermediate term bear market. That is likely to be the scenario for the next number of months. Last week, there was an inter-week and inter-day reversal. Last Wednesday the market went way down, and then ended up on the day, but still below its Open creating a Hammer formation, usually a sign of washout. When investors are extremely nervous they capitulate and this formation happens, and at the end of the day the market picks up. The theory is that “Smart Money” picks up off of weak hands in the afternoon. That can be a good sign. Started seeing those signs in the past couple of weeks which could suggest a short-term rally. In other words, on any rally over the next 1-2 weeks, stocks should be Sold.

Charts. He always uses logarithmic charts. Sometimes linear charts distort things. A logarithmic chart will be on a trend line, but on a linear chart it is not. It is important because a $10 stock that moves to $11, a 10% move, is different looking on a percentage basis than a $20 stock that moves up $1.