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

“Sell in May and go away” for this year? This is a controversial question. On a long-term basis, the average date to Sell in both the US and Canada is May 5th. This is assuming that markets are going to go lower until the end of October. Statistics show that it doesn’t necessarily play that way. On average there are more years when the market actually goes higher during that time. “Sell in May and wait until there is a period of volatility.” is more appropriate. Between May and October, virtually every year, there is something that happens completely out of the blue. Last year was China, the previous year was Greece, and previous to that it was Europe. The key is to watch volatility very closely. If you see volatility “CBOE Volatility (VIX-I)” start to spike, then you get out.

Markets. This is the beginning of US earnings season. The big news tomorrow is going to be the US banks. Whatever the results, it will set the tone for the market. Everybody is going to be looking at the investment banking earnings. It was a slow quarter for Initial Public Offerings. People are going to be looking at the proprietary trading. Also, everybody’s concerned about write-offs and reserves in the oil/gas industry. There has been a lot of chatter about banks being overexposed, particularly to the tertiary, low quality producers, and whether that will impede their performance. In his view, the big US banks have been sold off so radically that the market is really anticipating lousy results, so anything good should lead to increases in prices.

Steel stocks? There is a lot of capacity in the industry. China is talking about shuttering steel plants because they have too much capacity. One of the reasons coal has plummeted is that there is too much steel in the world. Because of this, you have to be pretty brave to buy into this rally, and believe that the steel companies have a future ahead of them.

Markets. Loan quality is back in focus with Italian banks. They are talking about a tarp-like clean up of the banks there. This does not fix the underlying problem with QE and negative interest rates. It is a demographic problem. You can’t expect a 60 year old to go out and borrow money to spend because of low interest rates. Whatever they are doing is not working. The EU does not work and eventually it will break apart. It could be years, though. There will be periods of failed rallies. China is coming in under the radar to inject liquidity into the market via lending. They really have to re-think how they stimulate growth. China would be growing at 3% a year if it was not for all these programs.

Taking Profits. He has been recommending taking some money off the table recently. He would take profits on an ETF that reflects the broader markets. He would not sell individual stocks to raise cash.

When to get into a bank. Employment numbers Friday were not credible. When did Alberta add that many jobs? The Canadian economy is going to do okay (2%ish). There are headwinds for the Canadian banks. In the next month or two, real estate values may pull back. He thinks banks will fall to their recent lows and that is the time to put new money in.

Educational Segment. A Safe Withdrawal Rate from Retirement Savings (e.g. RRSP/RRIF). With a 5% interest rate return, it would have taken $178k for an income of $48k through retirement. Now you have to put $563k to get the same payout. This environment crushes the savers. Less than 10% of Canadians have a financial plan. You HAVE to have one. There is a pending crisis regarding retirement because of low interest rates. If you withdraw at too high a rate, you run out of money.

Markets. Oil is above $40. He thinks there will be continued volatility. The supply is coming out of the market gradually. It should be higher a year out. He has made a few purchases and thinks opportunities will continue to surface over the next year or so. There is a vote this year for Britain leaving the EU. It is a good time to hedge your portfolios. Trump is, if nothing else, unpredictable and the markets don’t like unpredictability. Canada is interesting for investment because it has been so beaten up over the last couple of years.

Canada’s Gold Reserves. Gold is not held to back currencies now. Governments feel that currencies can hold up on their own. He thinks this trend will continue around the world.

Comment. Expectations are low this quarter. Earnings are the missing piece in the puzzle. Economic data has been improving, but US earnings numbers are expected to be down 9.5%. We always start quite low, and then beat expectations and sort of trail up. Expects that maybe we may come in at -5% or -6%. If there is a catalyst that takes this market higher, it will be a very strong earnings season with strong guidance. Energy has been dragging down S&P earnings, materials stocks have been dragging it down, and all the businesses that run off that, the industrials. Oil price has been improving, the material’s complex has been improving a little and some industrial numbers have been looking a bit better. He is a little more optimistic, but thinks the earnings number is the missing piece, so is not willing to bet the farm just yet. He looks at 3 key things. 1) credit spreads, 2) volatility and 3) moving averages for the major markets. All 3 have been improving over the last 6 weeks. Has about 90% exposure to the market now.

Markets. The drop off in US production has been slow. Eventually we have come to 77%. He thinks we will fall almost as much again this year. This should balance the supposed oversupply. Iran is adding almost as much production this year. But the Chinese are going to be down more than that, and so on. Iran is about the only country increasing production. Globally we are drawing on inventories of oil. The market today is undersupplied. It does not make sense for anyone to drill for more oil. This is why he sees $60 oil next year. We are going to see a higher price than consensus believes and it will take industry longer than we think to respond to a higher oil price.

Oil Services Sector Stocks. The headwinds are so overwhelming in this space today as there is so much oversupply. There will be a time to buy. He is shorting PD-T right now. You are probably two quarters early to go long in oil services sector stocks.

Markets. There has been a lot of strength attributed to the decline in the US$ since the start of the year. The decline has been in a perfect trend channel and is now testing the lower limit of that channel, which would imply that the downside risk is limited and we could get a bounce back. Investors want to pull chips off the table now that we have the earnings season starting next week, and they want to see those valuations prove themselves. We are at an extreme valuation here. Technicals are overbought and have been rolling over for the past couple of weeks. Also. we are getting into the period of “sell in May and go away”. You have to be tactical during the summer. Avoid areas where volatility persists, such as industrials, materials and consumer discretionary. Go for defensive names such as yields that can lower the beta in your portfolio, so you can cushion yourself from the volatility.

Markets. Canadian stocks are coming out of a trough valuation. A 3^rd of our index was trading below BV. The market had come off in US$ terms, about the same as it has in each of the last major pullbacks. There were really oversold conditions on what he considers value stocks, which is very typical of a market bottom. Since then there has been a move higher in value stocks. The money has essentially been coming from growth stocks. Former growth darlings have sold off, deeper value cyclical stocks have turned the corner. Relative with the price of crude and the Cdn$, they all tend to move together, which has moved the TSX up about 12% from its lows.

Energy. Had been Short energy stocks for about 18 months. As of the beginning of March, he is no longer Short energy stocks in Canada, a fairly significant shift for him. This comes out of his process of sifting for value. Two months ago, valuations were there, but price momentums were very poor. Now that the turn is starting to happen, he can gear up risks moderately in his funds.