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

An ETF that represents Dow Jones averages? A problem with the Dow Jones is that it is a price-weighted index, so the higher priced stock, the higher the weighting in the index. There are just 30 stocks. You have to decide what you believe is going to happen to the currency, and that will give you the answer. Diamonds DJIA (DIA-A) is the biggest ETF in the US, and in Canada you have the BMO DJ Industrial Avg hedged to Cdn$ (ZDJ-T).

Markets. The biggest ETF conference in the world is on this week in Florida. 2200 attendees this year breaks a record. The head of OPEC called for a team effort to reduce production. There is a Million to a Million and a half barrels of excess production. If every producer cut back a half percent we would be fine. Last week looked like a short term bottom and will build over the next month or two. This overall market volatility will continue, especially in the second half of the year. S&P earnings with 73 companies reporting are down 3.5%. Earnings are beating on average. There is an increasing lack of earnings growth potential in the world. Don’t look for US markets to make new highs through the first half of this year if not into 2017.

Resource stocks. He has been suggesting that Canada is 3-4% of the world for years and you should not overweight it. He is now looking for trading rallies in this sector and you should only lighten up now when these rallies are on. He expects oil to recover slowly.

VIX – is it safe to hold an ETF for the VIX for more than a few days? The smartest people in this marketplace have trouble trading volatility issues. It is extremely difficult to do. When underlying stocks cut their dividends it gets passed right through to the shareholders.

Hedging non-US$ currency. Some ETFs hedge other currencies. You have to look into what the ETF holds and how they hedge it. Look at the CAD$ /US Pound or Euro hedges and exchange rates. He is fully hedged in these currencies. He expects to take more currency risk on with these later this year when the US$ peaks.

Educational Segment. Standard Deviation. In December, securities regulators put out a paper for comment about more disclosure for mutual funds. People don’t understand the true cost of investing. However, the biggest cost to investors is really the emotional costs – the volatility. People sell when they should be buying. Standard deviation defines risk. Looking back over 10 years, higher than 20% on your return means +60 to -40%. The real cost of investing is being able to stay in the market to get that return. ETFs are good for keeping in the stocks for the long term.

Markets. A bear market is 20% and a correction is 10%, according to media. A 100 year study shows a 20% decline occurs about every 3 years, after which markets advance to new highs. You should not try to time it, even in a bear market. The problem is that we don’t know if a 20% decline is over 3 weeks or three years. He decided a market must make a new low within 6 months for it to have been a bear market. The first violation of a close below the lowest low of the last 30 weeks was back in August. Then last week we had violation 2. So he thinks this is where the S&P is going to stop. He says the S&P low is 1867. His analysis of Eliot 5^th wave advances says we will see an advance yet to come in this market during this year.

S&P. Repeat of the ‘07/’08 pattern. It will probably hold the low of Oct/14. This year is going to be marked by some sectors making highs and some not. The biggest risk is anything to do with consumer. 1820 is the new support, in his opinion.

Money center banks such as BAC-N and C-N. We have this rally coming into 2016 and the financials should participate. The lenders to highly qualified clients should do fine. Go with high quality names. He does not like the chart. But these ones will probably be pulled up by the markets.

Market. Central Banks have gone through this big experiment starting in 2008-2009, so there is a huge mispricing of assets globally. It is very hard to see where the seeds of recovery are coming from. Ostensibly the market has been going down because of China worries, and those worries are driving oil down, and oil is driving the market down, etc. Until we see stocks significantly lower or significant confidence that the growth in China is here to stay, or global growth is here to stay, he doesn’t think it is going to be smooth sailing. What we have seen since August of last year is likely going to continue, making it very challenging for investors. Valuations are high versus historical norms along with an absence of growth. Expectations are still too high. We need some sort of capitulation where the market moves down 10% or more.

Gold? Geopolitical risks figures into the price of gold, and if we had a geopolitical crisis, gold would be higher. This has performed reasonably well in the last week or 2, but he doesn’t really see any upside from here.

Markets. The TSX is down about 23% from its high, officially bear market territory, but this is where opportunities surface, so he has been buying aggressively and reducing his cash position. We have seen most of the decline in the Cdn$, but it could decline another 5%-7%, but at some point you will get a recovery. There will be a period when it will trade in a narrower range. Expects that in 4-6 weeks we will see the bottom in oil, but will have to see how much oil Iran actually produces. There are also the floating stores. Most people think it is oil, but it is really mostly condensate. Venezuela is not in the best of shape, so we will see if they can continue to pump 2.4 million barrels a day.

Markets. He is still conservative and would suggest investors should take some money off the table on the rally. Feels the rally has legs, but was extremely surprised at how quickly the market came down this year. There is a lot of weakness and thinks the market is overvalued, and will continue to correct. Because of this he would continue to stay cautious. However, there is a bright side, and that is the decline of the Cdn$ even though it is affected negatively, but it is having a really good outcome on the earnings expansion of Canadian gold producers. Gold crossed $1600 this week and closed today at $1550. These companies are producing at $1000 or less Canadian, so their earnings are expanding. In essence, gold is doing what it has always done, acting as a safe harbour in times of currency crisis. We have so much debt in the world that economic growth isn’t happening, it is being stifled. The same as what happened in the 30s.

Uranium? Likes the uranium industry, but doesn’t know if he would be getting in just yet. Thinks this is being driven down through this inflationary spike we are going through. He would be looking to add some, because a lot of nuclear plants in Japan are getting turned on again. It is a question of timing. For him, he would rather stay in cash right now.

Markets. The fed’s impact on the markets has led to low volatility that has not been normal in the past. We are getting back to normal now. Good companies will attract greater amounts of capital and propel their stock higher. Last year he said he would like to see a quiet, flat year in the market because the market was getting too distant from earnings.