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

Real return bonds? He would not recommend these as he doesn’t think there is going to be any kind of meaningful inflation on the horizon. Historically the Bank of Canada and the US Federal Reserve has been managing towards 2% as their target. Nothing has really changed in the past quarter-century and he doesn’t expect it to change.

Principal Protected Notes? These are products that pay little or no income. They are structured products that guarantee you will not lose money. You get a limited upside on the basket. It can be a TSX, S&P 500, dividend paying stocks. He likes these as it is a chance to get a better upside with a guarantee of no downside.

REITs. Interest rates and REITs have been the theme that has been going on since July. The impending interest rate rise has put a damper on REITs. Now that it has finally happened, he thinks we will just see more of the same, which is not much. Real estate trades more off the 10 year than it does the short rate, and very little will change on mortgage rates. Mortgages will cost a little more, but not a lot more. Sees 3 more US rate increases, but none in Canada. Expects the Cdn$ to continue to weaken against the US$. If Canada starts raising rates, that means we finally have economic traction, which will outweigh any of the downside.

Markets. There is going to be a lot of fear and a lot of worries. In the past year, on the S&P 500, there has been a pretty defined lid at around $2,100-$2,130. In November, when we had the little pullback, it came back to about where it is right now, which happens to be around the neck line of the double bottom that we saw from the summer pullback. That was around $1,990. So long as that neckline is not broken by any significant degree or for any significant period of time, anywhere above $1990 is an indication that we are safe. We are probably going to see some sort of a bounce. There is some positive seasonality coming in right now, and we will probably see a bounce back up to the trading range. Like it or not, this market has been in a defined trading range, and we have to assume the trading range is in place until it ends. He expects the S&P 500 to get back in the $2100 trading range, probably by the 1^st or 2^nd week in January. He will be selling into that rally. You can’t ignore a sideways rally, you have to trade it. Sell near the $2100 mark. If it blows through that, it is going to need a new leadership sector to blow it through, and he can’t find one right now.

Markets. Resources are a very risky sector. You can’t avoid them entirely, but it is very capital intensive and you don’t control the price of your resources. The banks have been treading water for a number of years and there are tougher capital requirements now. They are bringing up rates and starting the normalization process. They are going gradually and laying out the road map. There are bargains in smaller and mid-cap stocks. They got decimated this year. We have not seen such attractive valuations since the financial crisis.

Markets. It was pretty well consensus that they would raise rates and it was funny there was a rally right after it, but then it pulled back again today. They feel the US economy can withstand rate increases. The US dollar was a headwind this year for US companies’ earnings. As we go into 2016 she hopes the energy prices will moderate. Earnings should grow about 8% next year. The US market is trading around 16 times forward earnings and it should be 14 or 15 times. Canadian investors should still have US exposure. You still want emerging market exposure also and can get it through multinationals. There are not that many in Canada, however. She is hopeful that the Canadian economy starts to grow next year.

Markets. After the feds raise rates, the markets usually do fine. In the last 4 pivots, in all circumstances the US$ trade weighted was either even or lower after 6 months after the 1^st hike in interest rates. In 1994 the Fed did a surprise hike which had a short-term shock effect, but a year later the markets were up. That is what he expects in this instance. He is personally sanguine about the overall economy in the US. Last month the CPI was up 2% year-over-year. That is encouraging. We are not facing deflation. He wouldn’t want to see inflation at 4%, but also wouldn’t want to see it at 0%. Particularly with energy prices being so weak, a 2% year-over-year CPI increase tells him that the economy is reasonably healthy. Unemployment is coming down. All these things point to an opportunity and a position where the Fed could be a little bit more conservative.

Cdn$? This has been a very bad market for the Cdn$. We still need to see stability in the price of oil. Also, the Canadian economy is moving in a different direction than the US economy. While he doesn’t think there will be another big fall in the dollar, he is not sure we are ready for a rally yet. As a result, it is not compelling enough for him to hedge his positions yet.

Interest rate hike on Canadian telcos? The interest rate cycle in Canada is much further behind the US, so he wouldn’t be is that concerned about interest rates in Canada. Also, expects the US rate rises are going to be very, very slow, so long dated assets like utilities and telecoms will be less impacted.

Markets. This has been a very positive day. What the market hates is uncertainty. If the rate increase had been anything but what happened today, it would have been a disappointment. This sets it up for a bit more strength than what you might expect going forward. Clearly the market has some challenges. There are worries and that’s why it is dovish for the economy, but he thinks the market will do very well over the next 6 months. This is why you should focus on US stocks over Canadian stocks. “Growth” is definitely where you want to go and you want to favour the growth sectors. It tends to trade at a premium as it historically does over non-growth sectors. You want to look at health care which has a very strong story with an aging demographic globally. Technology continues to be a growth area. You also want to look at the consumer sector. This should underweight the energy/materials space and some of the infrastructure names that are linked to these slower growth stories. With the rate rise, you have to be more cautious on REITs, pipelines, utilities and telcos.

Cdn$? The impact of the rate increase will be negative on the Cdn$ and most forecasters are expecting it to weaken. The US$ broadly will appreciate slowly against other currencies. He could see a depreciation on the Cdn$ in the next 6 months of about $.02.5-$.03 to bring it to about $.70 and then expects it to flatten out at that point.

Sell US property? This is a good time, but you could wait because the exchange rate is not short term. He thinks we are going to have a weaker Cdn$ for some time. If you don’t need the money right now, hold and enjoy another winter or 2.

Markets. It would be a shock if rates did not rise by a quarter point tomorrow. UUP-N, the ETF for the US$, has been setting 52 week highs. He thinks the rate increase is already in the price and won’t have a huge affect on the dollar, unless there is a huge surprise in the language. Higher interest rates are good for insurance companies and banks. BAC-N predicts that every percent is $4.5 Billion in earnings. It could be a 15-20% bump in valuation. We have been suffering with tax loss selling. People are taking advantage to sell off losers and winners to negate the tax. He thinks there will be some rebound in the XEG-T ETF due to tax loss selling, but does not advocate investing in it for a quick bounce. Don’t be too cute in trying to get into a position in timing the bottom.

Markets. Santa Claus rally typically starts on Dec 15 and lasts until Jan 6. We are seeing a little bit of this so far, and let’s hope it keeps delivering. Santa Claus rally has been a persistent trend for some time and he is looking for the same thing this year. He doesn’t see the market responding on a big negative downside because of any Fed rate hike. We got the tax loss selling out of the way early this year. If the Santa Claus rally does not happen it’s not the end of the world. We are still within the 6 month favourable season for stocks, which lasts from the end of October to the beginning of May.

Junior golds? Whether it’s golds or whether it’s oil, the juniors follow the same pattern as the seniors. Sometimes they will lead the way, which is a very positive dynamic. The chart shows a long-term downtrend for gold. The best time to be focusing on gold has been from July into September. That is the key, core seasonal period for gold. He is not investing in gold in his funds, but is waiting for the seasonal period to come up.