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

Writing Naked Puts? A Naked Put gives people the right to sell you a stock at a certain price. If the price of the stock goes down, you are still on the hook. Basically you are selling a Put and you have cash to cover it. It is the flipside of a Covered Call. The strategy works until it doesn’t, and he has seen this happen many times. Because the people who are doing Put writing are never actually taking delivery of the stock, it is all treated like income unlike Covered Calls which are treated as capital gains.

Markets. Doesn’t believe we are going into a recession. The market was just overextended and just needed a correction, something in the 10%+ range. Central Banks are still in a mode of easing, outside of what the Fed is doing. Growth has slowed down, profits have turn down a little bit, but valuations have come in, and are more attractive for a lot of companies, than what we have seen in a while. There is a bit of a shift from growth to value, which can benefit Canada a little more. Also, we might be seeing a peak in the US$. Bank stocks have been absolutely hammered. His hedge fund, which was 80% net Short at year-end, is now basically 80% net Long.

Markets. Looking at Price to Book Values on the TSX, it looks like a market bottom. There are lots of value signs, but stocks can stay cheap for a long time. Valuation is not a great catalyst for things to change. A 3^rd of our market now trades below Price to Book. That has only happened 3 other times, 1982, 2000 and 2008. All 3 near cyclical lows for value stocks, 2000 being the exception where the market continued lower, but it was the high growth Internet stocks that rolled over, and more traditional cyclical value stocks did very well for the next couple of years. We are also 21 months into the bear market in Canada, which is well beyond the average of 11 months. From a US investor perspective, which does matter, Canada is down 45% from its highs. That should ultimately attract them. A US buyer not only gets the currency play, but also access to stocks that are well below Book Value in many cases. $7 trillion of government bonds globally are now trading at a negative yield, so the world is now pricing in this deflation scenario, this risk of global negative interest rates. It took a Fed rate hike to get treasuries to rally and yields to fall off. There is irony that the Fed is trying to raise rates, and the only thing that has happened is that rates have gone down. This is because Japan, Europe and other countries are using negative interest rates as a policy tool, which is what is crushing their banks. Overall the market is discounting this scenario of a US recession, which probably isn’t in the cards. He sees weakness currently in manufacturing in the US. Not particularly surprising given that energy is a large part of CapX. Energy is dragging down that part of the market, but we are seeing strong employment growth and wage pressure increase, which ultimately translates lower profit margins for companies, but more discretionary spending by consumers, and we are seeing a really strong service sector. The overall economy, when you combine it, is still strong. Doesn’t think we are on the precipice of a new recession, and thinks stocks are starting to discount that.

Energy. In general, stocks are cheap and a lot of them are trading below BV. For a 10 year hold, from a sector perspective you want to be rotating into them. However, on a case-by-case basis, some may not make it. A lot have far too much debt and will have to do some restructuring, whether it is issuing equity which will dilute you, reducing or eliminating the dividend, or the worst-case scenario, the bondholders becoming the new equity holders. You are probably better off getting into something like iUnits S&P/TSX Capped Energy ETF (XEG-T), and at least you’re balancing your exposure between the good and the bad. Or look for the strongest balance sheets that can at least generate cash flow somewhere in the 30s or 40s. Be very selective.

Gold. This rally looks very sustainable. Gold and precious metals in general do very well right through until the prospectors’ convention Mar. 6^th to 9^th this year. That is a typical period of seasonal strength and it looks like we will have continuing follow-through. Just be aware that you will have only 5-6 weeks to go.

Markets. They’ve been brutal since the beginning of January. Earnings on the S&P 500 companies have been down 4% on a year-to-year basis. That’s the bad news. The good news is that we have just completed a volatility spike. Historically, when you get a spike in VIX-N, once it is over it sets the stage for markets to move significantly higher. The TSX Composite since Jan 21 is already up 7%, so we are already starting to move to the upside. Seasonality is positive right through until the beginning of May for both Canada and the US. In the last 2 weeks, markets have been choppy, but have been forming a nice little base. Today we had a very, very strong bounce from some very critical levels technically. So the stage is set for US and Canadian equity markets to significantly go higher until May.

Canadian $. This has a period of seasonal strength from the beginning of March through until the end of April. This coincides with the strength in oil and an improving industrial production. The bad news is that technically we are in a long downward trend. There are some early signs of bottoming which is fairly encouraging. You want to see more confirmation that it has actually reached its low.

Energy. The energy sector is set up for a major move during the next few months. The period of seasonal strength is from the 3^rd week in January right through until May of each year. We are already seeing technical signs that the Canadian energy sector is in gear already. Forming a nice little base pattern and about to take another move on the upside.

Markets. Gold. It is not a great sign when you see people moving into a safe haven. It is the first time we have seen it since 2008. Investors have exhausted all places to put money: Bonds are volatile, equities are volatile and you don’t earn much in cash. Be selective in oil. He has been negative in oil for 4 years. Even now, he sees we are close to the bottom in oil prices, but you don’t want to falsely translate oil price stability into share price stability in oil stocks. He is not a buyer in the oil space. 2016 is another year of pain, with even more. A hand full of oil companies have hedges coming off. They have been burning cash hoping oil prices will come back.

Weighting – banks and financials. If you assign a 10% weighting, then the subsectors should be included in that. If you add to subsectors then you add to the space. You might differ between Canadian and US, but otherwise both banks and insurance companies are financials.

Negative interest rates in Canada. We are quite a ways from banks charging to take your money. Negative interest rates are more of a term. He believes Canada is going into a recession. He expects interest rates to go to zero. You will not be earning a net positive rate after inflation. This will continue as Canada’s economy struggles.

Do I go back into the market from cash? There is always a risk going to cash, but when you get it right it feels good. Try to build a portfolio you can live with in tough times. Remind yourself that going to cash is a strategy that is not sustainable according to history. Buy now if you are all in cash. He is at 25% right now. Make sure they are dividend paying names. Don’t make any big bets on sectors or individual names.

Markets. It is very difficult to figure out exactly when all this stuff stops. There are a lot of things happening that are driving the stock market including a disbelief that the US is probably going to put off rate increases for quite a while. China is slowing down with a lot of talk about further devaluation of their currency. Inflationary expectations have been going down in the last little while, not only in the US, but in Europe as well. There is a real worry in the world that monetary policy cannot do the things it was supposed to do. Thinks the argument is valid that monetary policy has to be mixed with fiscal policy. We are looking for this to be happening in Canada in the next little while, and we need to see it in other parts of the world as well, such as US, Europe, UK, etc.

Energy. We have seen hundreds of billions of dollars in cuts in CapX spending in the industry. Feels the time for buying energy is probably coming quite soon. It is time for people to get interested in energy, because all the CapX cuts are going to impact production growth in the future, which is where the real opportunity lies. OPEC produces 2 million a day more than they were when all this started. Part of the problem has been OPEC itself, but also we have not had the kind of production we expected from the US, but that is coming. It has a lag time. When we saw the production cap happening in the US, a lot of it came with efficiency gains because of production cuts, and she doesn’t see that for this year, and this year the cuts are really going to impact. There could be a surprise to the upside because of how crude trades on this kind of behaviour. One caveat is that demand is going to be pretty decent this year, but there have been reports out that demand might slow down growth. However, thinks the oil sands is going to be challenged.

Markets. Things people are worrying about are not new problems for the most part. Markets for the last 5-6 years are advancing in spite of major issues percolating underneath the surface. The problems really never went away and as valuations continue to appreciate, and as some of the problems became more acute, it has given people pause to think about their positions. A common lore is that demand for oil is falling, and falling oil prices have been a symptom of weak global demand. However, demand for oil last year was the strongest it has been in 5 years. The problem is we have too much oil. This is an example of people focusing on what is an easy answer. Another one is the focus on China. China is decelerating its economic activity and is going through a transition, and people are worried about the devaluation of the Renminbi and what it is going to do to global markets and that we are going to have a currency war. We are already having a currency war and we are all pushing China to make their economy more open. The Chinese currency has appreciated, as has the US currency, for many, many years now. Now the currency is going down a little and people are criticizing them. Nobody pays attention to the fact that every country is in a competitive devaluation situation, which is very deflationary and is causing major problems to the US economy. Investors are only now starting to pay attention that the strong US$ has become a major headwind to US multinational corporate profits. He carries a very heavy cash position, just under 30%. The big new problem: are European banks spiraling out of control? He has been watching credit spreads widening globally for quite some time. Partially that is a function of the structure of the credit markets where a lot of high-yield bonds are held in ETF’s. The illusion exists that you can get instant liquidity. But the ETF has to sell the underlying security. With the new regulatory environment in the States and Europe, banks are less inclined to become liquidity providers in bond markets, so they have to find fewer and fewer buyers, and the major buyers of ETF’s are now in liquidation mode taking things down to valuations that compel people to purchase them. He is finally starting to see pretty good value in securities, particularly in the US. With credit spreads widening in Europe, etc., that stuff starts to begin morphing and becomes problematic.