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

Import inflation is when imported goods, such as food, become more expensive due to the dollar. We are seeing this.

Educational Segment. Are global markets oversold? Everything he looks at tells him we are ripe for a new trading rally. We won’t make higher highs, however. Canada will outperform. He looks at the percent of stocks above the 200 day moving average. Only 16.5% (it is very low compared to other periods earlier in the year) of global stocks are above it now. It was over 50% back in August. Sell into rallies.

Markets. A year from now we will not be looking at such low crude prices. It is a classic supply/demand imbalance and since we are not going into a global recession, it will come into balance. The lowering of interest rate has had a 3 standard deviation effect in how fast the currency has gone done. This could hold the bank of Canada back from cutting rates this week. No one wants their currency sliding this quickly.

Selloff in transports being a predictor of recession. It is an old DOW transport rule. He does not think this is the case today. He does not see the US going into recession, but growing at 2-2.5%. He does not think we are going into recession.

Oil and the Canadian Dollar. No one thought we were going to $28 oil a year ago. He thinks when we bounce it will go too far to the upside. Over a year or two we will settle on a price of mid-$40s to $50s.

Markets. The North American market is extremely volatile, and is very difficult for clients and investors to look at this with any kind of sanguinity. They are understandably nervous. What people need to understand is that if your portfolio is being managed properly, you should be prepared for volatility. He looks at volatility as his friend, because he is prepared for it with 30%, 40%, 50% in cash and bonds, with no long-term positions. This means that if there is volatility, he can take advantage of it.

A US ETF that excludes oil and hedged in Cdn$? You might want to take a look at some of the sector ETF’s that are hedged. BMO has some such as healthcare, banks, covered calls in the US, etc. You could look at ZUB-T and ZUH-T.

Are options trading allowed in a TFSA? Yes, in the same sense that it is in an RRSP. There are certain things you can do including covered calls and buying and selling options. What you can’t do is any naked strategies.

Using Options to take advantage on stock selections that look good? You need to really take a look at some of the material from the CBOE education section to learn something about this. You do have to know what you are doing, because time is your enemy and an option can expire worthless.

Markets. There is illogical selling going on. Investors are selling because the market is down. Have your companies really changed dramatically because of what is happening in China or the price of oil. In spite of this stocks are down and it has nothing to do with anything that is going on in the world. If you are not in commodities, it is not a panic “end of the world” scenario. The Canadian economy is not great, but valuations are starting to reflect that. Also, the US economy is quite strong with everything more or less under control. Canada may go into a recession, but it is not the first and won’t be the last time. Volumes have started to pick up in the US, so you are getting that capitulation trade. He would recommend you own a piece of the business rather than anything else.

Canadian Banks? If he told you that he had a stock that had been around for 100 years, always paid their dividends, raised the dividend on a consistent basis, survived the financial crisis, in an oligopolistic position, pays a 5% dividend and the valuation is 8X earnings, you would be all over it. The current situation will end and people will realize that banks are not going to change their dividend again the cycle. Will raise their dividends as they did in the last quarter with valuations quite, quite low for the sector.

Markets. He focuses on companies that create free cash flow consistently over time. When you get into markets like this, you don’t want to have companies that are heavily indebted, because their costs of borrowing are going through the roof. He started to accumulate cash, probably in 2014, and was happy to have 10%-15% cash last year, because if the market continued higher then clients would make money, but if it started to pull off then there is cash on the sidelines to take advantage of opportunities. What we saw today is nothing compared to what we saw in 2008. There hasn’t been capitulation, you are not getting everybody screaming to Sell watching the bids disappear. Normally, when PEs get up around 23 or 24 times, that is usually signalling a peak. We’ve had ultra low interest rates for a very long time, and if you back out the extraordinary items from earnings, you are going to start to see the S&P, 600 Europe, etc. all trading at 22-23 times earnings. There is nothing wrong with having cash on the sidelines. He has always advocated no more than 20%, because that is deemed to be a synthetic Short cash.

Markets. The oil market may not be balanced until 2017. He would have thought it would have expressed itself by now, so he expects the fundamentals reach a balance by the end of 2016. There is a big drop off in the investment in future production. OPEC is 2/3rds of the world’s production. Non-OPEC supply will adjust. We have to be careful about the growth rate in oil demand. It will be 3-4% over the next 10 years. He looks at gold as a pretty safe place to be. However, in Canadian dollar terms you have seen no change in the last year. We have accepted that the floor is between $1000 to $1100. The key for him is to focus on companies that can excel in that price range.

Markets. This has been an emotional selloff. There is a storm of investor anxiety, some new, and some old carried over from 2015. This has caused the equity markets to have one of the worst starts in history. We are looking at things like the economic deceleration in China, falling commodity prices, a decline in corporate earnings expectations, strong US$ headwinds are still out there, and we have some new geopolitical tensions that serve as a backdrop to start the year. Investors have pressed the Sell button first without really looking at underlying fundamentals, which aren’t that bad. S&P is trading at about 15-16 times forward earnings. If you take a 10-15 year history, we are pretty much average at this point. Selling in the equity markets has certainly been overdone. From a technical perspective, we are oversold. For patient investors who are picking away at equities, we’ll see some sort of relief rally. Continues to like US equities over Canadian equities. The US economy is still going to grow at the 2%-3% growth rate this year, and earnings per share on the S&P 500 should grow at around 7% this year. He was about 12%-15% in cash at the beginning of the year, but is now down to about 8% cash.

Economy. Global economy is growing slowly which makes it more vulnerable to shock. As global growth comes down, the economy is more susceptible to shocks, positive or negative. With a higher number it would be more sustainable, but we are not seeing that right now. He is forecasting only 1.5% growth in Canada. Generally, growth consensus starts out the year higher, and always seems to come down through the year. His forecast is low to start, and he would rather ramp that up. The TSX is in bear market territory, and about 40% of stocks in the US are down more than 20%. China is a huge economy and they are trying to grow it as best they can. Some transition comes from manufacturing to service, and that is going to be lumpy.