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

Overweight TSX stocks because they have pulled back so much? Oil is cheap and Canadian market performance has always been about oil. He might look to starting to overweight Canada with the expectation that in 1 to 2 years oil might start to come back.

Gold – Buy now? He just nibbled last week. He only goes to gold when the risk reward is attractive. A 5% position would be his maximum.

Educational Segment. Japanese Debt. There was a $57 billion increase in global debt since Leman. The biggest accumulation of debt is on the government and corporate sides, not households. Look at credit default swap spreads. Emerging markets have higher spreads. The bond market is starting to get on alert. The trend has turned and this is where we watch for global systemic risk.

Markets. Valiant is blowing up the whole health care space. Oil seems to be entering a second down leg and money is flowing out of Canada. There is always something going up, however, and you just need to be working harder. He would be looking for turnaround stories and those few pockets of growth. He likes alternative finance (specialty lenders), as well as US real estate, especially housing. Sometimes it is hard to sell when you are down 30%. You just have to take your lumps.

Markets. Market had a rally today, but didn’t have a sense that it was a really strong rally despite what the numbers showed, because there was a lot of money moving into energy. Also, defensive as utilities and staples did well. It was definitely a surprise as he had expected a tougher day. This is a very difficult time as nothing is clear. Most investors have to almost take a little bit of a “wait and see” approach. He would hold a little powder back and not be fully invested, until you see a path unfold. As investors, one of the problems we have is that we are in a transitional period. We don’t know if the Fed is going to raise rates, and until that happens we are not sure what it is going to mean. Valuations are not cheap right now and yet compared to any other alternative, equities still look the most attractive, but there hasn’t been real capitulation, valuations are not attractive, earnings have been fairly disappointing. Many people are just wondering what the direction is. Caution is really the order of the day.

Canadian Banks? You truthfully can’t go wrong with Canadian banks. In general they haven’t had a very good year. That cake of pessimism is fully baked for the banks. If you want to make a switch, consider moving to one of the US big banks. A number of them are a lot cheaper valuation, and a much more improving story.

Cdn$? Most strategists think it is going to go down. The fundamentals between the US and Canadian economy definitely favours the US. Thinks there could be $.02 or $.03 come off in the next 6 months. Doesn’t think gold or silver is a solution. If the US does go ahead and raise rates, which most people expect, then all of a sudden you have a risk-free asset that could be treasury certificates you are purchasing, that offer yield. Gold and silver offer no yield.

Markets. An investor has to hitch their wagon to the American Star. Even if you are investing in Canada, forget what we are famous for. Forget Greece, forget rocks, forget paper unless it is focused on harnessing the growth that is the US economy, which has already been through its long, dark tea time of the soul, and is on its way up. More than half the revenues of his funds come from the US, with another 20% coming from Europe and overseas. We are in for a rough time for a while, until we begin the upswing. In this environment, investors need active managers more than ever, particularly if you are talking about the Canadian market.

What percentage of a portfolio ought to be in Canadian Banks? How many banks would you own and how would you weight them? Canadian banks are not a bad place to be. Have performed very well over a protracted period of time. National Bank (NA-T) has the biggest exposure to energy, making it the most vulnerable. TD (TD-T) has been the most successful in the US, and he thinks there is going to be growth out of the US. Scotia Bank (BNS-T) is the most international and there can be some growth there. He likes Mexico very much. He is not equally weighted in the banks.

How would you evaluate a company’s ability to pay a dividend? You will have done well focusing on dividends for the last several years. As interest rates have been lower, lower and lower, there has been a demand to get better and better dividend paying stocks. Going forward, it is going to be critical to focus not on the magnitude of the dividend, but its trajectory. Growth and growth of top line is important, but a better number to look at is free cash flow. That’s the cash that a company has after it has met its obligations after it has reinvested in its business and paid its existing dividend.

Markets. There has been a lot of volatility on concerns on what is happening with global growth. The Chinese economy has slowed down, and the question is whether it has reached a plateau or not. The bright star globally has been the US economy, which has seen 6 years of expansion, but at a tepid rate. Every time they start talking about whether interest rates are going to rise or not, the market seems to get a little skittish. We keep seeing mixed signals. There have been strong employment numbers lately, but industrial production numbers may be a little soft lately. In Canada we are still dealing with the fall off from falling energy prices last year, and that is still rippling through the economy. We now have new governments provincially in Alberta and federally, and their policies with respect to business are not entirely clear. There are some legitimate concerns out there, but some of the valuations we were seeing until a year ago were getting a little bit stretched. A lot of things have pulled back, particularly in the financial services. There have been pullbacks and valuations to a level where a lot of the bad news has been built into those numbers, and where there is room for investors to look and position their portfolios for the next cycle.

Canadian Banks. Have corrected over the last year which is being caused by a number of factors. One is that they are in Canada with exposure to energy markets. There are a lot of international fears about the Canadian housing market, which are unjustified. Since the financial crisis, there have been movement by regulators globally, to force banks to increase the level of capital that they hold, against any future calamity. As they had to hold more capital, it reduces ROE. However, banks in Canada are selling at reasonable levels and are carrying compelling yields. He owns the Royal (RY-T), CIBC (CM-T) and Bank of Nova Scotia (BNS-T).

Markets. It is an interesting point in the market. It all comes down to the interest rate question, which is creating opportunities in the market. Any REIT with US exposure has been outperforming and Calgary focused REITs are the worst performing. If you see the rising rates coming in December, the Loonie will weaken further. Once rates move, the market will realize that this move is very slow and they can focus back on fundamentals again. With Calgary we need to know what the security of the rent is. It is not that bad, but the market has such a hate for them and soon they will be the place to buy.

Market. Despite massive efforts by banks globally, there is a shortage of demand for almost everything. As an example, the third-quarter report from Caterpillar (CAT-N), a big capital good makers, tells you that nobody is investing in basic production. This is weak even in the US which has a strong economy. Production increases in the US has really been offset by decreases in places like Mexico or Venezuela, state owned oil companies that haven’t invested substantially in sustaining capital for a long time. The increasing US production is great for the US and for US consumers. What is really driving commodity prices is lack of demand. Coal, iron ore, uranium, base metals businesses are getting decimated. For investors with a decent time horizon, this is very good news. In resources this happens periodically about once a decade. Money has been made historically in resources by being a classic contrarian, buying when the situation is bleak, not with a quarter to quarter view, but buying it with a 2-3 year view. The cycle always turns. As long as people are being born, and those people want to eat or drive, demand for commodities is one of the basic economic drivers globally. Regarding precious metals, we are at the beginning of the end. Regarding industrial materials, we probably have 1.5-2 years to go. Fiscal measures, which are still being undertaken and which really began in 1997, had the effect of forward shifting demand. We have forward shifted demand for 13 years, and the chickens are coming home to roost. We have to work our way through this. In 2015, we are wearing the effects of 15 years of quantitative easing. It is a natural, if unpleasant cycle.

Ecuador? He would happily invest in Ecuador. This is a country that is in transition, and he thinks it is for the better. The problem will be a social accommodation between the centre Quito and the regions. Traditionally, resource rents have always gone to the centre, while regions have always paid the cost. Also, the government currently wants approximately 50% of the economic value of the resource. They are going to have to become more competitive.