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

Markets. In the last 8 weeks, portfolio managers have really had to earn their keep. It has been really confusing, a lot of noise, a lot of leadership changing in the market. It felt like things were going to go the wrong way. The complexity of all these different macro economic factors, things that most investors have to pay attention to that you never did in your life before. Everybody is a Fed expert. The whole community has been egregiously wrong on what is happening with rates. What he has found to work in his approach is to just focus on incredibly good companies.

US banks? Very bullish on the US banks. Their expenses in legal and litigation have plummeted. They are cost-cutting. If we do have rising rates, it would be a good backdrop for the US banks. He owns Citigroup (C-N), J.P. Morgan Chase (JPM-N) and Goldman Sachs (GS-N).

Markets. Some roll-up strategies have been very aggressive in taking on debt to pursue acquisitions. This is a formula that has caused people problems in the past. They Buy a company, incorporate their earnings into their earnings, earnings go south a little, and they write a product off, so that doesn’t show up in the earnings. They keep the earnings growing, but what was bought is not as solid or accretive as they thought. They write that off on the goodwill line and it really doesn’t impact things. There is also one difference for Canadians. Our short selling rules are a little bit different, so it makes it an easier candidate. In the US, a short seller must uptick a stock; they have to sell the stock Short at a higher price than what it last traded at. People just get so frustrated with the game that they tend to stay away from the market.

Markets. You can’t load up on a stock that is going up so it is very overweighted. As it goes up you have to keep selling a little. The more concentrated your portfolio is, the more volatility you are going to have. VRX-T has a large market cap and so impacts Canadian indexes very much. In a taxable account it makes sense to have lots of Canada, but otherwise having more than a small portion is not a good idea. You need to diversify globally. Trailing earnings per share in the US are declining on a yearly basis. The currency is a big concern. China is going to do whatever they have to do keep the growth rate up to 7%. They are really struggling at this point. He thinks they are heading to 4-5% growth over the next few years.

Timeframe Analysis. A short term trader may look at day or intra-day charts. You take one time frame bigger than you are trading in. If you trade in and out every day you look at 1 to 5 minutes bar charts. Your long term trend will be the last week to a month. If you trade quarterly then you look at yearly and multi yearly charts. He warns against big block trades impacting short term charts.

Energy Stock Dividends. We are starting to see some dividend cuts. If there continues to be supply/demand imbalances for the next couple of years, then stocks could have pressure in anticipation of dividend cuts.

Educational Segment. Real Estate (like it was a stock). The guest is cautious on the outlook for real estate. House maintenance is like an MER is to mutual funds or ETFs. Real-estate is VERY expensive to maintain. It is almost becoming a luxury product. You should not fall in love with the value of your house as they rise and fall. Don’t sell your own house because it is overvalued. The current rental house in Toronto has a ‘P/E’ ratio that has risen from 5.1 to 8.5 since 2000. Vancouver is at 11 times and New York is at 6. Retirees want to extract maximum value from their house. Maybe they should think about selling in this kind of market. Condos are expensive also.

Markets. He thinks the US dollar is on the way up again, but US companies’ valuations will be going up again also. Eventually money flowing into the US will find its way into the S&P. The stocks in the top quartile of that market will receive the most. The dollar index will go up another 60% over the next few years. People better get used to a stronger currency. It is a little late to position portfolios to take advantage of a lower loonie. In Ontario all the manufacturing infrastructure has to be rebuilt for us to take advantage of the lower loonie.

Markets. His outlook on the market is positive. Technically we’ve had a double bottom, so now the market can go forward based on the outlook for Q1 earnings in 2016. Doesn’t think the Fed is going to act in the short term, and that will give the markets a bit of an impetus. The world has been in a short-term inventory correction in the 3^rd quarter, which has really slowed down production as people adjust. Towards the end of Q4, we can look forward to an uptick as the inventories start to rebuild. The economic data out of the US has been spotty at best. Given the severity of the 08/09 recession, it was going to take a decade to recover, but we are only in year 6 or 7 of that recovery. As China moves to a consumer economy, it is going to have all kinds of ups and downs, but not enough to drag down US or Canadian markets. When energy turns, he thinks the TSX will also turn at that time. The US$, which has been up dramatically this year, has impacted earnings. If that stays flat or starts to decline, that will be helpful to the US corporate earnings.

Markets. Technology earnings has been really good news and the companies are coming out with much better earnings. One of the encouraging things is that you are actually seeing some top line growth, not just cost cutting. Although companies, like Google, keeping a lid on costs is probably a major factor. This probably represents the start of a decent rebound. Particularly with the Fed not raising rates, we are now moving into an acceleration phase. The Fed, not raising rates when they led everybody to believe that they would, effectively means it is off the table, at least until sometime next year. The Chinese will do what they need to do to maintain growth, which maintains social stability. You have to feel that the enormous selloff in the commodities was somewhat overdone. We are probably going to see a pick up in Chinese growth from its low. That will help commodity prices, help the rest of the emerging markets and help Canada with central banks remaining on hold or do more easing. With the 15%-20% correction on August 24, you could say that we are on another leg of this Bull market.

Markets. The rally would have been better if health stocks hadn’t dragged the portfolios down. They were helped today, but then the oils got hit. In any case, this was a good week. Thinks the downside sentiment was very much overdone. He is quite astounded by all the concern about China. We have been through about 3 or 4 of these cycles. China is a managed economy, and politically they have to have growth. They are going to get growth anyway they can. They have huge savings in the economy and have 1.2 billion people so they have lots of resources. They are going to pull and push the right levers and get things going. They are not a consumer economy yet. Once they become one, they are going to be a lot harder to predict. In the meantime they cut rates, allowed greater use of credit, etc. The next wave will probably be some move towards infrastructure, etc in order to get people working. The US economy is doing a better than a lot of others. One is the tech sector. As the economy improves and people upgrade, corporations upgrade their technical systems and thinks you are going to see both consumer and big corporations all upgrading. The commodity sector is probably 6-9 months away from some real improvements, but the market will probably anticipate that. He is willing to sit on the sidelines for another quarter or so.

Markets. Q3 was incredibly volatile and negative. Q4 is going to be quite positive to the upside and we will get back quite a bit of the Q3 drop. Quite a few of the Q3 uncertainties have been cleared up, one being the election, another being when rates will go up. US numbers are starting to look better and China is managing its slow down in a constructive way. He got out of VRX-T because he created a closed end health care fund. He was going to invest the funds in that fund over 60 days and he ended up taking his time. If he still held VRX-T he would have difficult client calls. He has only one energy holding and has moved over to the pipes otherwise. He has a heavy weight in forestry due to US housing. He is a quarter of the way to getting courageous with energy. He feels better about metals than lumber.

Energy. Thinks the market is starting to appreciate that the imbalance in the marketplace is tightening. Their current estimate now is that we are still oversupplied by about 1.5 million barrels per day. Counteracting that, we have had the strongest demand growth this year of any year going back to the great recession. Demand is up about 1.8 million barrels per day this year, and estimated to be up next year by roughly 1.3-1.4 million. The total oversupply next year is roughly equal to 1 year demand growth. Capital expenditure globally is down by around 24%, year-over-year, the biggest drop in the history of oil/gas. Looking out to next year it is likely to be down another 10%. Globally, supply is falling, and the key question is at what pace. Is it going to be quick enough to offset barrels coming out of Iran? Over the past year there have been 3 areas of supply growth. the US, Iraq and Saudi Arabia. The US has gone from a run rate of growth of 1.5 million barrels per day to roughly 500,000 barrels per day from a peak. That rate should continue to drop 100,000 barrels per day per month, until we get a high enough oil price to allow drilling to resume in the US. Believes Saudi Arabia is close to producing at their maximum operational capability of 10.5 million barrels per day, and Iraq is likely to be flat next year. So the 3 primary areas that meet supply this year are at best flat next year. We have record growth in demand this year, and strength should continue into next year. Finally we just have to deal with Iran. It is thought that it is going to be around 300,000-500,000 barrels per day by around Q1-Q2. This coincides with the drop in US production. His belief is that if we do not get a rally in the oil price, the market could actually be undersupplied next year by about 500,000 barrels a day, probably in Q3. We need oil to rally to around $55-$60 versus $45 today. The challenge for energy investors is that a lot of stocks are already discounting that scenario. He thinks investors have gotten more optimistic than the oil market. Money is coming out of the health area and is going into the large underperformer, which is energy. Secondly we saw the oil price for a few days tick up when we saw the US rig count drop. Once the money starts piling in, you get a combination of Short covering, US money coming in and, most importantly, you get generalist investors who manage the multibillion-dollar funds coming in.

Healthcare Stocks. His best read is that everything is being driven off of Valiant (VRX-T), even companies with absolutely different business models. Those stocks are falling 10%-15% a day, depending on what headline we get out of Valeant. It is not just Valeant. The Shorts are acting like a bunch of wolves on some of these names. In a jittery market it doesn’t take very much to scare initial investors out of a name. That starts a negative momentum which is why you get a name like Nobilis (NHC-T) falling 15% in a day. It is down 45% this month.

Small-Cap Stocks. He takes a somewhat niche approach. In North America alone, there are about 16,000 small-cap stocks, so there are always opportunities. Earlier this year he felt that the general valuations of companies were not terribly attractive. You had to pay forward for growth. As we have seen a pretty significant selloff, not just in energy, materials and healthcare, but pretty much everything has been in freefall. People who were up a lot in a year, 10%-20%, had big positions in certain names which they may not have known as well as they thought they did. There was mass liquidation as they tried to lock in gains. Now we are into tax loss selling, and that is creating opportunities in non-energy, non-material, non-healthcare, small-cap land within Canada. It is a stock by stock basis.