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

Markets. He has been uncomfortable with what is happening in the Canadian markets, so has cut back about a third on his iShares TSX 60 (XIU-T). Then the market dropped down so he switched to the US side. He is very positive on the US and sees continuing growth. What concerns him about the Canadian market is that we are gold, energy, financials and telcos. Doesn’t see any recovery with the golds, and expects $45 oil will continue. Still likes Canadian banks, but is not quite as enthusiastic as he had been. He is using option strategies and covered calls on financials. When you have a rising market, a Covered Call will underperform it.

Which sectors should be included in a balanced ETF portfolio? The most diversification you could buy would be the iShares S&P/TSX Capped Comp (XIC-T), which is diversified, iShares S&P 500 (CAD Hedged) (XSP-T) or the Vanguard S&P 500 (CAD Hedged) (VSP-T). He would have about 20% Canadian, and would also have a combination HAP Floating Rate Bond (HFR-T) as a place to park some cash and maybe one of the laddered ETF’s.

Markets. Has seen a lot of things improve from several weeks ago. He is looking at a lot of breadth and volume, and one by one, he is seeing a lot of improvements, but is still in neutral with his positioning. He uses chart oscillators, which is just looking at different price levels and different price momentum over shorter and longer time frames. Using long-term oscillators they show 1) the level they got down to (how oversold the market became) and 2) that they have now turned up and are positive. The S&P/TSX oscillator shows past corrections in 2008 and 2011, and how the oscillator has got down, but not to the same level. Then it crossed up and there is a positive signal. Also, looking at Volume Thrust which shows volume of 5 to 1 of Up Volume over Total Volume, over a 4-day period. 3 of those days are positive. This is very rare. There has been only 10 times since 1950 this has happened. This shows this is not just a little short covering rally; there are real significant changes that have happened in the market on October 2nd.

Markets. Broadly speaking, valuations are high. There are a couple of groups, especially financials, where valuations are not high and they still look good. A lot of stocks are at the extreme ends of their spectrum, and a lot of them are just going on momentum. To navigate this, you have to go down to the cheap stocks and hope that they start to work out. US investors are all over us on the banks and the housing sector, thinking we are going to collapse. This is a tough market to navigate. Of the energy stocks, including pipelines, only 5 of them had what he would call Fair Market Value. Japan is basically in the stage of collapse. China is slowing down. Europe is pretending that they are recovering, and they are not and their numbers are painfully slow. Globally we have a slowdown. This means that the people in charge are not the politicians. It is the bankers. If we get into 2016 and things are still slowing, he doesn’t think the US Fed is going to stand aside in an election year and do nothing. Some more QE may be on the way.

Investing. The growth of the economy in Canada and everywhere else in the world is not going to be what it was in the past generation or 2 or 3. It used to be normal to grow at 3.5% or 4%. Now we have an economy that grows at 1%-1.5%. Doesn’t think we will see even 2% growth in Canada decades from now. You have to realize that when the speed limit goes down and the economy is only growing at 1.5% instead of 3.5%, we are going to have a lot more technical recessions for the next 5, 10, 15 years. People should set their expectations for substantially lower growth for probably the most of the rest of everyone else’s lives. The loonie hit an 11 year low about 3 weeks ago. He has spent most of the day putting hedges on his clients’ US positions, so as to lock it in at $0.37. In the past 3 weeks we have gone from $0.745 back to $0.77. He thinks the $0.745 was the bottom, but who knows.

TFSA. How does this impact an individual on a fixed income such as the CPP and security benefits? Does income earned in a TFSA account reduce security benefits? These accounts are literally tax-free. Whenever you take money out under any circumstance, you are not going to see any tax, and as a result you are not going to have any OAS claw backs and you will not be paying any income tax. Those people who have already put in the $10,000 this year are probably not going to have to take it out again. He expects the contribution in 2016 will be back to $5500.

As a new retiree, I have funds in a group RRSP that needs to be transferred. Should the funds be put in GICs or left in mutual funds? I am looking to buy a condo. He would do neither. You should build a balanced diversified portfolio using either asset classed mutual funds or ETF’s. Not traditional mutual funds and not traditionally actively managed mutual funds. Use ETF’s creating a balanced portfolio using 6 asset classes.

Would it be possible to own a statistically significant subset of an index in order to mirror the index by owning the stocks of individual companies? His hunch is that you can. The advantage is that you don’t pay the MER for the ETF. You are going to have to pay more to transact to build the basket and will probably have to do a fair bit of homework. To do it properly, you would probably have to use $500,000 or more, and that is just for one asset class out of 6 asset classes.

Where do dividends from stocks held in a Principal Protected Note go? These go straight to the producer of the product, the people who are actually manufactured these things.

Homebuyer plan? There is not going to be any changes in this. The new Liberal government has not said a single thing about it. It’s a program that works and is not contentious. If you have taken $25,000 out for a first-time home buyer and you become eligible again, it’s a one-time shot and you cannot do so again.

4 ETF’s of $10,000 each that can be contributed to a 1^st time TFSA account for a new retiree? BMO India Equity hedged to CAD (ZID-T), iShares S&P/TSX Capped Comp (XIC-T) for Canada, which is better than XIU-T because it has more small companies. iShares MSCI EAFE (CAD Hedged) (XIN-T) and iShares S&P 500 (CAD Hedged) (XSP-T) as examples of larger company ETF’s.

RRIF withdrawal amounts? These were lowered by about 20%-25% across the board in the most recent budget, and this is the sort of thing that is not going to be changed by the Liberals.

Parking money temporarily while waiting to get into the market? If you are going to park cash, you are not going to get much anywhere. For quick access you may as well just keep it in cash. If you are going to park it somewhere, you can probably get 1.5%-1.75% out of President’s Choice, Tangerine or something like that. The vast majority of his clients are fully invested all the time.

Markets. The risks to global growth are more apparent now. China has been slowing down for 2 years. The investment business does not believe the published figures. He is fairly constructive, however. Emerging markets concern him. Brazil is really struggling. Something bad could happen in emerging markets, but it is probably less than 20%. He hopes the Fed raises rates. It will send the right message to the marketplace. There is not an indication of a recession in the US. He focuses on a two year window and how much cash does a company generate.

Educational Segment. Elections. Statistically, when the Democrats are in power, the markets do better than when the republicans are in office. But if you throw out 1929-1932 you find it is the reverse. This tells you the dataset is useless. In Canada, going back to 1922, when Liberals were in power, markets did better, unless you take out the great depression and in that case they are about equal.