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

Markets. The back drop for stocks is not that bad. We had a volatile start to the year that we had to deal with. He reminds us it was like this last year. Financials almost everywhere in the world look good and are the biggest weightings in his funds. Commodities, especially base metals will remain weak for some time. We have real GDP growth accelerating in 2016 and reasonable valuations, high single digit earnings growth across the world. The emerging markets story is not performing well right now.

US Dollar Investments. He took his currency hedges off a couple of years ago and just in December, he put them back on. He took half his US$ currency exposure of the table 3 weeks ago and will take the rest off in the next few months. The Canadian dollar is going to strength a lot.

Refocusing from China to countries with expanding manufacturing. China is moving from a manufacturing based economy to a service based economy. The problem is that those markets are closed to retail investors.

Markets. The China situation has been a tough start for the year for everyone. Doesn’t think this is over yet and there will be more volatility going forward. When they shut the market in China for such a brief period of time, there were a lot of people wondering how much further could it have gone. His perspective is that what we are seeing is the end of a bull market to some extent. There are adjustments happening in the economy that are going to ripple through. It often is a violent looking period, but what is happening is that you are getting a lot of restructuring into a lot of industries that will inevitably lead to their longer-term health. Energy is a good example of that as we have seen tremendous pressure on some companies. Some of them have been more farsighted and very quick to cut back on capital expenditures, and reduce dividends if necessary. Those companies with strong balance sheets are the ones that will eventually really benefit from this kind of environment. The question is, how long does it last. As a value investor, he doesn’t try to guess what the market is going to do or when, but uses his valuation disciplines. A lot of his portfolios are balanced portfolios, so the shift between equities, fixed incomes and cash get shifted over time, and hopefully you are selling when the market is raging ahead, and buying when the market begins to get into a position like it is today.

Markets. The US market is a bit extended. There are some overbought and oversold sectors, and you have to be a bit ginger about where you are stepping for the next little while. There is a risk that the US$’s big run flattens off, or even ends. When big currencies move, they follow a pattern. The pattern here is that the US$ should have a bit of a rest to allow everybody else to get aligned up again. Looking at overbought sectors, income has been bid up. Retirees have to get income and cash flow, and the bond market doesn’t really offer it. The bond market, preferred market and the income part is where people would normally want to go, but thinks have been bid up pretty heavily for the last 2-3 years. There is no room for error in that part of the market. China is being blamed for almost everything, but looking at some of the numbers coming out of China, PMI (manufacturing) it has been in a bit of a downdraft. However, at the start of their original five-year plan, they told everybody they were going to deemphasize manufacturing and emphasize the service part of the equation. The trend is looking better, and is also trying to turn.

Markets. There is not much to be hopeful for in the short term. A lot of the data points that are coming out just don’t look that great. There is no reason to be fully invested or leveraged long here in this environment. He looks at 3 key things for his Canadian equity fund. 1.) Market trends, which are all broken quite badly on a technical basis. 2.) Volatility, which is spiking up. 3.) Credit Spreads which are also spiking up. The economic data is backing that data up, and we are seeing ISMs trailing down, which usually leads GDP. Earnings growth is lacklustre; we are in an earnings recession, which we should see in Q4 in the US. Has been taking some Short positions, hedging, Buying Put options, and raising some cash. Not expecting a huge dump, but is expecting some great opportunities to buy some great stocks on sale. Last year his fund was up 12.7% while the TSX was down by about 10%. His strategy is to go where the momentum is, but also find undervalued names.

Gold. Has no picks, but you could potentially be thinking about increasing your gold exposure. Canada is in the quadrant where inflation is potentially increasing in an environment and growth is decreasing. In that kind of environment, monetary policy is handcuffed, and you want assets like gold that will do well. To get exposure, he would be buying the SPDR Gold ETF (GLD-N).

Canadian Banks? Sees a lot of risks on the horizon and doesn’t think they are going to be the outperformers next year; the way they were this year. There could be some kind of earnings decline to the tune of 5%-10%. If your holdings are over 25%-30% in bank stocks, you might have some kind of risk over the horizon. Trim your holdings down a little, to at least 30%.

Markets. It is the start of the year and everyone should sit back and think about what they are going to do this year. He is not a trader, doesn’t worry about moving averages or death crosses. The biggest battle long term is between your emotions and your brain. He does not know what the stock market is going to do. In the short term, movements in the market affect returns, but he looks for good quality companies. Buy at a good price and hold them for the long term. The market is inefficient in the short term. Value gets recognized over the long term. Over time over half your return comes from dividends. The world is changing so that now you are not buying products, but services or experiences.

Gold. He does not understand how you value an asset that does not produce anything and is not useful for anything. It is a sentiment play. They stopped buying it when all the things that would make investors nervous happened.

Markets. To look forward you have to look backward because it will be more of the same thing. There such a depressed commodity market. The underlying TSX and the Canadian economy are underpinned by that. There is a feeling of capitulation, but it is very tenuous to pick a bottom. The US recovery is still very tenuous. This is a stock picker’s market as it was for the last year. It will not be a big momentum situation. Canada has underperformed the US market for several years and statistically, it should not do so this year. Canada keeping interest rates low is encouraging even more debt. Lowering rates would create a run on the currency.

Markets. We are going to have a lot more volatility. We didn’t get the Santa Clause rally. Markets are selling off because of weak economic data from China. One of the biggest risks this year will be geopolitical risk, especially in the middle east. Oil should bottom this year, then rally, but he does not know when. He thinks US stocks will be flat if it is a good year. He sees a bigger correction this year than last year, more than 10%.

US ETFs. BMO has equal weight bank ETFs. ZWB-T and ZBK-T. ZWB-T is hedged. IAT-N is a US ETF that excludes money centre banks.

Hedged ETF still? When to stop? The S&P 500, ZSP-T (unhedged), ZUE-T hedges. Some people think the currency will dip into the 60s. In 5 years the CAD$ will be closer to $.90-$.95. I terms of Europe there is XIN-T, currency hedged. When the Euro is below parity, he would lift hedges (Trade to unhedged ETFs).

Education Segment. Promise yourself to be diversified. There are 11 economic sectors. REITs are split out from financials now. 8 of the 11 sectors are much more volatile than the whole thing put together. The more concentrated the portfolio, the more volatility you could get. This year will see more volatility in equities than the last number of years. Tech, healthcare, financials and energy are the most volatile and Canada will be more volatile this year because it concentrates in these sectors.