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

Preferred Shares. It has been a difficult market. He does not invest in them. Now that resets are resetting, they are doing so lower. Each individual issue is unique and you have to consider each one individually. You have to be pretty careful picking them.

Markets. With low interest rates, if we get a bit of wind behind the market, people get afraid to be under invested. Maybe in another month or so you generally get strength. China is a communist country still and they do not have the transparency when it comes to their economy like we do. They put out a 6-7% GDP growth figure and it doesn’t seem to be that much. He feels it is growing in the 3% range, the slowest growth they have seen in a long, long time. It is still positive. The government there is doing all the right things to get things accelerating again. Meanwhile the strongest economy in the world is doing well (US).

Markets. Global GDP is going to be muted. The reason you saw the Fed make the stance that they did, was that they threw in this component of having to be concerned about what international markets are doing. It makes a problem much more multi-layered than just looking at jobs and inflation in isolation. As an investor, you just stay the course, but you have to be selective. What is happening, especially in the Canadian market, is that you are getting a bifurcation. Anything that is tied to commodities is completely ignored for the time being. There is going to be more volatility that the investor has to accept. A sector for all seasons would be healthcare, as well as some areas within technology, where you are going to be able to drive a margin expansion story. For companies this means cash flow growth, and this is where you hang your hat.

Markets. This business of the Federal Reserve raising rates has taken way too much time. It is kind of tiresome. You are looking at a quarter of a percent. Too much is being made of the whole situation. The people who are viewing and reacting seem to be saying these people know exactly what they are doing, and he thinks that even they do not know exactly what they are doing. They are putting together probabilities in their best guesstimates, and at the end of the day too much is being made of it all. There are so many problems out there that he thinks we are in a worse position in many ways than we were in 2008. There is so much debt out there, that it is a major problem. The hedge funds and what they can do is a major problem. There are difficulties in Canada with personal debt loads. When housing values go down, which it will, the debt loads will still be there. If interest rates go up a couple of percents a lot of people are going to have tremendous difficulty paying their debts. Thinks we are in a bit of a fool’s paradise right now.

REITs? At this point he is not crazy about them. Back in 2008-2009, he was looking at a lot of them. There is a lot of transformation going on in the industry. A lot of the real estate companies are having difficulties because of the change they have in the malls with bankruptcies, diminishing store space, online sales, etc. This is a very, very changing sector. A lot of them pay great dividends, but for him they are not cheap enough.

Markets. The language the Fed uses is more important than whether they raise rates today. They are ready to raise rates. With 5 years of phenomenal returns, especially in the US, the days of buying a dividend stock and being okay are behind us. He needs to see earnings per share growth, cash flow growth, and low balance sheet debt and their ability to service that debt. Better value is found in the US than Canada.

He is under weight Canadian banks. Loan growth has accelerated, but now slowing. Many Canadian banks are down double digits. Real growth is in the regional banks in the US.

Markets. He thinks the markets have settled down somewhat, other than today’s gyrations after the Fed made their announcement. Investor sentiment remains rather fragile. There are still concerns over the timing of Fed policy, trajectory of how interest rates will move, economic stability and growth in China. Investors have to go back to the fundamentals. The S&P 500 is trading at about 17X forward earnings. Even though we are still in a low interest rate environment and a low inflation rate environment, it represents fair value. You need to pick individual stocks and choose those names that will grow. He still likes the US over Canada. Canada has some issues with where we are in the commodity cycle and how that affects the rest of the market. He continues to favour the areas of consumer discretionary, healthcare, infotech, maybe industrials in financials as well.

US$ strength? At the very least, it is going to remain where it is here relative to the Cdn$, but more likely it is going to move further and further ahead in terms of upside.

Markets. It is more than a 50/50 chance that the Fed is going to raise interest rates tomorrow. As an investor, he is hoping that he is right. This need to get out of the way. The US economy is in reasonable shape and can afford a move towards normalization. Thinks the impact on the markets will be limited. If they don’t raise rates it may just add more volatility, because it is anticipating the next meeting and how much they are going to raise at that time. The US is his favourite economy right now, yet he is not overweight the US market. Sees some better opportunities in other markets around the world. This is a little difficult right now because of the strength in the US economy, but valuations in the US are reasonably fairly valued, so he sees opportunities in Europe and Asia that are a little better. Right now, Europe is being affected by what is happening in Asia. Germany in particular has a fair amount of exports to Southeast Asia and China, and there is negative sentiment coming from the consumer. Newspapers’ headlines are all fairly negative on China which is having a negative sentiment. This impacts Europe, but overall feels European prospects are improving. It is going to be dragged up by the good economy in the US, and he sees some good opportunities in the European stock market. He favours European companies that have exposure to the US. They are going to be the biggest beneficiaries of the weaker euro relative to the US$, and will also be beneficiaries of a strong US economy because of demand from the US consumer. However, he is fairly optimistic on the “domestic markets” in Europe. Thinks there will be a decent recovery in consumption. Emerging-market prospects are not as good as they were several years ago, but when you look at the opportunity with the valuation and the selloff that they have had, there are some real good opportunities presenting themselves.

Stock plays in India? He is optimistic on prospects for India. Thinks Modi is the real deal and really wants to see things improve. There are a lot of different ways to play India. He owns 2 stocks. Zee, which is a content and network television broadcaster. Great company and they have a great franchise. Also, Indian Bulls, a household financing business, which is growing very, very rapidly.

Markets. The S&P 500 had a long consolidation phase where it was consolidating from $2040 to $2135 in August. It was uncharacteristically tight. There was no catalyst to push it up. Inevitably coming into the weaker 6 weeks of the year, the summertime, it was more likely to break to the downside. That is exactly what took place. In October 2014 there was a big drop in the marketplace and it had a V bottom. Then in October the earnings started to roll in and the S&P rallied back up to new highs. The likely scenario is that we are probably not going to move to new highs in the short term. Right now S&P 500 corporations are at historically high levels as far as profit margins go. The expectation is that they are going to have a contraction on a year-over-year basis in the next quarter. It is going to be difficult for companies to grow their earnings at this point. China is in the news a lot and has a huge impact on the world. We are still in the phase of the weaker 6 months of the year and September is typically a weak month. He doesn’t expect the next 6.5 years to be as strong as the last 6.5 years.

Canadian bank stocks? The best time to be in these is from Oct 10 until Dec 31, and sometimes you want to get out at the end of November. (There is another period from January into April.) This is because the banks Q4 ends on Oct 31 and they come up with earnings in November. Usually this is when they come out with their best earnings and when they do their dividend increases and have their stock splits. Banks have been beaten up because of what is happening in Canada. This year will be interesting because we will start to see some of the ripple effect from the oil patch. If we do see a pickup in October, it might be a good opportunity to step in, and use a Stop underneath.

Markets. He is really agnostic as to market conditions, and the last few months have demonstrated that in terms of the ability of his portfolios to react to market conditions. In August his portfolios were flat to within a percent down for most of the month and then, ironically as markets rallied harder in the last 4 days, some of his Short positions really kicked in. He ended up about 2% down in the month. His portfolios are designed to perform very well in Down markets and Sideways markets, and moderately Bullish markets. When you get very strong increase in market conditions, like there was in the last 4 days of August, ironically the fund doesn’t do as well. However, at that point most investors have other stocks in their portfolio that are doing well. The bulk of his investments in his Flagship Fund are in Pair Trades. People are often confused about Pairs as to how you can make money being Long and Short in stocks in the same sector. The idea is to try and remove industry specific risks. E.G. if Long Canadian National (CNR-T) and Short Canadian Pacific (CP-T), he is taking out weather risk, regulatory risks and input fuel type risks. It also takes out a lot of market risk. This is isolating the specific factors that differentiate these 2 companies.

Markets. You have most things descending, because it a bear market. It is also a summer lull market, and we are also inflicted with amazing global events, which he thinks has stunned us. We also have political events. A bit of a frustrating market. As we come out of the summer, perhaps we will slowly get into a better theme, but he doesn’t think stocks will be up by the end of the year. The refugee situation is a massive historical change.