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

Canadian Industrial Sector – Auto Parts. He has liked auto parts in particular. MG-T and LNR-T benefit from a lower Canadian dollar although are diversified with plants around the world. You would have to think they are reasonably valued on this pullback. China is a different story altogether. He is not concerned about its impact on Canadian auto parts companies.

Markets. There are corrections in the market all the time. If you are a long-term holder of equities, you would see this as an opportunity. With this volatility you can actually buy companies that you have wanted to buy for a while, but the valuations just weren’t there. You should have a list of stocks that you like. For most companies, this volatility doesn’t change too many things, and over the long-term you should be able to grow your wealth. Doesn’t think the equity markets are going to fall apart. Rates are still low, dividend yields are still high and companies are still buying back their shares. When you get into September, the first couple of weeks are volatile. A 10% pullback in the market is not a bad thing. It washes out a lot of unnecessary speculation and it gets things started again. That is a healthy thing. He is not negative on the stock market. Canada is a little bit more difficult, but the US is certainly growing and there is good employment growth. Interest rates probably go up, but not aggressively. There is a slow turnaround that is happening in Europe. There are some good opportunities with some great companies.

Markets. He has cash on hand that he can deploy for opportunities when they arise. Looking at a Hong Kong based shipping Company, possibly a European insurance company and some non-resourced based stuff in Canada. Canada is relatively less attractive to him than other markets. So much of our market is resource, material and financial based, so there isn’t a lot to choose from with any liquidity. He is looking a lot in Europe and Asia. Because the US$ has been so strong, it has been great for his investors because they have a good chunk of money there, but with the Cdn$ where it is, he is loathe to put much more into the US market.

Energy. He doesn’t see a bottom in oil right now. There could be substantial declines. There is nothing out there to make it turn around. When the summer driving season comes to an end, you start to get less demand for it. A big US refinery is off-line which is keeping demand for crude down. Commodities trade in decade long cycles, and we are only about halfway through here. That doesn’t mean it goes down for the whole decade, but can stay down and flatter for quite a while before heading back up again.

Markets. He looks at a number of different factors. All of the economic indicators that he follows are still positive and still favourable, showing that we are not likely in a recession. Those can deteriorate, but at this point in time he is not seeing it. Commodities are indicating there is going to be some kind of slowdown, but whether they are going to be severe or shallow is what we don’t know yet. His indicators are showing that we are not yet in recession or that there is going to be a recession in the next 6 months, but certainly commodity prices are telling a different story. Because of that, he is very cautious. He is not specific to any one sector but is really looking for earnings growth, which he hasn’t really seen from the energies or material sectors in a while. However, in the last couple of weeks he has noticed that a couple of energy names have started to perk up in his screens, which he hasn’t seen for close to a year now. A little premature yet, but he has them on his watch list.

Markets. China is the 2^nd largest economy. The fear that resonates from their devaluation is that it imports deflation into the US market as well as globally. Central Banks around the world, especially Europe and Japan, are trying to re-inflate their economies. Anything that dampens that prospect is a concern. China’s growth rate is slowing which is a worry. Wasn’t really sure that China’s growth rate was ever really the numbers that they had talked about years ago, because growth in GDP is developed domestically. China built an awful lot of ghost cities, which would have contributed to GDP, but there is not any real economic value that was generated by those projects. One of the difficulties in the options market is that in a very flat market, you don’t get a lot of volatility. Without a lot of volatility, the amount of money you collect when you sell an option isn’t great. Thinks the US is going through a correction this year, and it is based on a timeline as opposed to a price correction. In this environment, selling Covered Calls against some of your positions is an excellent strategy.

Energy. Doubts if oil will get back to $75-$80 a barrel until the latter half of 2016, if even then. This is a supply issue. There will be a point where there will be a lot of pain and will cause some countries to shut down production, which will pull in supplies. The US will be the most likely country to do that, as they are the 2^nd biggest producer of oil globally. If you cut production, it takes a while to restart it, but it doesn’t take the US long to restart it because of the technology they’ve employed in their process.

Market weight versus Equal Weight ETF’s? Market weight ETF’s means the ETF is replicating an index in which various components of the index are weighted within the index according to their market cap. E.G. In the S&P 500, the largest market cap is either Exxon Mobile (XOM-N) or Apple (AAPL-Q). The market cap is the value of all of the outstanding shares, multiplied by the current price. Probably about a 3% weighting of the market cap of the S&P 500, so they would get a weighting of 3%. If you took all of the 500 stocks in the S&P and make it a CAP weight, you are limiting how much importance the company would have within the index. So even though they represent 3% in terms of their size, you would count them at 1% or 0.5%. Usually you see this occur when you are dealing with a smaller index. He would be more inclined to have a Cap Weight.

Options? An Option is a derivative and its value depends on an underlying security. A Call Option gives you the right to buy an underlying stock at a certain price for a certain period of time. (Exactly like a warrant.) If the stock is trading below that price, at expiration your option expires worthless. The most you can lose is what you pay for the option, a fraction of what you would pay for the stock.

Covered Calls? This is where you own a share of a stock and, if you believe the stock is going to go up, then you just own the stock. If you are not as sure, and you want to drive income into your portfolio, you can sell a Call Option, which means you are agreeing to sell the shares you own at the price selected. When you do this, you get a premium which is yours no matter what happens.

Selling Calls? Very often he will Buy a Call back before it expires. If it drops in price, very often he will just take the profit on the option and hold the stock, and then rewrite the option again. This has been particularly attractive this year with a flat market that has gone up and down with no direction.

Naked Puts, E.G. January 2016. Can this Put be exercised by the buyer at any time? Yes. A Naked Put is an uncovered Put. When you sell a Put Option, you are obligating yourself to Buy the shares of the underlying stock at a specific price.

Does the seller of a Covered Call on dividend paying stocks have the responsibility to pay the dividend to the buyer of the call option? When you do a Covered Call, you own the underlying stocks and you get to keep the dividend. You are not responsible to give anything to the Call buyer.

How do you know when to sell a Covered Call Option? This is a judgment call. When you buy a stock you should have an exit strategy. “Is there a point I would sell the stock and at what price would I be comfortable doing that?” If you are not going to exit it, then don’t sell options against it. If you are looking to trade out of it at some point, you should establish a price at which you are willing to sell the shares. The sale of a Covered Call actually does that, so it brings discipline to a trading strategy.

Danger to Obama care if the Republicans get in? If you are concerned, he would buy Puts and would probably do a Put Spread, as premiums on healthcare would be fairly rich. Would probably look at health care providers, like Humana (HUM-N), Aetna (AET-N) and SPDR Health Care (XLV-N) because there would probably be a squeeze on margins. Not a strategy that he would be jumping on.