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

If you buy equal amounts of a hedged and unhedged S&P 500 ETF, are you currency neutral? Probably close enough not to worry about it too much. But on the other hand you could see a dramatic spiking.

Your strategy for ETF’s with $500,000 for a risk averse holding? The problem is that he doesn’t know you and your circumstances. However, a core position would be the iShares S&P 500 (CAD Hedged) (XSP-T) and the iUnits S&P/TSX 60 (XIU-T) for the TSX and iShares DEX Short-Term Bond (XSB-T) for the bond portfolio. However, what proportions you should have is not something he would recommend at this time.

Markets. There has been an incredible drying up of liquidity in companies that are worth less than $1 billion. If you are going to be in this area, you better make sure that your company really does what it is supposed to do, because if it turns around and you need to get out of it, there might only be 5000 shares to trade. Because of this, he sees some really good deals, but doesn’t want too much exposure, so has limited his exposure to the overall portfolio at about 15% for companies that are under $1 billion.

Contrarian Investing. He looks at companies that are out of favour and have been around for at least 10 years, badly beaten up, and often trading at 52 week lows. Looking for a minimum 100% upside off of 200%, 300%, 400%. None of that is “pie-in-the-sky”, it is all based on where the stock has traded in the past. He is basically looking at a recovery to form, and at certain points it is easier than others. For example after 2008-2009, things got hit across the board. A lot of companies got hit that shouldn’t have been hit. However, at times like these, it is more sector specific than just looking helter-skelter. He looks very closely at financial statements, financial ratios, management, cash flow, is their dividend safe etc. He is also very debt adverse. If buying into a company that has low debt or no debt, it makes it a lot more difficult for the company to get into real trouble for the long-term. Sometimes he gets caught, but over the past 5 years, annualized returns were 28.9%. He buys companies that have been around for at least 10 years, and usually makes his purchases during tax loss selling season. Then he hopes for a Santa Claus rally, and that generally boosts him about .05% on the average every year.

Sector plays? Not crazy about health, but oil and gas are looking interesting. You have to watch what you buy so that you don’t get blown out and lose all your money. The commodity sector will recover, but he doesn’t know when. It is crazy how high the US$ has gone. A few years ago people hated it, and now it is the “go to” currency again. In a few years time, the pin will prick it to some degree, and when that happens commodities will go up because of it. Oil and gas will go up again. Those are areas that he would be looking at.

Markets. He does not expect a move on OPEC production quotas this month. It is hard to know when something will change, but he thinks it will be sometime in 2016. Society is aging, especially in Europe and Asia and many have not saved enough for retirement. We need adjustments to government policy so that it is far beyond central banks to manage this. They can’t keep spending money they don’t have and it will be toxic in the decades to come. He thinks the Fed will do a partial move, depending on non-farm payroll numbers coming out this week.

ETFs that hold ETFs and their fees. There is almost no double dipping. In the MER of a fund holding other funds, they include the MERs of the funds they are holding.

Educational Segment. Tax Loss Selling. This is tax loss selling season. Energy is the worst sector this year. FHE-T gives a selection of US energy companies, traded in Canadian dollars, no hedging. You sell the stocks for tax loss and then buy back this ETF to keep your exposure. They decided not to hedge to the US $ last year. Canadian dollar ETFs with US holdings are not subject to US estate taxes on high net worth investors upon death.

Markets. 75% of the time the market goes up in December quite nicely. 1.7%. That is in the US. The Canadian Market is up 2.3% during December 87% of the time. People buy things for Christmas and that is positive. Tax loss selling finishes and people buy. The TSX starts rising this week and outperforms the US market because Commodity prices bottom this time of year. The US$ is ahead of itself and pushes down the prices of commodities. On Dec 16^th, the Fed is likely to increase interest rates and once that is over, that sets a stage for commodity prices to move higher. COST-O and WOOD-N and ITA-N have gone up nicely since November when he was on last.

Oil going forward. The seasonality turns positive this week and strengthens until the summer time. Prices bottomed two weeks ago. The energy complex is starting to move quite nicely. Gasoline is up 5%. This is caused by commodity prices. Around the end of January the stocks will set up for a sustained move. If the US $ comes down then oil prices will go up, regardless of what happens with OPEC this week. We have a bottom in for crude oil.

Markets. Running about 12% cash, this is down from the fall. He is nervous. The names that he has are working really well, and you always start to worry about that. They are no longer as cheap as they were, and there are a lot of headwinds. A lot of his money is invested in the US. US currency has been a problem, and he thinks it is going to continue to be a problem. International investors are going to increasingly look to put money to work in the US, because it is a high yielding currency. Two thirds of European communities have negative interest rates. Globally we are somewhat in a liquidity trap, which is a concern for equity investors, because there is reasonably sluggish global growth, low rates and the big US international companies are going to struggle with the currency headwinds. Thinks he will do a little bit more raising of cash in the not too distant future if things continue this way.

Lifecos or Banks? Owns 3 Canadian banks, but doesn’t own any lifecos. If you want to own a lifeco, he would own Manulife (MFC-T) because of its exposure to Asia. However, from a growth perspective, the Canadian banks look like pretty good value here. Yielding about 4.25% or so and trading at around 11X forward earnings, which is pretty reasonable.

Invest in Canadian companies that do a lot of business in the US or invest in US companies? Canadians, as a general rule, have way too much money invested in Canada. They have their homes, they have their jobs, and they tend to have a large chunk of their portfolio invested in Canada. There are some companies that have a lot of exposure to US$ earnings. Royal Bank (RY-T) would be a classic example. The spectrum of choices that are available in Canada are so limited compared to the US. Although the exchange rate is a problem, an $.80 Canadian dollar is as good as it is going to get. US companies are the place to be.

Markets. The US$ will continue to be strong, and may even get stronger. However, when companies report, the FX headwind that they have been reporting all year is going to start to drop off. In early 2016, we are going to see comparatives start to be more in line. The US dollar a year ago was about $1.20-$1.25 to the euro, but in early 2015, that dropped down to about $1.06. So when companies compare this year’s earnings to last year’s, you are not going to hear talk about the FX headwind again. Energy is a part of the market, but we have to analyse things. It’s not enough just to see headlines and draw conclusions. US corporate profits are basically flat for the year, but when you drill down, ex-energy they are up about 5%.

Markets. He has a lot of cash and has found it difficult to find stocks with good valuation to buy. Now we are in tax loss season and he is starting to get some valuations, so over the next couple of months, he is probably going to be putting his cash to use. Regarding the US Fed increasing interest rates, history has shown that stocks do well when interest rates start going up, because it means economies are doing better. As interest rates keep going up, it is good until inflation starts to wield its ugly head. That is usually the end of the market for that cycle. We have some good times ahead. The Canadian prime rate is not going up in any hurry. There is no economic reason for the Bank of Canada to raise rates.