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

Markets. He expects the returns to be lower and to be the new norm. We have slower growth and perhaps longer cycles. 5-7% is what he expects from the markets. Jobs numbers are rising and the wages that big companies pay are rising, e.g. MacDonald’s. We added a lot of good jobs to the economy. He thinks confidence may result in people spending some of the money they were saving. It is a head scratcher that we have not seen more growth after the 2008 stimulus globally. The US economy is doing fine. In Canada our debt has increased, but our assets have increased at a faster rate. Our debt is affordable because interest rates are so low. His strategy is high quality dividend stocks.

Split Shares. They are an unusual investment. They take a portion and say that is the ‘preferred’ part, and then the rest is the capital appreciation. They have no risk of capital. You get the change in the underlying equity magnified. They are not well covered by the street. You have to have a good advisor who knows how to use this in your portfolio.

Markets. We have been very quick to point to China as the catalyst for this whole event, and he questions that proposition. There are trillions of dollars wiped off of investors’ assets in the last 35-45 days. That was probably a little overdone, but in 2008, the 1^st drop started in May and started accelerating into the fall. Because of that he wasn’t going to take any chances this time. Still doesn’t know the answers as to what the real epicentre of this correction is. It definitely felt just a bit too organized. We are in a range right now, where he believes we are going to see some big rallies, which he wouldn’t get too excited about. We will also see some big downdrafts, which he wouldn’t get too despondent about. Has been going into this one with more cash than normal, 20%-40%. As an investor, if you have increased cash already, it would be a good idea to take a look at your positions that you are least comfortable with as well as those where you have made a ton of money on, and reduce those to more reasonable weights. Then wait for both what the Fed is going to do and the Canadian election. Mid to late October, has traditionally been a good time to deploy capital. That would be the time to be Buying, adding to names or establishing new positions. Don’t rush into the market right now.

Canadian Banks? 3^rd quarter results were good, but not spectacular. They didn’t show any cracks in housing and oil/gas loan books. It looks like underwriting revenue and capital markets is going to be down across the board. They are all yielding around 5% right now. Historically, it is probably a good entry point, but he would wait 6 weeks to see what happens in the Canadian elections, as well as rates with the Fed. If you don’t have any banks, you could dip your toe in now and do the balance in 6-7 weeks.

Markets. Canada has to go a lot lower. The US is fighting between 2 bookends. If the Fed does what it should do and not raise rates, then everything is fine and look for about a 12% bounce in the S&P 500. If all does not go well, 3^rd quarter earnings as well as the Fed, look for about $1750 on the S&P 500, about 10% down. If it goes down there, there would be a huge tradable rally at that level. Raising rates is more of a political decision rather than an economic one. China is looking at corporate tax cuts, and these are drips of desperate actions. They have a “balance of payments” issue. In the month of August, they spent over $100 billion in keeping the Renminbi at a level at around the US dollar. They are spending $4 trillion of Foreign Exchange reserves, and that is going to continue until there is meaningful devaluation in the Renminbi. When China does devalue, it will be quite large. Unfortunately that is going to set up a deflationary wave globally. We have to get ready for very volatile down markets, but in the interim, we seem to have these huge relief rallies. He favours US assets. Every day the US$ looks bigger and bigger. Any US assets are good, but if push comes to shove, the S&P will come down to about $1750, but he thinks it becomes stable there.

Which Canadian bank or insurance company to hold for 5 years? They all have to go lower. Thinks the Bank of Canada reduces rates significantly in the future. Interest margins are getting squeezed. A lot of people have all kinds of concerns, certainly on real estate and its value. He is underweight both of these areas.

Markets. There was no change in Canada to the overnight lending rate. This is encouraging. There was two months of trade data and we saw the benefits of the Dollar in exports and the employment data has been slowly improving also. It is encouraging and we should see the back half recovery. There were fears we were in a technical recession when we saw China had slowed. For Canada now, if the US goes back into recession, it will be a huge negative for Canada. We are seeing that the US economy can decouple from China. It can grow is China continues to weaken. She is just focusing on the economic fundamentals. If the Fed raises interest rates 25 basis points it will not stop the economy growing.

Markets. We have moved from a point of low volatility to suddenly high volatility. When that happens, the challenge is you’ve got a number of hedge fund investors who are leveraged, and they measure volatility as a way of deciding how much risk they should be taking. As market volatility picks up, they are forced to reduce risks on both the Long and the Short side. We saw a lot of that on Monday in the big sell off. J.P. Morgan recently said they expect as much as $100 billion to follow on selling from those types of investors. A dip like that often retests the lows, so that would be back to the lows that we saw on Monday. The rally back was very much what he would consider low quality equities. He didn’t see meaningful, long term value buyers step in to pick a bottom, which leads him to believe that there is further downside. If you are trying to construct a balanced portfolio, it has been a real challenge. The more defensive aspects have not been defending you.

Markets. We are in the middle of a prolonged business cycle in the US, and he has used the market pullback as an opportunity to increase his exposure to some high-quality dividend holdings. Unfortunately, retail investors look at the volatility and just think they want to avoid the market entirely. The reality is, the value of these large companies doesn’t change 20%-25% in a day, even if you do have a slowdown in emerging market growth. It is discipline and a steady hand that you really need to have when markets are this volatile. In the last 4-5 years there has been an increase in household spending in the US, but it is largely as a result of high income households. Low to middle income earners haven’t really seen their wages go up all that much. Once they start feeling a little more confident, because of wage growth and home price appreciation, it will have a positive knock on affect for the economy. It will encourage corporations to spend a little bit more. European growth expectations were ratcheted down by the ECB last week. It is his view that the quantitative easing program will help, the same way it helped in the US. In the interim, corporate profits in Europe and the UK are still 40% lower than they were in 2007, so there hasn’t been a fundamental improvement in the corporate sector in the economy, and that is what is going to drive a combination of earnings growth and multiple expansion. It makes sense to have a little bit of European exposure.

Markets. The correction came earlier than expected and the worst is probably over. The lows on Canadian and US markets hit August 25. There is a perception that the month of September is a terrible month for equity markets, but that is probably more of a myth than anything else. The S&P 500 and the Dow, for the last 10 Septembers, have actually gone higher. TSE composite has gone up 6 of the last 10 periods. However, the caveat is that when the markets do well in September, they go way down. This year, we have hit the low and we are going to go through a volatile period of base building. 14 times, when the Fed as been about to increase interest rates for the 1^st time, the stock market has gone down. On average it has gone down 10%, and already this year on the S&P 500, it has gone down 12%, so we have already seen the correction prior to the 1^st increase in interest rates. We are going into a period of volatility and you can expect these big moves one way or the other, but ultimately when you get a test of the previous low, it is an opportunity to start buying.

Gas. Watch the gassy stocks, both Canada and the US, as they are starting to significantly outperform the market and we are just entering a period of seasonal strength. This normally bottoms right around the 1^st week of September and moves higher right through until the 3^rd week of December. Starting to look very interesting. (See Top Picks.)

Lumber Stocks? These tend to bottom around the middle of October and then move up strongly, normally through to April of each year. Then from April to October they go strongly on the downside. These have, what he calls, double seasonality. They don’t just go up, they go up and down and up and down during both periods of seasonal strength.

REITs. These have a tendency to do very well in the summertime. This is because interest rates tend to move in their favour. Right now the sector is still in a downward trend, but there are early signs of bottoming here, which could mean that we might be going into a period of seasonal strength. He would like to see more evidence. Usually if you start to see interest rates move lower, that has a positive impact on the REIT sector. This year it is not acting like it normally does, so he would be very cautious right now.

Junior golds? Gold bullion actually bottomed around the middle of July, as you would expect for seasonal trade, and then would take you right through to the end of September. Gold stocks actually bottomed at the time as well, but recently they have been underperforming gold itself. He has become concerned that the seasonal trade for precious metals stocks in general is not working the way it normally does at this time of year. The end of the seasonal trade is right around October 1, so you are starting to run out of time, so it is a question of when you sell these securities.

Silver? This has 2 periods of seasonal strength, one now until the end of September and then it comes back in January until February. Silver has been disappointing this year.