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

Markets. He is neutral, so his cash levels come up a little. He is trying to figure out if it is a correction inside a bull market or a bear market. He leans towards it being a correction. Energy and Materials sectors have the wind in their face. There are concerns about banks and Financials. He is seeing pockets of growth in healthcare and technology. But he would make sure to stay diversified. There are pockets even in energy and mining to have a piece of. The markets will not be affected that much by a 25 basis point raise in interest rates.

Markets. The Fed signalled quite strongly that there will be a rate increase in December. They also indicated that the economy is not great, not awful, just kind of mmph. Thinks the Fed is quite anxious to get 1 or 2 rate increases in, so that they will have some bullets in the gun for the next recession, whenever that happens to come. The problem is, if you go into a recession and you have no monetary tools left, what do you do. Particularly if you are faced with a recalcitrant US Congress dominated by Republicans, who don’t believe in fiscal stimulus. This means the loonie is not going to go through the roof. People going to the Dominican or Florida, who have been holding off, expecting the loonie to go to $.80, forget it. It is not going to happen. If the US raises rates before Canada, then we are going to see a lot of hot money flow out of Canada and into the US. This probably means interest rates in Canada will rise eventually. A lot of big cap stocks on the TSX have been very weak this year, including Canadian banks, utilities and telecoms. People globally have sold off the Canadian economy and are worried about the effect of weak commodities. This has given us some opportunities in the Canadian market.

US Markets. Thinks a US federal rate hike will take effect in December. A 25 basis points doesn’t do a heck of a lot, so why not just get some of that uncertainty out of the way. We are starting to see some growth in the jobs market, particularly in wages. It is a consumer driven economy, but at the same time you have a 5% unemployment rate with a couple of hundred thousand jobs per month coming in. This is a very constructive job background. You are also seeing wage growth. He sees a lot less working in this market than what there was a year ago.

Markets. There were lots of special situations that happened today. Gold hit a five-year low. There were special situations, like Costco, that moved to an all-time high. A number of aerospace and defence stocks moved to new highs despite the markets being weak for the last 2 weeks. There are a number of cross currents that are acting quite positive despite these choppy markets. He expects the market will continue to be choppy until the Fed increases its Fed fund rate for the 1^st time. Seasonally, you want to look for a Santa Claus rally, which is getting lined up in a number of ways. First you have to get past the tax loss selling pressures for the next 4 weeks or so. When you have the 1^st increase in the Fed fund rate, the 6 months prior to this, markets do not do very well. Since 1944 the market has gone down 10%. But when the 1^st increase happens, the S&P 500 in the next 6 months went up an average of 10%. Historically, from now until July in the US presidential election year, markets do very, very well. Markets continue to go higher right through until July and sometimes into August.

Markets. The Paris events of Friday remind him of 911 and the show he did immediately after it. It is disruptive to the markets for a few days, but these events are starting to have less and less of an impact on the markets. The markets had already been selling off for a week or so before this event. Once we digest this event, markets will go back to where they left off Friday. The Japanese economy is the leader in the world to face the debt accumulated over the years and the aging demographic. We need other policies than QE.

Overweight TSX stocks because they have pulled back so much? Oil is cheap and Canadian market performance has always been about oil. He might look to starting to overweight Canada with the expectation that in 1 to 2 years oil might start to come back.

Gold – Buy now? He just nibbled last week. He only goes to gold when the risk reward is attractive. A 5% position would be his maximum.

Educational Segment. Japanese Debt. There was a $57 billion increase in global debt since Leman. The biggest accumulation of debt is on the government and corporate sides, not households. Look at credit default swap spreads. Emerging markets have higher spreads. The bond market is starting to get on alert. The trend has turned and this is where we watch for global systemic risk.

Markets. Valiant is blowing up the whole health care space. Oil seems to be entering a second down leg and money is flowing out of Canada. There is always something going up, however, and you just need to be working harder. He would be looking for turnaround stories and those few pockets of growth. He likes alternative finance (specialty lenders), as well as US real estate, especially housing. Sometimes it is hard to sell when you are down 30%. You just have to take your lumps.

Markets. Market had a rally today, but didn’t have a sense that it was a really strong rally despite what the numbers showed, because there was a lot of money moving into energy. Also, defensive as utilities and staples did well. It was definitely a surprise as he had expected a tougher day. This is a very difficult time as nothing is clear. Most investors have to almost take a little bit of a “wait and see” approach. He would hold a little powder back and not be fully invested, until you see a path unfold. As investors, one of the problems we have is that we are in a transitional period. We don’t know if the Fed is going to raise rates, and until that happens we are not sure what it is going to mean. Valuations are not cheap right now and yet compared to any other alternative, equities still look the most attractive, but there hasn’t been real capitulation, valuations are not attractive, earnings have been fairly disappointing. Many people are just wondering what the direction is. Caution is really the order of the day.

Canadian Banks? You truthfully can’t go wrong with Canadian banks. In general they haven’t had a very good year. That cake of pessimism is fully baked for the banks. If you want to make a switch, consider moving to one of the US big banks. A number of them are a lot cheaper valuation, and a much more improving story.

Cdn$? Most strategists think it is going to go down. The fundamentals between the US and Canadian economy definitely favours the US. Thinks there could be $.02 or $.03 come off in the next 6 months. Doesn’t think gold or silver is a solution. If the US does go ahead and raise rates, which most people expect, then all of a sudden you have a risk-free asset that could be treasury certificates you are purchasing, that offer yield. Gold and silver offer no yield.

Markets. An investor has to hitch their wagon to the American Star. Even if you are investing in Canada, forget what we are famous for. Forget Greece, forget rocks, forget paper unless it is focused on harnessing the growth that is the US economy, which has already been through its long, dark tea time of the soul, and is on its way up. More than half the revenues of his funds come from the US, with another 20% coming from Europe and overseas. We are in for a rough time for a while, until we begin the upswing. In this environment, investors need active managers more than ever, particularly if you are talking about the Canadian market.

What percentage of a portfolio ought to be in Canadian Banks? How many banks would you own and how would you weight them? Canadian banks are not a bad place to be. Have performed very well over a protracted period of time. National Bank (NA-T) has the biggest exposure to energy, making it the most vulnerable. TD (TD-T) has been the most successful in the US, and he thinks there is going to be growth out of the US. Scotia Bank (BNS-T) is the most international and there can be some growth there. He likes Mexico very much. He is not equally weighted in the banks.

How would you evaluate a company’s ability to pay a dividend? You will have done well focusing on dividends for the last several years. As interest rates have been lower, lower and lower, there has been a demand to get better and better dividend paying stocks. Going forward, it is going to be critical to focus not on the magnitude of the dividend, but its trajectory. Growth and growth of top line is important, but a better number to look at is free cash flow. That’s the cash that a company has after it has met its obligations after it has reinvested in its business and paid its existing dividend.