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

In an RRSP, is it prudent to have half in a Global Stock Index fund and half in a US Bond Index fund? Why wouldn’t you have half in global stocks and half in “global” bonds? He doesn’t know if US bonds are better than anywhere else. He doesn’t like bonds, so he wouldn’t do that.

Better off taking money out of an RRSP every year at 25%-35% tax, or waiting until the estate is settled where it will be taxed higher at 50%? It depends on how long you are going to live. On the one hand you are taking money out and paying the tax sooner, and if you can actually defer that 25%-35% tax for the next 10-20 years, you get the extra 10-20 years of compounding.

Market-linked or conventional GIC? Believes market-linked GICs, or better yet, their 1^st cousins Principal Protected Notes (PPN) are better than traditional GICs. Gives you most of the capital appreciation, you don’t get the dividend of the stock market or PPN, but there are 3 benefits. 1.) It is liquid, so if you want to sell it before, with a PPN, you get liquidity after about one year. 2.) If you sell it and it is up, then you will be paying tax as a capital gain on the proceeds, whereas with the traditional GIC or even equity linked GIC, that will be taxed as regular income at your top marginal rate, so you cut your tax liability in half. 3.) If you are wrong and the stock market drops, as long as you hold it until maturity you get your money back.

Markets. After 2008 we had an environment where equities were deeply undervalued and all sort of catalysts for above historical growth for the last 6 years. So for the last 5-6 years we’ve had phenomenal returns with very little volatility. The easy money has been made and on a go-forward basis the new normal is 1) we will not see the same magnitude of returns as we have seen and 2) we are going to experience reduced returns with more volatility. When equities are trading at discounts to intrinsic values, investors are a bit more patient with bad news and are not pricing in perfection. Now when looking at valuations there is not much room for anything but perfection. We have seen that recently with companies reporting earnings, and those that miss earnings have their share price being punished quite a bit more than what we have seen over the last few years.

It is advantageous for an investor to have money managed properly. He is somewhat counterintuitive to what many investors and money managers try to do, which is to hit home runs on the way up. In an environment where volatility picks up, active management can better manage risks on the downside. For example, when you buy an ETF or an index in Canada, you are very heavily exposed to banks and energy. An active manager can choose and limit the allocation to any one sector, which you can’t do in a pre-packaged product, including an ETF.

Markets. Seasonally we are approaching the weakest period of the year. The US market peaked in the middle of May and so far has traded flat. It has still shown its strength despite all the volatility. We have basically seen a digestion of negative news pertaining to China, some negative earnings results and has held up quite well. Going forward we are approaching the weakest and most volatile time of year. September and October are notorious for large swings in the equity market. You want to stay fairly defensive and lower the beta in your portfolio. Also, take advantage of some of the seasonal opportunities. With regards to the S&P 500, back in 2011 when we had the ultimate low, you could draw an upward line under the market. Recently it has consolidated and we have had some resistance. About mid June, it broke the lower limit of the trend. Usually when you get a break in a rising trend pattern, you typically see a large retracement in the market, but the market has held up quite well. There could still be a retracement coming. The leadership right now is turning more towards defensive such as Consumer Staples and utilities. When you see defensive sectors take control that does not bode well going forward. We are starting to see some of the riskier areas of the market underperforming the market. These are all warning signs that suggest investors are reducing risks and getting defensive, which is not positive for the market going forward.

Markets. We are in a secular bull market. Asset classes come into favour and go out of favour. In a secular bull market you get earnings growth, multiple expansion, and over time the correlations between stocks seem to fall. We are now in a world where energy, low priced and plentiful, is leading the markets. There are sectors and markets being hurt by that, putting them into a bear market. He favours consumer sectors. Housing ETFs are hitting new highs today. Consumer discretionary like SBUX-Q is hitting new highs. Financials that are domestically focused on the US are doing well. Technology is in favour because companies are looking for technology and have cash to spend. We are headed for a tough period, but the trend is good for equities. Money should slowly rotate from bonds which are over owned into large cap equities.

Prefers the auto parts and assemblers as opposed to the big auto companies. The strong dollar is a problem for US auto makers.

Markets. Everybody loves growth companies, but they are hard to find right now. There is so much change and a lot of moving parts and the market is trying to digest all that right now. There has been a slowdown in growth overseas. The US has been the strongest market for a number of quarters now and continues to be, but even with those pockets of slowness, with the dollar having gotten so strong it is impacting the exporters. A lot of companies in the industrial space are tied to commodities and energy, so there has been a lot of softness impacting results. There are pockets of growth and that is what she is really focused on. Right now the market has come up so much with a lot of risk coming in that the value stocks you are looking for, just on a pure multiple basis, there is a lot of fear which is why they are trading like that. This is a temporary fear so she is looking for stuff that is improving, and in this environment those are hard to find. Global growth is slowing down and she thinks that continues. All of a sudden you have growth as a sort of scarce commodity. Any time you have that, she expects a premium on growth companies to get better.

Markets. He is cautious. Started to tell people to raise cash about a year and a half ago. As a Bull market ages, he recommends having more cash. Markets have sold off a lot and thinks we will get a bounce in September. Recommends staying cautious though. Recommends that you significantly be invested in cash right now.He has 80% cash. Evaluations are high. Interest rates apparently will be increasing in September, although with this China de-evaluation this might change. Believes that we may be near the peak of the bull market. Feels that there is hope for a lot of promising companies that have been down a lot. If they have cash, good management, and good ideas, they will be come back and thrive. Generally, he thinks stocks are in for a rough ride.

Energy. He doesn't think the energy sector will turn around anytime soon. He has heard some promising news that the big majors are determined to selvedge their dividends and are cutting back on exploration. This will lead to less production and will take some supply off stream.

Canadian Banks? He feels that banks are banks and that they will always make money and pay dividends. They have always been good investments. At this stage of the cycle they may not be attractive buys right now. It might be better to buy next year if the housing market rolls over as some people think. If you are looking for a dividend buy them now, but if you are looking for capital gains you might get a better chance in the near future.

Markets. There are two ways commodities can recover from a bear market: Demand Creation, when prices become lower or the economic recovery spurs demand for them. The other is that you have demand destruction where you shut in mines and wells. The first is a shallower bear market compared to the second. He thinks demand destruction is the way we are going. We are seeing investor capitulation, but not amongst the juniors.

Gold. The first interest rate hike is baked into the cake. The question if they can make it stick and is another in the cards. That would create strength in the US dollar.

Markets. We are in a bull market, but it is resting. In the market we go from a depression period to a euphoria period. During March 2009 we were feeling a depression period , but feels we haven't hit the euphoria period yet. You need to have a plan as to how the market is moving then you can make some decisions. Since Oct. 2014, we have been in a horizontal trading range. He feels we still have one more uptrend to go,. The next uptrend could go to the middle of 2016. Feels that there is room to run, the market has been long, but you have to understand that when you have a huge secular bear market, you are going to get a huge secular bull market.

Gold recently broke the technical lines? Do you still use this line in how to trade? He believes that you should never disregard anything. Sometimes you have a one day reversal and you want to look at it to see how people have reacted to it. Gold had a upper rising, 40 week average. Somewhere it changed and it started to come down and even today we are falling below the 200 moving day average. The trend line is broke and it is trading down. It is possible that gold is having a selling climax. Make sure that gold has found a bottom. He recommends getting into gold stocks once gold has definitely found its bottom.