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

Markets. The volatility has subsided to a degree, and suspects it may last another few weeks. Normally the middle of October is when things die down and people start looking forward to the rest of the year. He has some measure of optimism although we could test the lows again. Thinks we will end the year higher and perhaps the next 2-3 quarters might well be up. We are in a correction, rather than the start of a bear market. He is more optimistic that Canada will have a more robust short-term recovery than the US. The most hated area by investors is gold, which has been a total disaster and expects that has made a short-term bottom. Thinks the US$ is in for a period of consolidation, if not giving back the huge 20% gain that it has had. Believes oil is in the process of bottoming, whether it is this quarter or next, and that the supply/demand is better than everybody realizes. He is largely out of resource stocks.

Markets. It is always a mixed blessing when you get a correction. It pains him to see all the red numbers on the screen, but there are some bargains emerging. Stocks are selling off in the absence of any hard reason, so obviously there are bargains. He saw an outflow of funds from equities. When you see this kind of volatility, buyers go on strike. This is when you should be looking the hardest. We are three weeks away from the third quarter earnings announcements and we have seen a lot of revisions downwards. He is not seeing a lot of earnings warnings. Now is when we should see them. He takes this to be a good sign. There will be pervasive weakness in energy and commodities. People are worrying about a spillover to the banks. He thinks there is nothing serious going on this quarter. He sees no sign of a recession in the US. He looks at alternatives. Long bonds return negative return after taxes, but high quality equities are paying 3-5% dividends. The dividends should be lower, meaning the stock prices should be higher.

Copper Producer. He would go to the States and get a long term producer. FCX-N, for example, would be better than a Canadian producer. It could be a long trough on the commodity price.

Buying US stocks with the Loonie so low? If you are going to live and retire in Canada, you should not have too much outside of Canada in case the dollar gets strong again and you are stuck with devalued foreign investments.

Markets. Everyone knows that the Fed is going to increase rates at some point. There are going to be some traders reacting to that, but doesn’t think it means an awful lot for regular investors. He looks 3-5 years out for his clients, but these things create some anxiety. They are only raising it up a quarter of a percent, so it is not a big deal. He is being quite cautious at this time and is skewing towards the US. His holdings in straight equity are probably about 15%-20% Canadian and 30%-35% US. Has nothing in emerging markets or China and a small bit in Europe.

An ETF that can be a held for 30 or 40 years? You could look at Vanguard FTSE Cda All Cap (VCN-T) or the iShares S&P 500 (Cad Hedged) (XSP-T) for the US side.

Markets. He looks at the market internals price and volume data as well as a number of different economic indicators. Currently they are mostly out of the US including the leading economic indicators, the ISM, etc. and are still very positive. LEI is another indicator he likes to look at for the 18 moving average, and whenever LEI crosses below that, it has been a very strong positive sign that we are going to see a recession. He is still not seeing anything like that. The ISM is also very strong. Manufacturing isn’t super strong, but the services side is very strong, which is a big part of the US economy. He is defensive and cautious right now. In June, some of the market indicators turned negative, so he started to raise his cash position and is about 30% in cash now. If you are looking at things from a 3 year timeframe, right now you could be picking away.

Big banks or insurance companies for a 3-5 year hold? This is a tough one as both have positive and negative traits, especially over that time frame. In a 3-5 year time frame, you would expect interest rates to be a little bit higher, which will really drive insurance companies. On the flipside, the banks are also going to see nice business. If it were him and his money, he would probably look at the banks, especially over a 5 year time frame.

Markets. With energy being where it is and the mining area still behind, there is just not enough fuel in the tank for it to be interesting to him. Because he is a global manager, and Canada being only 3%, he has much broader options open to him with what he can do with clients’ portfolios. In energy there is a lot of inventory. Technology has totally changed the ball game. There is nothing particularly special about what we have in energy, and there is no scarcity factor.

An ETF that will allow overweighting Frontier Markets? A Frontier Market is usually a low quality emerging-market, so you are really walking out on the risk scale at that point. Emerging markets, and by extension Frontier Markets are a certain part of asset class that doesn’t really lend itself to indexing. There are too many countries, too many cultures, too many laws and too many industries. The ETF side just doesn’t work in this area. They are not homogenized.

Markets. The Fed, by not raising rates and mentioning China as a concern, has really confused the market rather than giving it some certainty and clarity. He was looking for a very slow rate hike increase, which would indicate the Fed was confident growth would continue. He tries to ignore the large economic fundamentals, such as China. He is a stock picker. If he can find good companies that are trading of valuations that are attractive, he is generally going to own them through the cycle. Always tends have a lower proportion of companies exposed to oil and gas. Oil prices will rise over time as the supply correction eventually reasserts itself.

Canadian Banks? They face a bit of a challenge in earnings growth over the next year. Dividend yields are anywhere from 4.5% to almost 5% across all the large tier banks. The dividends are well covered. Having exposure to banks at this time, on a risk/reward basis, is quite attractive.

Markets. Sentiment, since the middle of the summer, has been pretty weak. He doesn’t know if there was a perfect outcome the Fed could have done to appease markets. In bad markets, even when good things come out, things can still go down. There have been a lot of US companies recently, who report off season, that have been reporting good numbers and yet the stock is still getting crushed. Thinks the Fed is putting out a message that they are not going to exasperate things and are going to wait for sentiment to improve a little. As we get into earning season, any expectations that might have been too high a few weeks ago, expectations are quite low now. As we get out of this volatile season, we are going to start to see improved prices.

Energy. Thinks we are getting close to a bottoming process. Until North American production rates start pulling back, we are not going to see an end to the oversupply of oil. We are now starting to see that. In July, production rates were around 9.5 billion US barrels a day and are at around 9.1 now. Suspects that in the coming few weeks, they are going to make their way below 9 million barrels a day. This is one of the key ingredients for a bottoming process, but also we absolutely need to see the Iran nuclear deal get settled. Feels Iran has a bunch of oil at sea waiting to hit market, and he thinks we need to get Iran back into the global producing in an unabated market, before we really see that bottom.

Europe. The early part of this year until mid year, when this emerging markets and China crisis erupted in the markets, the European markets were some of the best stock markets of the year. A big part of that optimism and the movement in those markets was that the economies there have started recovering, so the QE that Draghi has done, and the weakness in the euro itself, has really helped activity. Thinks it will continue to improve despite all the emerging-market concern.