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

Markets. What happened to Volkswagen this morning will badly damage their brand. If Money Managers did this, it would have huge reputational risks. Technically Volkswagen should bottom out about where it is today, but this news may increase the downturn. He thinks it will be a while for this one and it is not the day to step in a buy it. The Fed could not come to a consensus on when to raise rates. This decision on when and how to raise rates will have a huge impact on world economies.

Are we entering a depression? No. The liquidity we have seen has stabilized things. Right now the deflationary forces of the global QE and the aging population are far greater than inflationary pressures.

Educational Segment. Opportunity and Event Risk. This week there is an election in Spain. The US debt ceiling in October will be a market moving event. How do you navigate around them? His current road show addresses this. He addresses events by moving in and out of equities. When an event occurs he goes back to see similar events and sees what happens to look for opportunities.

Markets. Valuations have come down a bit on this recent pullback. He has been buying a bit in the last little while in Canada and the US. The consumer discretionary and tech spaces interest him. What people save on gas goes into discretionary spending. There is a lag effect and that is just coming in to play now. Larger, more stable REITs are more challenged as to growth so he is looking at smaller ones. Precious metals have some high quality companies that have been beaten up fairly badly.

Drip Programs. If you want the income, then take the money. If you don’t need it, then you can reinvest in the company going forward without brokerage charges. You have to want to buy the company through thick and thin, however.

Preferred Shares. It has been a difficult market. He does not invest in them. Now that resets are resetting, they are doing so lower. Each individual issue is unique and you have to consider each one individually. You have to be pretty careful picking them.

Markets. With low interest rates, if we get a bit of wind behind the market, people get afraid to be under invested. Maybe in another month or so you generally get strength. China is a communist country still and they do not have the transparency when it comes to their economy like we do. They put out a 6-7% GDP growth figure and it doesn’t seem to be that much. He feels it is growing in the 3% range, the slowest growth they have seen in a long, long time. It is still positive. The government there is doing all the right things to get things accelerating again. Meanwhile the strongest economy in the world is doing well (US).

Markets. Global GDP is going to be muted. The reason you saw the Fed make the stance that they did, was that they threw in this component of having to be concerned about what international markets are doing. It makes a problem much more multi-layered than just looking at jobs and inflation in isolation. As an investor, you just stay the course, but you have to be selective. What is happening, especially in the Canadian market, is that you are getting a bifurcation. Anything that is tied to commodities is completely ignored for the time being. There is going to be more volatility that the investor has to accept. A sector for all seasons would be healthcare, as well as some areas within technology, where you are going to be able to drive a margin expansion story. For companies this means cash flow growth, and this is where you hang your hat.

Markets. This business of the Federal Reserve raising rates has taken way too much time. It is kind of tiresome. You are looking at a quarter of a percent. Too much is being made of the whole situation. The people who are viewing and reacting seem to be saying these people know exactly what they are doing, and he thinks that even they do not know exactly what they are doing. They are putting together probabilities in their best guesstimates, and at the end of the day too much is being made of it all. There are so many problems out there that he thinks we are in a worse position in many ways than we were in 2008. There is so much debt out there, that it is a major problem. The hedge funds and what they can do is a major problem. There are difficulties in Canada with personal debt loads. When housing values go down, which it will, the debt loads will still be there. If interest rates go up a couple of percents a lot of people are going to have tremendous difficulty paying their debts. Thinks we are in a bit of a fool’s paradise right now.

REITs? At this point he is not crazy about them. Back in 2008-2009, he was looking at a lot of them. There is a lot of transformation going on in the industry. A lot of the real estate companies are having difficulties because of the change they have in the malls with bankruptcies, diminishing store space, online sales, etc. This is a very, very changing sector. A lot of them pay great dividends, but for him they are not cheap enough.

Markets. The language the Fed uses is more important than whether they raise rates today. They are ready to raise rates. With 5 years of phenomenal returns, especially in the US, the days of buying a dividend stock and being okay are behind us. He needs to see earnings per share growth, cash flow growth, and low balance sheet debt and their ability to service that debt. Better value is found in the US than Canada.

He is under weight Canadian banks. Loan growth has accelerated, but now slowing. Many Canadian banks are down double digits. Real growth is in the regional banks in the US.

Markets. He thinks the markets have settled down somewhat, other than today’s gyrations after the Fed made their announcement. Investor sentiment remains rather fragile. There are still concerns over the timing of Fed policy, trajectory of how interest rates will move, economic stability and growth in China. Investors have to go back to the fundamentals. The S&P 500 is trading at about 17X forward earnings. Even though we are still in a low interest rate environment and a low inflation rate environment, it represents fair value. You need to pick individual stocks and choose those names that will grow. He still likes the US over Canada. Canada has some issues with where we are in the commodity cycle and how that affects the rest of the market. He continues to favour the areas of consumer discretionary, healthcare, infotech, maybe industrials in financials as well.

US$ strength? At the very least, it is going to remain where it is here relative to the Cdn$, but more likely it is going to move further and further ahead in terms of upside.

Markets. It is more than a 50/50 chance that the Fed is going to raise interest rates tomorrow. As an investor, he is hoping that he is right. This need to get out of the way. The US economy is in reasonable shape and can afford a move towards normalization. Thinks the impact on the markets will be limited. If they don’t raise rates it may just add more volatility, because it is anticipating the next meeting and how much they are going to raise at that time. The US is his favourite economy right now, yet he is not overweight the US market. Sees some better opportunities in other markets around the world. This is a little difficult right now because of the strength in the US economy, but valuations in the US are reasonably fairly valued, so he sees opportunities in Europe and Asia that are a little better. Right now, Europe is being affected by what is happening in Asia. Germany in particular has a fair amount of exports to Southeast Asia and China, and there is negative sentiment coming from the consumer. Newspapers’ headlines are all fairly negative on China which is having a negative sentiment. This impacts Europe, but overall feels European prospects are improving. It is going to be dragged up by the good economy in the US, and he sees some good opportunities in the European stock market. He favours European companies that have exposure to the US. They are going to be the biggest beneficiaries of the weaker euro relative to the US$, and will also be beneficiaries of a strong US economy because of demand from the US consumer. However, he is fairly optimistic on the “domestic markets” in Europe. Thinks there will be a decent recovery in consumption. Emerging-market prospects are not as good as they were several years ago, but when you look at the opportunity with the valuation and the selloff that they have had, there are some real good opportunities presenting themselves.