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

Stock plays in India? He is optimistic on prospects for India. Thinks Modi is the real deal and really wants to see things improve. There are a lot of different ways to play India. He owns 2 stocks. Zee, which is a content and network television broadcaster. Great company and they have a great franchise. Also, Indian Bulls, a household financing business, which is growing very, very rapidly.

Markets. The S&P 500 had a long consolidation phase where it was consolidating from $2040 to $2135 in August. It was uncharacteristically tight. There was no catalyst to push it up. Inevitably coming into the weaker 6 weeks of the year, the summertime, it was more likely to break to the downside. That is exactly what took place. In October 2014 there was a big drop in the marketplace and it had a V bottom. Then in October the earnings started to roll in and the S&P rallied back up to new highs. The likely scenario is that we are probably not going to move to new highs in the short term. Right now S&P 500 corporations are at historically high levels as far as profit margins go. The expectation is that they are going to have a contraction on a year-over-year basis in the next quarter. It is going to be difficult for companies to grow their earnings at this point. China is in the news a lot and has a huge impact on the world. We are still in the phase of the weaker 6 months of the year and September is typically a weak month. He doesn’t expect the next 6.5 years to be as strong as the last 6.5 years.

Canadian bank stocks? The best time to be in these is from Oct 10 until Dec 31, and sometimes you want to get out at the end of November. (There is another period from January into April.) This is because the banks Q4 ends on Oct 31 and they come up with earnings in November. Usually this is when they come out with their best earnings and when they do their dividend increases and have their stock splits. Banks have been beaten up because of what is happening in Canada. This year will be interesting because we will start to see some of the ripple effect from the oil patch. If we do see a pickup in October, it might be a good opportunity to step in, and use a Stop underneath.

Markets. He is really agnostic as to market conditions, and the last few months have demonstrated that in terms of the ability of his portfolios to react to market conditions. In August his portfolios were flat to within a percent down for most of the month and then, ironically as markets rallied harder in the last 4 days, some of his Short positions really kicked in. He ended up about 2% down in the month. His portfolios are designed to perform very well in Down markets and Sideways markets, and moderately Bullish markets. When you get very strong increase in market conditions, like there was in the last 4 days of August, ironically the fund doesn’t do as well. However, at that point most investors have other stocks in their portfolio that are doing well. The bulk of his investments in his Flagship Fund are in Pair Trades. People are often confused about Pairs as to how you can make money being Long and Short in stocks in the same sector. The idea is to try and remove industry specific risks. E.G. if Long Canadian National (CNR-T) and Short Canadian Pacific (CP-T), he is taking out weather risk, regulatory risks and input fuel type risks. It also takes out a lot of market risk. This is isolating the specific factors that differentiate these 2 companies.

Markets. You have most things descending, because it a bear market. It is also a summer lull market, and we are also inflicted with amazing global events, which he thinks has stunned us. We also have political events. A bit of a frustrating market. As we come out of the summer, perhaps we will slowly get into a better theme, but he doesn’t think stocks will be up by the end of the year. The refugee situation is a massive historical change.

3 market sectors that give the least volatility over a 3-5 year period? Banks, utilities and usually pipelines. However, be selective with your pipelines because there’s all this political nonsense going on. He likes Fortis (FTS-T) and Enbridge (ENB-T). With the banks he would go as basic as possible with CIBC (CM-T), the closest thing to what a bank used to be.

Markets. When you look at retail sales and growth rates over the last 15 years, they have gone down, but China is still growing at a tremendous rate. No one on the planet believes that it is 7%. Most think it is 6.0-6.6%. It is the second biggest economy in the world. This is actually China’s second big spike and fall, the last being around ’08. The world oil demand is still going out and with Iran coming back on stream next year, there are some issues to be debated. The US has seen the boom in fracking and it is over. The world economy is not that robust and strong. If the US had not accumulated 9 Billion in debt since Leman, the US economy would still be shrinking at a couple percent a year.

Gold and Silver. He was long 4 or 5 weeks ago. But deflationary pressures are more than inflationary. Gold is taking a back seat. If it breaks lower to new lows then buy, and sell if it breaks $1250. New lows could result from tax loss selling of gold stocks.

Short Oil ETFs? There is no ETF that shorts oil producers in Canada. He does not recommend shorting oil producer long ETFs.

Hedged or unhedged for Europe exposed ETFs? The biggest differentiating factor in equities around the world is currency fluctuation. At the moment you want to be hedged, but when we get to parity you want to be unhedged to get the benefit of the currency gains.

Corporate spreads – have they impacted ETFs? Credit spreads have widened. There is some value in the credit area right now. But if interest rates rise you will lose some capital.

Educational Segment. It is FED Week. What happens with interest rates for the next couple of years is really important for investors. The probability of them moving up a full 25 basis points next week is about 20%. He is expecting half that. There is about a 60% chance that the Fed does a half a move. In the 50’s when interest rates went up at first when hikes started, the markets also went up because it was due to the economy being stronger. He does not think we will get over tightened any time soon. He thinks that even if the FED tightens 4 times, the markets will still be strong. There is no historical period to use as reference as to what to expect. He thinks lower rates are here to stay for quite a while.

Markets. The reaction to what has happened in China is excessive. We have seen a huge draw down in earnings expectations in the US as the year has gone on. Earnings are now looking like they will be down this year. This decade, US stocks have been the best place to be. About 45% of his clients’ investments are in the US. The key to selecting US equities is to look at large cap, battleship type blue chips with most of their revenues in the US.

Markets. The market is waiting for the Fed to decide on interest rates on Thursday. In the absence of anything positive, the market will sort of dip a little. We are at a level where the market looks to be value, and there is also seasonality. He is hoping that they raise rates to 0.25% which will take the volatility. The initial reaction for a half hour or a day might be negative, but after that it would be positive through to the end of the year. If they don’t raise rates, as long as they are extremely clear that they are going to shortly, that is still okay, but not as bullish. Looking at non-resource, this correction has provided value for lots of things. You have to be selective, but there is value both by group and by stock.

Markets. You have to be careful in the Canadian landscape. In the last 5-6 years many companies have had excessive amounts of yields being generated, but have leveraged the balance sheet in order to deliver that yield. He looks for companies that have good free cash flow and gives some of that cash flow back to investors and reinvesting some of it into the business. Currently is seeing a lot of value in that part of the market. When looking at indices that are pure yield, they are down significantly more than the broader market, so he is seeing value in the yield part of the market. Thinks Canada is a sale that is going on. There are no US investors buying the Canadian market. Banks have been under pressure because people are trying to short the real estate market, real estate has been under pressure because Americans think it is overvalued, energy has been a headwind, and there haven’t been many Americans that want to take currency risk here. Many of these headwinds are starting to wane, so he thinks Canada should see a little bit of outperformance relative to other markets going forward. The part of the market you want to be invested in, are businesses generating revenue outside of Canada, more dependent on US growth.