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

Seasonality. In the latter part of July you tend to get a pickup in volatility. Volatility tends to rise between July and October. Right now we are in this stagnant market, a neutral sentiment. A bit of volatility has crept into the equity market and the bond market recently. What better time to think of a possible Summer rally. At the end of June is when you get your typical Summer rally into the month of July. Kind of the last Hurrah before the market tends to get really rocky and a little bit weak. Between June 27 and July 17 the S&P 500 has actually gained about 1.22%, so if you are in equity positions you want to think about decoupling from the equity market and reducing your beta, because between July and October you are going to get the uptick in volatility. You can play this by bringing up a chart of the volatility index, the VIX (VXX-N), and draw a line at 12 and draw a line at 21. When things get complacent, below 12, you want to think about hedging your portfolio, perhaps buying into volatility, perhaps taking profit in some of your positions. Conversely when things get over 21, when fear is spreading throughout the market, you want to take advantage of that. Buy into certain high beta positions; perhaps start preparing for your fall allocations. Sell at 12 and Buy at 21 has worked quite consistently. To benefit from volatility, the asset class that tends to benefit the most from volatility mostly is gold and possibly entering into a position a little bit sooner. The end of July all the way through to September is the period of strength for the gold miners. Period of seasonal strength for gold itself starts a little bit sooner, at the beginning of July. When you start to see an uptick in inflation that is usually a good indicator that you are going to see some movement in the price of gold. The gold trade has worked about 70% of the time.

Resource Equities. When looking at supply/demand fundamentals and their underlying commodities, the supply side is starting to react to lower prices and you are starting to see projects deferred and slowed down and capital cuts. For the metals/mining sector, it has been a 2-3 year process. Thinks the worst is over for base metals. He is strategically positioned more for things like zinc and nickel, a little less on the copper side. Expects there will be a check back in iron ore, but later in the year you might want to look at that. He can see gold range bound between $1150 and $1250. Not a bad entry point if you focus on low cost producers. There is a seasonal pattern for gold between July and September. For oil/gas, it is a much more of a responsive change. Thought it would take 3 to 4 quarters before it took hold, and he is seeing this in the numbers. He could see oil checking back to perhaps $55, but relatively range bound between $60 and $70 over the next 12 months. Comfortable that from now on there is a good entry point for oil. Natural gas has been a longer-term play in a sense of adjustment to the supply side of the equation. There are a number of factors coming up this year in terms of power demand, new power generation capability as well as LNG kicking off late this year and moving forward over the next several years. This should drive the price range closer to $3.50.

Markets. We’re already seeing some distribution starting. Today was positive, but it could be short-lived. There is some push-pull going on and probably confusing a lot of investors. On the TSX, it is the 14,900 that he is watching. Interesting that we don’t have the commodities participating meaningfully. It is hard to see a catalyst in Canada. S&P 500 books a little more positive. There is a lot of confusion. The Dow transports have been falling off since late last year, while the Dow industrials have been gradually moving upwards. There is a bit of the divergence between the two. You want the industrials to be confirmed by the transports that are shipping things.

Markets. Markets have been pretty range bound for most of this year. First we had a lot of weakness in economic data in the 1^st quarter. Based on the strong US employment numbers in the last 2 months, it was largely weather-related and strikes in the Western ports. There is a rebound in employment which suggests we should see better economic growth going forward. With lower energy prices and the stronger US$, there has been a negative profit revisions for the S&P 500. Going forward, there is not a lot of room for multiple expansion, and it may be a profit driven story from here on. Feels the US economy is on a slow path to improvement. Also, consumers will benefit from lower energy prices, and if they stay low consumers will start spending. Improving employment will also lead to consumer spending. Thinks the US currency will stay strong and investors should continue having some of their investments in the US.

Markets. Markets are basically unchanged for the year, both in the S&P and the TSX. There are a bunch of different issues on the forefront, and some of them are valid concerns. The big ones that the markets are struggling with are 1) rising interest rates and the impact it is going to have on corporate profitability and the competitiveness of stocks over bonds, 2) a strong US$ and the impact on the profitability of corporations, particularly US multinationals, 3) what is going on in Greece, which he thinks is going to continue to drag on for quite some time and 4) emerging markets have been pretty sluggish, and China continues to show signs of decelerating economic activity. Thinks investors have not been paying enough attention to the big moves in currencies.

Transports. There is an old theory that the transports have to confirm the strength of the industrials, because the transports are carrying the wealth of the nation on the rails or in their planes or their trucks. Energy should be a huge tailwind for them, and that is not panning out. A chart with Transports and the Dow shows a large divergence with the transports falling and the Dow starting to follow. That is a classic Dow Theory warning sign for a correction.

Markets. The strong US dollar is starting to have an impact. ECB and Japan are full peddle to the metal with QE and the US is pulling back. It is about what is likely to happen over the next year. The run-up in the Chinese market could be locals speculating on the increased weighting in world index (MSCI), resulting in the buying of Chinese stocks.

In Europe, dividend payout ratios are generally higher, but you don’t get the dividend tax credit. All the ETF providers in Canada have a fund that gives this exposure (Eg. EUR-T). He believes the Euro is going to get weaker so you want to be currency hedged.

Energy Sector. The Alberta election was a big catalyst in the energy sector, pushing it down, as they wanted to raise taxes. He believes we are making a big bottom. ZEO-T gives you exposure to the sector.

Smart Beta ETFs take the universe of ETFs and filter for momentum characteristics: Momentum, price, etc. When momentum is hot, these are where you want to be. When value investing is in favour then these will underperform dramatically. He is weary on momentum strategies over the next year.

Educational Segment. The 6 Tenants of Dow Theory:

(1) The market has 3 movements. We are in the speculative phase around the world now.

(2) Market trends have three phases.

(3) The market discounts all news.

(4) Stock market averages must confirm each other.

(5) Trends are confirmed by volume, which is not what it used to be.

(6) Trends continue until there are definite signals they have ended. If industrials are doing well, then the rails should be doing well. In ’05 and ’06 the correlation started to break down in preparation for ‘07/08.

In ‘11/’12 it started to break down but we did not get a bear market, so he challenges Dow Theory. Don’t pay a lot of attention to it, but it is an important point about divergences.

Markets. Typically the summer is not the most euphoric time. He is 70% cash about a month ago. He is slowly deploying cash, being patient over the next couple of months. He tries to find a stock that is mispriced for whatever reason. He took profits as we headed into the most recent run on energy. We went from way to pessimistic to way to euphoric and now there are a few new headwinds we have to deal with. He deals with single stock opportunities. You should be heavy in cash and be ready for table banging opportunities and then if you are wrong take your loss quickly.

Markets. Thinks North American markets feel somewhat stretched. We’ve had a good correction since 2008-2009, and since then he feels investors have been bidding up the market, particularly those looking for yield. In Canada we are having the fall in energy prices, which is still reverberating through the economy. In the US, things have consistently gone up in the face of what is really not gung ho GDP growth. In Europe, we have the well known problems there, but it does look like it is somewhat stabilizing. This recent pullback provides an opportunity for investors to determine at what price levels they will be comfortable stepping in and initiating some positions. Thinks we are getting close in a number of areas there. He would be very surprised to see the US Fed raise interest rates this year. The US$ has been so strong, and he thinks that is already beginning to hurt their exports.

Telecoms? Feels they are all worried about their businesses to some extent. The Internet is changing the game very rapidly. They are trying to stay ahead of it by offering streaming services, etc., but really smart kids know how to stream without paying for a lot of services. People are getting phone services over the Internet much cheaper than the used to get it over wired line. All this leaves them with is the Internet providers, maybe offering some enterprise solutions, etc. Bell (BCE-T) and Telus (T-T) are executing relatively well to date. Rogers (RCI.B-T) has been struggling with their model. His personal choice would be Bell which gives you a good yield with good success with their fibre-optic to the home.

Markets. With jobs being added, it is further evidence that the US economy is recovering. However, we are still not seeing the US consumer starting to loosen up the purse strings and spend money. The good news is that the recovery is still on track, but the bad news is that the consumer has not become as active as many would have thought. His strategy is designed to identify dividend paying stocks that will grow their dividends. On a valuation basis, he still sees more opportunity in the US. He has been two thirds US and one third Canada for the last 5 years. Likes the US regional banks over the national banks, because they are more focused on consumer banking, which is where he sees the growth. Has been pessimistic on the commodity/energy space in Canada for several years now, so missed the oil price drop. Although oil is undervalued, it is still a bit early to step in.