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

Markets. He sees the Fed bending to what the market wants. It seems that expectations of the market have been a lot farther off in the past than they are now, but expectations are still for a lower rate for longer, so the Fed seems to be bending towards that. If you saw more market volatility pick up, you would expect rates to be lower for longer. Today’s increase didn’t look like it was that much from where it was in the past, so they are bending even more to the market. If we go through the summer and market volatility picks up, with some of the data not being as strong as it has been in the last couple of weeks, then he expects rate increases would be pushed out into 2016. You have to be prepared for the case where they do raise rates in September, and what you have to really be prepared for is if they surprise the street and raise rates sooner than the market expects. He is net Long for his clients, but does have a Put option strategy, where he takes insurance and is willing to give up a certain amount of return to protect a portion of the capital. Currently has about 20% of the fund protected in the event the market sells off. He has been using things like emerging markets. Looks for Value names that have actually moved giving a good market support. Holds 20 stocks, so is fairly concentrated.

Economy. There is a secular move in the US$, and it is going to go on for quite some time. When it moved from 80 to 100 on the Dollar Index (DXY) everyone thought the move was over. When you look at the last 20-25 years, it started at around 80 and went to about 160 before it crashed down to 80 again. Then in 1991, it went from about 80 to about 122. He believes we are more in a Ronald Reagan rally rather than a Bill Clinton rally. The top will be at about 160, so we have quite a ways to go. The issue is that Canada is in a real tough place and the Canadian equity market is in a bear market. There are significant headwinds, and we need major structural changes to get us back on course. The good news is that the Cdn$ will help. We won’t see out and out deflation as other countries have, because as the Cdn$ floats, if we get down to a good level for it, it is good for Ontario and good for manufacturing. Feels that about 80% of valuation will be driven by where interest rates go and where the world economy goes.

Economy. Federal reserve just started its two-day meeting and his guess is that they will raise rates. Thinks they are anxious to get going on it and send a message. A quarter-point or a half a point is not going to have a big monetary influence on the market. The suggestion that the Fed is ready to move and the economy is ready to absorb higher rates is very important to them, so he thinks they will go, but then probably take a bit of a break and talk the markets up a bit. On bonds, his guess is that the long end of the curve continues to be in the control of the bond market. The Fed, of course, has great control of the short end of the curve, and with their bond buying program has some influence on the long end of the curve through a quantitative easing program. The market itself is going to take a bit of control, understanding that we are into a bit of a stronger economy and the Fed will start to normalize the monetary policy.

Markets. Investors are kind of bearish from a sentiment standpoint, and that is a great and powerful contrarian indicator. We are seeing a good deal of negative sentiment which is positive for the market, certainly in the short-term. Technically we are in a bit of an oversold condition.

Markets. Another breakdown on the talks of Greece. He has said for months now that it won’t work. If they put a band-aid on it now it doesn’t matter. The question is not about Greece so much as about the Euro. Italy and Spain are next. On Wed, the Fed will make their announcement. A survey said they expect to raise rates twice this year and 5 times next year. The market has priced in one this year and 4 next year. He expects a raise of an eighth of a point when it comes. The tick up in bonds, however, is due to what is going on in Europe right now. Larry would be surprised if the Fed even does a raise in rates this year but if it comes it will be September.

Park money in a Bond ETF? The question is interest rate risk. You want shorter duration bonds right now. There is no clear answer because if an interest rate rise slows the economy then long bonds could rally. At this point he likes adding duration to bond portfolio.

Educational Segment. A coming 10-20% correction. We get a 5 to 10% correction every year. The last big one was a 16% correction in 2010. It was a Greece-related correction. We are due for one of these bigger ones in the back half of this year. You have to have balance in your portfolio. Volatility is there.

Markets. Concerns of higher interest rate fears are probably overblown. QE1, QE2 endings had fears of rising rates, but they actually fell. He thinks rates will stay low for quite some time. There is a disproportionate amount of money moving to savings. The public is not borrowing as much; countries are not borrowing as much. He prefers companies for you which you don’t need to know what is happening in GDP numbers month to month. High growth rate companies can over shadow this noise. His newsletter recommends mostly US companies.

The two best banks with the best returns are WFC-N and USB-N. They came the closest to resembling the success of a Canadian bank. These are the only two banks Warren Buffet has owned.

Markets. All his clients have moved up into equities, because the alternatives are pathetic. Investments for his clients are in stocks, bonds or cash, and no client is going to pay him a fee to sit in cash to get guaranteed negative returns. The only alternatives are stocks and bonds, and bonds pay a pathetic rate of return, and many of them are negative on a real basis. He is sticking with dividend paying companies, and so far so good. Currently he is invested 60% Canadian and 40% US. You have to own good quality companies. You don’t know what stocks are going to do and you don’t know what interest rates are going to do, so you have to own a bunch of different types of companies that will benefit if different things happen.

Markets. He is a little cautious. We are starting to see signs both in Canada and the US that it is getting to be later innings. Hard to know when a bull market is going to end. There are a lot of IPOs happening, companies coming public at aggressive valuations, many oversubscribed deals, a lot of private equity firms spinning out companies they had taken private out of the public market. Also, there is some hype around certain sectors. He is not getting really bearish yet, but there are warning signs, so is trying to be more selective and find companies that are a bit more off the radar screen that trade at lower valuations. The risk is always a timing risk, so he tries to add to his Short positions to hedge off some risks. One risk today is if interest rates start to go up.

Housing. Quite a different story between Canada and the US. The US is coming from a very depressed level of home prices, whereas in Canada pricing has been strong for some time. US market has been improving for the last couple of years and he sees that continuing because there is limited supply. There needs to be 1.5 million new homes built every year, and right now housing starts are at about 1 million. The fundamentals and outlook, based on the demographics of household formations, are very good.

Interest Rates. He is not a macroeconomic expert, but tends to focus on bottom-up analysis. Believes rates are poised to increase. There is a question of timing and magnitude. As a starting point, he does not think bonds are a very attractive place to be invested in today. You want to look at businesses that benefit in a rising rate environment, whether this is life insurance or US banks.

Oil. It looks like there is competition to get out as much supply as possible. She was very encouraged to see how quickly the US and Canadian drillers pulled back on their rig counts, but at the same time she has seen a lot of companies trying to drill the higher impact wells in order to get crude production back up to where they were before all this started. She hasn’t seen the pullback she had been hoping for, but thinks it is coming. The amount of capital and activity that has been taken from the space is so enormous that we are going to see a re-supply response sooner than later. Inventory numbers are very encouraging, and we got to a peak of about 490 million barrels. Capacity is about 525 million barrels so there was concern that we were going to get to full storage, but it has pulled back by about 20 million barrels, which is very encouraging. There has been a slowdown in exports to the US which is helping a lot. However, the increase in the supply numbers for the US is not helping on the supply/demand balance, but she thinks that is going to come sooner rather than later. There are a lot of big global projects that are being shelved right now so there is going to be a pretty significant impact until that supply/demand balances.

Markets. Stocks have been fluttering for a while because overhanging the markets is this issue of whether rates are going to go up or not. He thinks they are going to go up. The Fed is waiting for the numbers to verify their decision. Just as everyone thinks things are awful, people then get a surprise and jump back in. Now we learn the US economy is not in a shrinking mode. He would not be surprised if there is a 50 basis point rise in the rate in a couple of months and then another before year end. 2016 will be the eighth year of the cycle. The Fed needs 150 basis points in order to be able to later reduce rates to provide stimulus. He is a value guy. In some senses it is getting harder and harder to find value. There are a lot of stocks that find themselves quite extended. There are sectors including the financial sector that have kind of been left behind in the movement upwards. It is a rising interest rate environment very much favours those kinds of stocks.