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

Where is a safe parking lot for cash, while waiting for opportunities? The primary objective is to keep it safe and have it liquid and available. You could do that with a high-quality money market instrument, or even the banks, depending on how much you are parking. Banks have high interest savings accounts and you can buy that right in your trading account. Yields are somewhere between 1.25%-1.5%.

Markets. Investors are looking at 2008 with memories of painful losses. They are kind of ignoring the fact that corporate balance sheets are much better, interest rates are at historical lows, earnings are solid and there is lots of takeover activity. Corporations have a longer-term viewpoint. If they are going to buy a company, they are looking at a 30 year timeframe, while individuals are only looking at the next quarter. Who knows what is going to happen in the next quarter? Looking at the big picture, corporations are quite happy to borrow money, basically at 0%, and buy growth. If a company is willing to pay 100% more for a stock to take it over, maybe individual investors should not be so worried. He has seen so many “doom and gloom” stories in the past 30 years, and he constantly gets bombarded by his customers about reading an article online. Basically it is the same old, same old, where someone has predicted a market crash and have backed it up with data. On the other side, there are people buying stocks, and they are not stupid, and they have backed it up with data as well. For Canadian investors, energy, resources and materials may not be the best place right now. He has been trying to focus his customers on companies that are growing 15%-30%, because scarcity of growth will be worth the premium in the market. He’s just launched a Growth portfolio with 25 stocks. Some of them are growing at 50%-60%-70%, and those will get a lot of attention down the road.

Interest Rates. Interest rates, going up in the fall, could trigger a lot of economic activity in the housing market, etc. and this is where investors are missing the ball a little. When the tapering came in, everyone worried about that for over a year and stopped buying bonds and the market went straight up. Thinks the same thing will happen with interest rates. There have been 7 years of preparation for interest rate hikes. When they actually do go up, maybe that will trigger some sort of event where money will start to flow faster and you get the acceleration of money, and people will start to feel that now is the time to buy that house, or to buy that car, because rates are going to go up. It could be quite good.

Airline sector? Today there was the Can-Jet problem where they are laying off two thirds of their staff. Industry capacity has changed a little bit. Historically it has been a horrible business. Why put yourself through that bother?

Energy. Thinks there is still some downside risk in oil. He has a lot of customers asking if they should go zero percent in oil. He can’t predict the future and doesn’t know where oil is going to go, so he tells them to make sure their weighting in their portfolio is appropriate. Thinks 10% would be a maximum weight.

Markets. There is no secret that the global market is pretty much stretched. On a market cap weight it is about 18X, which is towards the high end. Bears will tell you that is of great concern, but there are pockets of value. Within these large markets, like the S&P500 or Canada, there is incredible value. It is just whether you want to go down into some of those value names or whether you want to stick with what is working. Has been stopped out of a few names and hasn’t replaced them with a very good candidate yet. He puts investors into 3 categories. 1.) Those that have missed this rally, who have said they are not putting up with this again. They have stayed in cash because valuations are so high, so what is it going to take to get them back in. 2.) Those who didn’t do well in 2008, but have recovered, but haven’t changed the way they approach managing their money. If another 2008 comes along, he fears they will make another mistake. (Didn’t give #3.) He uses stop losses, which seems to work just fine.

Energy. He is not a fan of the energy patch, more because of its cyclical nature. It is fantastic to see some recovery, and very refreshing for a lot of Canadian investors. You have to remember that a lot of the valuation of these energy companies is based on $65-$70 oil, if not even higher. This rally is obviously welcome, but he is not sure it is as sustainable as some investors might think.

How do you apply your stop losses when the stock is moving up? He doesn’t enter Stops into his trading system. Uses an old-fashioned spreadsheet, linked in dynamically to his data feed. Has his spreadsheet showing red, yellow and green. Yellow he doesn’t mind, but red he does not like. It starts to tell him when things are weakening. He follows it up with a ratcheted level. His warnings are fairly simple and he is not looking at technicals at the 1^st stage. 5% off of its high gives it a yellow, 10% gives it a red and then he watches it from there. He doesn’t usually let things get much further than a -10 or a -12. Is the name falling 10% (Eg.), but is the entire sector down 10%? That gives him a bit more comfort to sit tight on it. If it goes down 11%-12%, then he starts looking at the 50-200 day and does another whole sweep of his fundamental research reports, and then makes a decision. When you have a sector doing well, and for whatever reason your name in that sector is not doing well, you have to get out of the name and move on.

Markets. There have been weak numbers out of the US which is causing a concern to investors as to whether growth has really slowed. Weather played a part in the 1^st quarter. There is slowing profit growth because of the strong US$, and that is a headwind. The US touched a high of $2,117 back in March, it has been up and down and we are still 4.5% from those levels. Earnings season is just starting now. There are some financial companies reporting. We are seeing a pretty healthy economy and things will improve as the year rolls out. The bar has been set low and it depends on the industry. The consensus for the S&P 500 is that earnings are going to be down over 4%, and that hasn’t happened in a while. 2^nd quarter is still down a couple of percents and this will slowly improve in the 3^rd and 4^th quarter. They will be raising rates in a slow, measured pace, until they see confirmation that growth has resumed. She thinks spending, because of low energy prices, won’t show up until the back half of the year.

Markets. Between now and May 5, markets are okay. This is because we are going through the earnings period for the 1^st quarter. Bulls are saying “Look for some good news in the next 3 weeks.” because this is when companies have their annual meetings, announce dividend increases, share buybacks, etc. On the other hand the Bears are saying “Earnings are not going to be good for the 1^st quarter, and in fact on average, earnings on the S&P 500 companies are expected to be down 4.8%.”. Beyond the beginning of May, it is a very different scenario. It looks like the Fed is going to increase interest rates for the 1^st time, probably sometime in September. Since 1946, the Fed has changed its course on 13 occasions, where it started to increase interest rates. On every one of those 13 occasions, the stock market has been hit on an average of 10.1%. On 3 of those occasions, it has been more than 30%. It is not at the time of the actual increase, but it is the 6 months prior to the actual 1^st increase. Between now and September, we are within that 6 month period. This is at a time when markets in the summertime are volatile anyways. Watch for markets to be okay for a while, but soon as it starts to spike, that is a clue that we have a problem.

US Dollar. When you look internationally at investment returns, currencies are a big, big factor. The dynamics that are going on in the marketplace right now, between the Fed contemplating tightening, Bank of Canada easing, Europeans just starting their QE, Japan continuing their QE, when you look at that and only that, you can get a real sense that the US$ is going to continue to get stronger. There is about $9 trillion worth of global debt from foreign countries and corporations pegged to the US$. So if the US$ gets stronger, for them to repay that, there is an added pressure for demand for dollars. All of these things combined over the next year probably keep the US$ on the stronger side. Never listen to what Central Banks are doing, they are almost always wrong.

China. This speaks to the US$. For many, many years, because of all the dollars they got through trade, they were the biggest buyer of US treasuries. A couple of years ago, they backed off and said that they weren’t interested in treasuries anymore. With them missing their numbers, we are all concerned. Very concerned about real estate prices now starting to fall there. They are going to do 7% growth because they are going to engineer it. He thinks China has got to be slowing to 4%-5%. That will ultimately come out in trade numbers.

US Earnings. We are expecting a little bit of weakness this quarter. A lot of that has been discounted already. The 1^st part of earnings, the banking side, people are expecting them to be a little bit better. Banks tend to report at the front end of earnings season, and that tends to be a bit more positive. The real risk comes towards the back end of earnings’ season as we get into late April and early May.

Why are leveraged ETF’s not recommended for longer-term investing? In a leveraged ETF, if the market goes up 1 day, they are buying higher. If the next day is going down, it is selling lower. So every day that it goes up and down you are buying high and selling low. That is a formula for disaster in the long run. When you look at any ETF, it doesn’t matter what it is, the more volatile it is over time, the worst that leverage embedded in the ETF is. Great for short-term trading such as a couple of weeks, even a couple of months, but you have to get the direction right. MER’s typically fall in at around 1%, so shouldn’t be a major consideration.

Hedged versus non-hedged ETF’s. You have to make a bit of a market call to know which one to do at any point in time. What we do understand from currencies is that they are a very low correlation generally with equity markets. If the view for the next year or so is that the US$ is going to continue to get weaker, the Cdn$ probably doesn’t get past $1.30-$1.33. The Cdn$ is currently sitting at around $1.26. You want to be hedged. When the Cdn$ comes back, you want to be more hedged.