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

US Dollar and portfolio adjustment. Japan needs to continue to weaken their currency. Euro may go to parity. US dollar staying strong may be a drag on US earnings so you may want to change your portfolio as currencies weaken.

Educational Segment. Volatility and the Bond Market. In his sleep at night portfolio he looked for this correction. Bond markets have done very well. With 3 ETFs you can buy the entire world of fixed income. He saw a 10 point spike in their charts. Hedged fund portfolios are forced to come and buy fixed income securities. He looked at the spread between VIX futures. Wednesday of last week we saw the spike in the VIX spot and the bottoming of the S&P. What he did was to get out of a lot of fixed income and rolled it into equities while they were so low and bonds were so high.

Markets. He is starting to pick at some stuff. He gets the sense that the worse is over for the correction. Same for the stories that had people nervous have started to abate. We were three years without a pullback. He never sells into those things. November and December are pretty good months usually. If you held good solid companies you only got knocked back a few percent.

Banks or Healthcare? Banks in Canada have been money makers in Canada as long as the eyes can see. Banks double every 10 years. To invest in Healthcare you have to invest outside of Canada and lose the dividend tax credit. He likes medical device companies. ZMH-N is a preference in healthcare.

Life Companies. They make more money when bond yields are higher. Right now bonds are so unrewarding. If you are SLF-T or one of the others, then what you get on your bonds is so much less than before the financial crisis. The question is how they can invest unearned premiums. He thinks it is premature to buy the pure life insurance companies at this time.

Markets. Buys businesses that generate high returns over a period of time. His value-add is just buying good businesses. He worries top down and invests bottom up. He is seeing opportunities in the market since the recent correction. He has been waiting for the valuations of certain companies to come down. He has been adding to some positions over the recent volatility. He expects volatility to remain as global economies continue to diverge.

Canadian Banks. He does not own any in his focus fund. If you have a big weighting in banks, it is risky. He is concerned about the amount of leverage they have on the balance sheets. It would exaggerate any slowdown in the next few years. He thinks earnings will slow over the next year, so take some profits.

Markets. This is the best time in 5 years to buy energy stocks. It is the best correction going back to 08/09. It was not the speculative names, but the majors. Physical demand for oil world wide remains strong. You look at inventory spreads. Demand is up over a million barrels a day, but financial demand for oil is very, very weak. These are people who do not expect delivery of the oil when they invest in the future. There has been a trade to sell oil because it was strong. This put enormous short term pressure on the price of oil. It is thought that oil futures are grossly oversold. US oil companies are massively outspending cash flow. As the price hits $80 going up, their cap-X should respond. Companies are now thinking about their 2015 spending plans. This weak oil price is very much a self correcting oil price. The opportunity is in Canadian oil companies and in the ones that have simply sold down with the market.

Markets. He thinks this week has to do with the Fed unwinding QE. Also, you are seeing numbers out of Europe, China and Japan that are quite worrying. The US can implement QE without impacting the purchasing power of its currency, whereas Japan, when they did QE, created a tremendous weakness in the Yen. Even grocery sales are down significantly. It means the whole QE game globally is coming to an end. We could see the Fed reverse their course, but does not think they will do that for credibility reasons. There are record levels of debt in margin accounts, even compared to 2007. Lighten up on risk assets and try to get diversified and not sensitive to broader market fundamentals. Volatility is quite concerning to him.

Markets. REITs have held up well in this market downturn. The 10 year bond in the US fell 60-70% this year when people thought it would go up. REIT fundamentals continue to be strong: above average free cash flow growth from occupancy increases, rent increases, interest savings on refinancing, acquisitions and development. We saw a number of things that derailed global growth projections. The US recovery will remain, but it will be a slow recovery. We have an environment right now where the economy is improving, but rates are not rising. Occupancy increases don’t happen overnight.

Markets. Seeing 10% declines on the TSX was a bit of a surprise. The S&P didn’t quite get to the 10% mark. October is often a month characterized by market declines, but also characterized by market reversals as well, so we may see that this month. We have an alphabet soup of different problems. We have Ebola, China, Europe, Isis, the Fed, etc. There are a lot of issues, a lot of concerns, a lot of problems and worries in the market, but when something starts to go right, the market starts to reverse upward. If you look at the fundamentals, the economy globally and the US are still moving forward. There are some question marks as to whether we are seeing some stalling in Europe and in China, but it is still moving forward. The bull market is still alive. You want to take advantage of these opportunities, and use any cash that you have built up, and put it back to work.

Market. Feels the biggest thing in this volatile market is the profit taking. We have had a big run on the markets. His theme for the last year or so is that it has been harder and harder to find cheap stocks. A lot of people are moving to the sidelines and locking in for the year-end. At some time there has to be a bounce. He tends to avoid commodities because you can never predict what they’re going to do, and they are violent when they start to selloff. At some point oil should stabilize because the marginal cost of production is around its current area now of around $80-$90, so it shouldn’t go below that for very long. He always tells people to take profits. Buy and Hold is overrated. It is nice to have cash right now, and he is close to 50%. It just makes sense that as this market cycle evolves and you are up on positions, you take money off the table so you have cash when this happens. He hasn’t been doing a lot of buying right now, but at some point he is going to start writing and recommending new names, but for now he is just going to ride this out.

Energy. Saudi Arabia is doing a real shift compared to what they usually do, which is to cut their production to stabilize prices. This time they are competing on price. Maybe they are worried about the US and its growing production and their exports of refined products. Who knows? Usually when there is political instability in the world, oil prices go up. Currently we have Isis, Russia, Iran and oil is going down. He is guessing there is a lot of politics going on that we don’t know about.

Home Price Indexes. He showed a chart indicating the US housing market with a big correction. Canadian market has not had a correction. The government is obviously worried about it because they are forcing CMHC to get more restrictive. Also, banks are concerned about it, but they are less exposed because they tend to sell a lot of mortgages off, but nonetheless they have some exposure. It seems impossible to him that an asset class can defy the long-term average this long. He feels that something has to happen.

Consumer discretionary. In the last 6 months he has noticed a lot of consumer discretionary stocks moving up. To the extent that they have sold off, the thesis of going into this sector makes sense. In the US, lower oil prices can put a lot more money into the average consumers’ pocket. Not a bad idea. However, if we are heading for a recession, or at least a slowdown, the thesis starts to fall apart despite oil prices.