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

Energy Services. In Canada this would be mainly gas services, which is a little different than global oil services, which is increasingly offshore. Gas does well historically from October to March, and he would start in advance in some of these names such as Trinidad Drilling (TRI-T), Precision Drilling (PD-T) and Arctic Services (?).

Markets. There was a sigh of relief from Scotland last night, the European markets were up, emerging markets were up, the US wasn’t too bad, but he thinks international investors just headed for the exits because of the high US$, which means lower commodity prices. However, there was also weakness in the banks, healthcare, consumer staples, which tells him it was a “risk off” trade that was unique to Canada today. Their real culprit of today’s move is that Europe is weak. This means the euro has to come down, which means the US$ is probably going higher, which will continue to pressure commodities. He is expecting more volatility. We are still in a Bull market, but there is more noise.

Which Canadian bank would you recommend? Likes Bank of Nova Scotia (BNS-T) for its properties and international exposure. Has paused here a little. Capital levels are really good and they can make accretive acquisitions. The Royal (RY-T) is still sensitive to the market that we are in. Toronto Dominion (TD-T) is good. Commerce’s (CM-T) growth rate isn’t as good but they have really good capital ratios so they can make accretive acquisitions. Likes the whole banking group. A good place to put money.

Markets. He is a value investor. Things are not as cheap as they were 2 or 3 years ago, but the economy has improved. He has no problem finding plenty of cheap stocks to buy. Feels good about the outlook for the economy going forwards. There is a lot of pent up demand for housing and car sales with more people getting employment. Corporate profits should go higher. Political events are important, but not important when deciding whether to buy, say, Tim Horton’s, for example.

Alibaba? Read the perspectus. The Chinese government is hugely involved in the company and he does not understand the company. Maybe give it a few years.

Gold. Was doing well until two months ago and then we had a sharp rise in the US dollar so gold broke down from $1350 to $1226. You don’t often get such a sharp move enduring for a long period of time so he thinks gold prices should turn around in the next month or so. Seasonally he would expect it to turn around in November.

Markets. Over the last 50 years from the mid-term US election through to the spring, this is the strongest period of market gains for the whole 4 year cycle. After the election the Fed usually increases interest rates. The next two years should look decent from that perspective. There are lots of risks out there and Europe has been in recession, but he has been asking the banks in Toronto when they see the end of the cycle and they don’t see it. You would have to have some nasty shock to put us into recession like a sharp increase in oil prices. Historically the 4^th quarter has been double digit gains. You have to be selective in the stocks you buy. Some of the commodity areas have been under pressure and there is starting to be value there.

Markets. This may be the 2^nd inning of a huge secular bull market in the US$. The performance of the US$ relative to the $index is the best it has been in 17 years. Today it made an eight-year high against the Japanese yen. He loves long-term secular trends. He showed a chart going back to 1997, which shows a long-term bull bottom forming on the US$. Once it passes new highs, the world will wake up and portfolio managers globally will be allocating assets back to the US. There is a lot of good, long-term news coming in that is beneficial to the US$. Europe is certainly a basket case economically, and will be for quite some time. The Japanese certainly want to engineer the yen lower. His client holdings is up to about 45% in US$ equities, this was actually zero 2 years ago.

Economy. Federal reserve is unwinding its money printing, Europe is accelerating it and Japan is doing the same thing. There is a ton of new money being created in the system. As we saw with QE 1, QE 2 and QE 3, it is impossible to tell in advance exactly where that money is going to be channelled. It doesn’t stick. There are no capital controls. Liquidity is going to continue to be tremendous. She continues to be bullish on equities, more so than on bonds and more so on North American equities.

Markets. Thinks valuations are rich when looking at the PE’s, certainly in the US where it is 19.5 on the S&P and 23-24 for NASDAQ. Earnings growth has been okay, but nothing special. The moves that we have seen in the market over the last year have effectively been valuations being more highly rated or investors being willing to more highly value the earnings. He thinks it is vulnerable. If there were any likelihood of interest rates going much higher, people would start to draw in their horns. Doesn’t expect the Fed will drop interest rates at this time. What they have been doing is taking the $10 billion out of the QE4, and we are pretty close to taking all stimulus out.

Expects much higher volatility, especially given the record levels of margin debt, high valuations and the time of the year. It is amazing, with the geopolitical uncertainty, that the markets keep going. A pretty good time to take some of your profits.

US banks? Has never been a big fan of US banks, because they did much worse than Canadian banks. Most of them cut their dividends and have the weight of the government regulation bearing down on them as well as enormous fines. Of them, Wells Fargo (WFC-N) has been consistently the best run. If you have to buy one, buy Wells Fargo.

Markets. He has always had quite a bit of cash in his portfolios and it hasn’t hurt his results. Has been able to find some pretty decently valued companies. The overall domestic situation in the US is quite good and there is pretty decent economic growth. They may raise interest rates, but they are not going to start raising them dramatically. It is going to be very data dependent. The businesses he does own, he is quite optimistic about and there are good things to happen. There are probably some constituents in the Federal Reserve that would like to start taking a more hawkish stance, particularly just to maintain their credibility. The Fed is on a trajectory and will stop tapering at the end of October. At some time they will start raising interest rates, but it doesn’t mean they will start raising rates in January. The numbers are good, but there are still lots of warning clouds on the horizon, growth is still very modest and is likely to decelerate again after we’ve had a build up after very weak winter and spring numbers. Problems in Europe are also a bit of a drag. We are not going to see any huge inflationary pressures. There is no reason for the Fed to go and stomp on economic activity that they have tried so hard to foster.

Cash. How much should a retiree have in their portfolio? He is running little bit higher than 15%. Somewhere between 15% and 20% feels right to him. It puts you in a position of confidence when the market corrects and they start to sell off. Also, if you have cash, make it US$’s. He is positive on the US$.

Markets. He thinks we had the economic recovery because we had ultra low interest rates. He is waiting to see what economic performance we get when the FED raises interest rates. 1 in 5 people on the US are still on food stamps, so he is not sure they have fixed anything. If Scotland separates the issue is North Sea oil. The issues are also how much of the debt do they assume and will they have their own currency. There would be brutal cuts to social services. If Scotland and its oil were to leave the UK this would be a problem. Maybe at the end of the day it will not pass. There are all kinds of destabilizing factors linked to this potential event.

Educational Segment. Liquidity trap. October is the last time they are doing QE. They are pricing in the first move by next June. You have to understand what the fixed income markets are going to do. We won’t have the liquidity from the FED, although Europe will fill in some of the lost liquidity.