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

Markets. You look at the VIX and other indicators and there is not a lot of fear out there. Yet things in the markets are deteriorating. He likes buying when people are afraid. You can’t argue the market is cheap any more. Thinks you could easily see this market down 15%. A 5% correction would create panic and down it would go. In the past you never knew what the catalyst for a pullback would be. You could still have a breakout to the upside where the market goes up in one final frenzy. There are less and less stocks participating in the advances.

Markets. The fall historically starts as the weakest time period of the market. September 16 through to October 9, the market has recorded an average decline of 1.8% and has been negative 18 of the last 30 periods. We’re still seeing very low levels of volatility in the market. The VIX is 14 right now and historically it should be about 24. It could still go much higher. Seeing all the turmoil we are seeing including some of the headlines and the coming elections, there are a lot of catalysts that could lead to a drawdown in stocks. You want to take advantage of this weakness. There are appealing buying levels during the period of seasonal weakness ahead. S&P 500 shows a significant rising wedge pattern. If we break below the lower limit, currently at 1950, there could be significant downside potential. He is expecting that support line to hold.

Energy. There is normally a period of strength for energy stocks at this time of year. Oil tends to rise around hurricane season, but hurricanes have been much weaker than historical norms. Because of this energy stocks have been poor performers. He is not seeing too many positive tendencies ahead to support the trend in energy. The period of seasonal weakness starts from mid-September until about the beginning of December.

Markets. Had thought there would be some kind of time correction as opposed to an actual 5%-10% correction, because there was too much money on the sideline. Because of this, he basically stayed fully invested, which was the right thing to do. Sold a position recently, so now has some cash. Markets are choppy. It’s September and October, so his current short-term thinking is that the market is really worried about the language from the Fed next week, and that maybe they raise rates sooner than they said. He doesn’t necessarily buy that, but it is getting priced in with a strong US$ and a weak Cdn$, weak bonds and weak pure yield stocks. On the other side, banks still do well. Lifecos are also beneficiaries of higher rates, so all those stocks are doing well. If the Fed says rates will stay low for a considerable time, he thinks there will be a bond market rally and you’ll see a Cdn$ rally back to $0.91 plus. Thinks the stock market is more nervous within sectors and he doesn’t think the market moves up a lot or down a lot. From here, we are really driven by earnings growth and/or the lack thereof, stock by stock and group by group. Canada has done very well, better than most G 20 countries. You now have to look at group and stock by stock.

Lumber stocks? Lumber prices have done well generally and the stocks have lagged a little bit. There is a soft 3^rd quarter coming, but he expects US housing to pick up slowly and the 4^th and 1^st quarters to be better. (See Top Picks)

Markets. Has being fully invested for a while and has started to raise just a little bit of cash, to take some of the gains on his positions. He is seeing conflicting things in the market. On the macro economic data, some parts are looking great, but others are not looking so great. Tempering his enthusiasm a little as he had since the fall, in case there is some kind of reaction to potential talk of rising interest rates. While he doesn’t think that is going to actually happen soon, he is getting prepared for the volatility that might result if people think that is going to happen. He is of the view that this is a false alarm and that things could correct a little bit, but who knows where rates go as they have been backed up for a little while. Today was the first he had seen signs that interest sensitive names started to pull back a bit. Hedging is important for him. He is managing his portfolio as an absolute return generating vehicle. When he gets cautious, he looks at how he can protect the downside if something happens. The cheapest way to do that is through the long-term bond. It is extremely cheap to hedge with. He is expecting a good end to the year and is still 90% invested.

Markets. Most bull markets end with monetary tightening when the economy gets overheated, but there just isn’t signs of that happening. Share buybacks are helping and are partly due to low interest rates. They borrow to buy back stock. There is complacency out there so you have to be careful. Year 3 of the presidential cycle typically does well after a weak year 2 but year two was strong in this case. You see a 10% decline in markets once every 28 months and we are in month 34. You can wait a long time for a decline. The complacency level concerns him because investors become vulnerable to a shock. Margin levels are high again. This is one sign that you have to be careful.

Markets. He can see some choppiness going forward given geopolitical tensions that are happening, as well as negative seasonal tendencies typically this time of the year, when the volatility index normally jumps by about 15%-16% on average over Sept. and Oct. There are also concerns as to when interest rates will rise in the US in terms of Fed fund rate. Plus concerns over China’s economic recovery. Still believes there is a strengthening US economy. We’ll see a grind higher in equities. It’s just in the near term there could be time for a bit of a pause. You’ll need positive earnings trends to continue and corporate earnings to continue to do OK. If you apply an expected $130 earnings per share on the S&P over the next 12 months, and multiply that by the 17 multiple that we have right now, that gives you $2,210 on the S&P, about an 11% return. He is looking for a 4%-5% pull back. Doesn’t really see a correction in the stock market unless there is an earnings recession and he doesn’t see that at this point. He is sitting on 10%-12% cash at the moment.

Markets. A lot of people think the markets are high here, but he thinks not. You look at the S&P earnings and we are where we should be on a PE basis. There is no indication that interest rates will go up appreciably. He thinks we are going up another 10-15%, but there may be corrections in the next few days or weeks. He feels you get 7% in the market vs. treasury bonds at 2%. You have to do security selection and have cash on the sidelines. There is every indication that we keep going up slowly. The US recovery is fully in place. Things seem sluggish from a jobs perspective, but from a company perspective, they are profitable, expanding and have high export growth. The US housing recovery is also in place. Consumer debt levels have really come off from 100% to 70% and they have net savings of 4-5%. The US is a dynamic economy and they are growing at 3.5%. The harsh winter messed up the statistics.

Floating Rate Preferred Rate shares. The rate gets reset as interest rates rise. This is what you want. He referred to XFR-T to show one year performance of rates and preferred shares.

Economic Growth. This is a slow and steady progression out of the great recession of 2008-2009. The world economy has a lot of stuff going for it, but there is some stuff pulling it back, so instead of having a robust growth which we usually see out of a recession, there have been 2 steps forward and 1 step back. Thinks this is continuing. It is mostly the US that is really picking up, which is super important because it is the biggest economy globally. There are still problems in Europe. China is maybe a little bit slower than it used to be, but is still growing robustly.

Markets. We are in a secular bull market. When he looks at the signals, he tries to understand what the market is saying. In general, in a healthy market over time, a broader and broader number of securities should be participating in market strength. In the spring, the developed markets were leading the world, led by the US, followed up with Europe and some other developed markets. We have seen buying in equities spread beyond developed markets and into developing markets. China is certainly behaving better for the first time in 2 years. Latin American markets are behaving a little bit better. The breadth of buying in markets has been expanding, and does not look overcooked when looking at credit markets. Corporations are being able to borrow money at very low rates so the market is not concerned about business risks at this point.

Market. The market has been very good, but we are always vulnerable to a pullback. Everybody keeps talking about a 10% pullback, but we haven’t seen that yet. Given the strength of the market, it will be sensitive to any potential negative news. Economically the growth in the US is quite good. There have been very strong industrial manufacturing measurements in the last couple of weeks. The Fed will be finished tapering in November and they’ll probably start to increase interest rates at some point. If the US economy comes on too strong, she could see the market pull back. Thinks growth will be somewhat muted, but because of the strong manufacturing activities, we’ll see job growth accompanying that, which will be positive. Outside of the US, things are slowly improving, but it is very bumpy. The Ukraine/Russian situation is having an impact on the European economy, but we have seen the central banks there inject more liquidity into the system to keep everything going. As long as profits keep rising in the high single digits, she expects there is more upside.

What are your favourite REITs? Feels there is a place for having some REITs in your portfolio, whether you are an income or a growth investor. Maybe 5%-6%. High quality REITs do provide a quality cash flow stream and give you yields of 4%-5%. She owns Chartwell (CSH.UN-T) in seniors housing. She also owns H&R (HR.UN-T) which has a high quality, blue-chip portfolio list of tenants. Occupancy is very high. If there was a high spike in interest rates, REITs would probably not do very well.

Markets. In the Scottish referendum it looks like they want to separate. He remembers when Quebec had a referendum to separate. The British pound is reacting. If Scotland separates would they use the pound? They would have to assume part of the British Debt. Job figures are being criticized. The average error is 90k-100k. But this is the only information on jobs we have. It was not a bad number, but off the current pace. The US is doing well because interest rates are low and that is funding the recovery. If years from now the economy is booming and interest rates have risen then he will be a huge bull.