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

Canadian banks. As a group, Canadian banks are getting very expensive. They are hitting his FMV. National Bank (NA-T) leads the list with a 23% upside. CIBC (CM-T) has a 12% upside. Bank of Montreal (BMO-T) has 10%. Toronto Dominion (TD-T) has 4% and Bank of Nova Scotia (BNS-T) has 1%. Royal Bank (RY-T) is trading over his calculated Fair Market Value. Yields have driven up all the banks to FMV, and it is really hard to see, unless they get really overvalued, where investors are going to make money here.

Markets. The Russian/Ukraine situation is a very touchy situation. Doesn’t think it means much for the markets. He still remains cautious on the markets. Feels it is pretty reasonably priced. When everything is quiet, that is usually the quiet before the storm. When markets run too much on the upside, that is when people get into trouble with too much margin and they get a little too risky. Some are in the market and shouldn’t be there. Thinks a 5%-10% correction would do the market some good.

How do you position your portfolios in the possibility of a 10%-20% market correction? One of the rules is that if you have 7% or more in a particular holding, you keep it that way. If it grows to 10%, then you knock it back by 3%. This assumes that you’ve got a relatively diversified portfolio. If you have a high beta stock and the market sells off 5%, it will sell off 10%, so that is where you probably try to lighten up a little. Also, dividend stocks tend to react better in difficult markets. (See Top Picks.)

Markets. This year had lots of drama without the volatility. Every draw down is met with a wall of buying. We have a month and a half of a seasonally low period, but indicators tell him the smart money is going back into the market. He wants to buy smartly and to buy on dips. US economy is growing quickly enough to justify earnings. Interest rates are going down because of plateauing global growth but earnings are trending up 8-9% in the US. Capital flows are coming into the market and should drive it to an overvalued price. US is the best looking developed country in the basket.

Economy. Thinks rates are going to remain low, probably into 2015. The Fed is doing the right thing by moving out of QE, which people were so worried about. That is not really increasing rates. Increasing rates is really when they push up the short end of the yield curve because of inflation and high growth. You are seeing better growth in the US. Unemployment is coming down and job growth is better. Also feels numbers out of Europe are better. It is too risky for the Fed to increase rates too rapidly when they feel the economy is recovering. Rates will go up, but at a much slower pace. He doesn’t think we will see rates go up until at least 2015.

Markets. Costs are still being cut, so we are not seeing top line growth as aggressively as we need to. In order to keep margins where they are or improve, we are going to have to see better top line growth. You do need this because, at some point in time, they can’t cut any more costs out of the system.

Markets. The market opened modestly higher today and then got a much poorer than expected retail sales number. It then scooted off to the upside, because “bad news” is still “good news”. We have seen this over the past several weeks because everyone fears the Fed is going to tighten. Coming into an interesting period, with the end of tapering and the Jackson Hole confab next week. Feels that Yellin is going to be dovish for a while, but the market is going to worry anyway. His view all along is that we would accelerate as we move through the year. GDP growth is well into the 3’s and this is what he thinks we are going to get as we move through the back half. That is good for certain sectors of the economy.

Gold. Japan is printing quite a bit of money, more aggressively in relationship to their economy than the Fed did. Europe has threatened that, but have threatened before and not actually done anything. It may be that the Europeans are forced to eventually do outright QE, but he feels they’re going to wait longer than people think and it may well be into next year before we even get some hint of that. This is a positive on the gold radar screen. Most of the things that drive gold are credit stress and inflation, and those types of things are quite low right now. His view is that all the central banks globally are going to find it difficult to escape zero interest-rate policy. As much as the US economy is improving and they are getting off the QE program, the odds are that something bad will happen over the next few years, long before they get back to normal interest rates, and we’ll be back into the printing money game. That is a positive dynamic for the price of gold, but you have to be a long-term holder of that asset. Trading around it on a short-term basis is very, very difficult. To play gold, he feels it is best to favour the miners. At the current level of gold, the miners are cheap. If you think that over the next few years gold can get to a higher level, then you want to own miners that have great operating leverage to that and can finance themselves through to that time. He would favour Yamana (YRI-T) or Goldcorp (G-T).

Canadian banks? Canadian banks have had a tremendous run. There certainly rich when you compare them to other places where you could buy banks around the world. Very high ROEs when you compare them to what you can find in other markets. Their ability to keep ratcheting up the dividend has been phenomenal.

Markets. This year has been a bit of a struggle for a lot of active portfolio managers. Underneath the surface, investors have missed what has been going on. Looking back to March, a lot of the highfliers in biotech, cloud computing, etc. corrected heavily. At the same time, the blue chips were doing not so badly. Then the social media stocks, biotech’s, etc. rebounded very sharply, while some large cap industrials were starting to roll over in June and into July. The net result had been a zero to a +4 in the US. In Canada it’s been masked by very strong performance in materials, a run-up in energy and, Canadian banks have come back into their own. A lot of moving parts. The correction that we have been waiting for has sort of happened in sector and theme, month by month. Feels this is one of the quietest 6 months he has had in the spring/summer in a long time. He is fully invested.

Canadian Telcos? The headwinds they are going to face in September are some hearings that are coming with respect to Spectrum and some initiatives. The government wants to bring in a 4^th carrier, which he hopes happens because there needs to be a little bit more competition. His order of preference is Telus (T-T) as a long shot, BCE (BCE-T) as a Hold and he wouldn’t touch Rogers (RCI.B-T) if his life depended on it. Quebecor (QBR-T) comes up in a lot of research. He would be comfortable sticking with Telus and BCE.

Markets. These markets are aging. They are in year 5. As a market ages, it starts to rotate, which he thinks is happening. We are moving out of high-priced assets or assets that have been working and into assets that have a bad reputation for not working. The current market can go on for quite a while. Watch the 200 day moving averages. Most indices corrected back down and bounced off the 200 day, and will probably continue higher. As long as the 200 day is pointed upward in a rising trajectory, we have a bull market. Financials have not rolled over and are still in an uptrend. The Dow broke the 200, but he doesn’t trust the new Dow. They screwed it up by putting too many consumer stocks in it. In a rotation, you have 1) leading sectors, 2) coincident sectors and 3) lagging sectors. Currently we are going through the coincident sector. We are done with consumers so we are moving into industrial and technology, and then we are going to work into materials, which are coming along too. If he had to pick one sector where he wanted to be now, besides materials it would be industrials in both US and Canada, but particularly in Canada. ETF’s are probably the best way to play this market. If you are a good stock picker, what you can do is pick a sector that you like, and then you can drill into the sector and pick a few stocks.

Oil. The chart on crude oil shows a “short-term” break, which is just a trading break. It could correct down a little bit more. Anything related to crude, he would be careful of.

Gold. He likes gold, because the US$ has had quite a rally over the past 6-8 weeks. Usually a rally in the US$ is going to hurt gold, but it didn’t. It’s very unusual to have both of these rally, and it’s a very bullish sign for gold. Any reasonable gold stock, unless it has a mine in a dangerous place, probably should be held. It is important that from June of last year, we are seeing higher lows. It is just a matter of time until the pivot point of March 2014 will be taken out.

Markets. Feels the developed markets are the place to be right now and is steering clear of emerging markets. They are further along with deleveraging process and you should see better earnings growth, and hopefully, as a result of that, you should see better share price performance. He always sticks to dividend payers, companies with good balance sheets and strong management teams. To see emerging market growth at this point in the cycle, you have to see strength in developed markets, like the US economy, as well as a bit of resurgence in growth in Europe. As the US is our largest trading partner, a lot of Canadian companies will benefit from the strength in the US economy as growth accelerates over the next 2-3 years. There is a bit of concern that Europe is in a deflationary environment. That is why the German 10 year is close to 1%. That tells you there is deflation risk, so you’ve got people worried about prices falling during the next few years. However, when he looks at the European economy in aggregate, you have to keep in mind that the ECB still has a lot of arrows in its quiver. They can depreciate the currency, talk it down and implement additional quantitative easing in the form of trying to increase lending to small to medium size enterprises. Thinks growth well eventually resume and should accelerate 1.5% next year.