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

Markets. Expects the 2 day sell off is the start of the correction that we have all heard of. Has been positioning himself in the past couple of weeks as negatively as he has been since 2011. Has a net Short in his hedge fund. He is still a long-term Bull and the glass is half full, but it seems so extended in the short term for a variety of reasons. It just seems that it is ahead of itself, and with political actions seems to be breaking down a little. Thinks we are overdue for a correction. His worry is that everybody is expecting 5%-10%, but sometimes these things gain momentum and it wouldn’t surprise him to see the market off 15%-20%. The safest place is to have cash on the sidelines. Some of the cyclical sectors are starting to act a little better. Europe growth is slowing down, but emerging economies and China seem to be doing well. Thinks gold is all right in an environment like this. Feels the highest risk sectors are energy, technology and social network. The earnings are sort of winding down now, so what is the next level?

Markets. We have had a few false starts this year on days like this, and then things rally back. It is too hard to tell. The correction is way overdue and he believes it would be very welcome. There won’t be a lot of places to hide when it comes. As a value investor, he is having trouble finding value here. He doesn’t find anything at these values to buy, and has some cash that he wants to spend. He hopes this Market does sell off and wouldn’t mind a 10% correction. He probably has 10%-13% in cash sitting on the sidelines.

Markets. We have just entered the most volatile period of the year. From the start of July all the way through to October volatility typically rises. As we have seen since June, the Vicks has spiked about 50%. The S&P 500 has now broken support at the 50 day. Since the 2011 lows, we have been rising in a narrowing range and the rallies have been less intensive. Investors do not believe in the rally. That is a bearish setup. If we break below the bottom trendline of that pattern, it could suggest significant downside potential. It seems reasonable, especially now in this seasonal volatile time frame, that we will see a correction happen in the next couple of months. Right now there are no favourable recurring events to drive the market higher. We are past earnings season. Between now and the 3^rd quarter earnings season, the market’s economic data tends not to be too favourable at this time.

Precious Metals. Gold is in a period of seasonal strength, and silver can tend to benefit as well. There has been a significant decline in gold prices over the last few years, but over the past year, they have started to show signs of bottoming. The chart is showing a good sign of a “head and shoulders” bottoming pattern. This implies that if we get a break above the neckline, there could be significant upside potential. Gold is due for a retracement. $1200 would be the new support for gold. $19.50 would be the support level for silver.

Platinum. Platinum tends to do well in the first half of the year, when industrial production rises and manufacturing tends to do well, January through to April. That’s when you want to be buying platinum. It is currently starting to show signs of rolling over.

Natural gas. Seasonality is from September all the way through to November. Last year there was a huge run-up all the way from September all the way through to February. We are within the seasonally weak period, but we are seeing signs of a bottom. Currently there is a bit of consolidation. It has certainly become very oversold.

Markets. Feels the market today was hit by the real, genuine, credible fear amongst the Bears that the Fed could be behind the curve. Yesterday there was a 4% GDP print and today there was some wage inflation, the biggest in a lot of years. We saw the 10Yrs race up, and then drop because of all the geopolitical concerns. That is the kind of thing that can bring an air pocket to this market. Feels we are going to have more of a correction. The S&P 500 cut through the 20, 50 and the 100 on the 2-year daily chart. If right, he can see another 4% down on this move, unless there is some other move that comes out. At the end of the day, this will be a real buying opportunity for a whole bunch of different reasons, but there might be a bit of a challenge for this bull market hegemony that we have seen so long. If rates rise for the right reason, this will be fine. He doesn’t think we are going to 4%-5% interest rates. We might have 2.9%, 3% or 3.2%. In low interest rates, what asset class do people want to go into? Feels that markets are very well supported. In any sort of trending market you are going to have days like today.

Protection strategies in the event of a substantial market downturn such as 20%? For most people it is about asset allocation. If you have a 50/50 asset mix, equities to fixed income with a tactical swing of perhaps 20% either way, then before the 20% happens, you may want to have only 30% in equities. You also want to own stocks that are doing well. Some will benefit from having an option facility. Others can benefit from being able to Short. Also, Futures makes sense. However, the key here is really experience. He finds that people usually put on protection when it is too late.

Hedging and protection strategies? Unless he is really, really confident that a position is going to drop, he won’t ever Buy Puts. The reason why options are so good is because you can write premiums. If you like Bank of Nova Scotia (BNS-T), but you think it has $3 downside from here, you sell Calls and you get a second income. If you like Canadian Natural Resources (CNQ-T), but you don’t want to buy it here because you think it is a little too toppy, you oblige yourself to own it a couple of dollars lower by selling the Puts. So options really make sense that way. If you want protection, then Shorting is the much cleaner, better way almost all the time.

Large Canadian banks for protection and growth? The banks are not cheap anymore, they are back to where they were in their heyday before the credit crunch. However, he thinks the capital is going to continue to go into them, and people are going to be surprised at how much higher they can go. Loan growth in Canada is looking pretty good. Although valuations are 12X, they are still a whole lot cheaper than many parts of the market. The best ones to own are the ones that have the highest tier 1 capital ratios, because they have the ability to make the most accretive acquisitions. That would be Bank of Nova Scotia (BNS-T), Royal Bank (RY-T) and the Toronto Dominion (TD-T). Also, the CIBC (CM-T) if they decide not to issue equity.

Markets. He is looking at the earnings of each company, but as long as the earnings are coming through he is willing to keep holding them. You have to be stock selective. Cap-X has been going up. Companies don’t feel the need to keep the money on the balance sheet so much now. He sees attractive companies in all sectors. There is no overweight in any one sector.

Markets. The GDP out of the US today was fantastic. This should lead to stronger earnings growth going forward. As long as we see the economy growing, which it has been over the last few quarters, we should continue to see earnings numbers from individual companies continue to be positive. Thinks there could also be some concern that the strong data means higher interest rates and less taper. A few things he is watching fairly closely are margin debts, which have continued to rise over the last several months. However, what is more concerning is that when credit gets pulled away, the margin debt numbers start to drop. He is seeing sentiment very much bullish for the newsletter writers, but the individual investors for the last 3 weeks in a row, have actually become more bearish. Two factors that he thinks are important for predicting a recession is 1) the price of oil, and whether or not it has seen an 80% increase in the past 12 months. We need oil to be trading in the $140’s for that to happen. 2) An inverted yield curve and we’re certainly not at that point in time right now.

Banks versus Lifeco’s? In his ranking system, lifeco’s rank a little bit higher. He looks for earnings growth and accelerated earnings growth. At this point in the cycle, insurance companies are going to see higher rates from higher interest rates. Also, bigger gains on their loan books based on capital markets.

Precious Metals. Six months to a year ago, he had no precious metals in his portfolios. The companies he looked at were probably in the bottom 2 deciles of his universe. In the last 6 months, these have come up in rankings. He is looking at more of these precious metal companies.

Markets. There are always smart people on both sides of every trade. Going back through the past 40 years, every time there has been a market top he can give you smart people that are saying keep buying, and smart people saying that it is going to be over tomorrow. You cannot predict these things. His customers are very worried about a correction, but he sees good earnings, good valuations and low interest rates, so it is not a problem in terms of what he sees going forward. Long-term trend looks pretty good right now. We are in the middle of a long-term shift, away from bonds and into stocks. In 2009, we were in a truly different type of economy. 2009, 2010 and 2011 was a recovery. Now we are into the regular type of economic recovery. Better job growth, better earnings and companies are spending again. Interest rates are going to go up one of these days, but they are going to go up because the economy is strong, not because they have to go back up to 10%.