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Market Analysis with Travis Dowle of Vistra Capital Management

With the S&P 500 and the Dow currently attempting to remain above key levels (Dow – 10,345 and S&P 500 – 1100), the widespread US Dollar weakness has caused Gold to surge to 1134/oz. While weakness in the US Dollar could have something to do with the news coming out of APEC indicating China’s failure to agree with U.S. demands of revaluing the Chinese Yuan, on the economic front, U.S. retail sales numbers from October came in at +1.4%, while ex-autos the numbers came in at +0.2% versus expectations of +0.4%. These retail sales numbers seem to have failed to dampen the risk appetite of investors as stocks rise and the greenback falls.
For further clarity on the markets, I turned to Mr. Travis Dowle of Vistra Capital Management.
Bio: Travis Dowle is the founder and President of Vistra Capital Management , an independent investment management firm located in Vancouver, Canada and the fund manager for the Vistra Fund.  Mr. Dowle has also served as the Vice President, Portfolio Investments with Gibralt Capital Corporation and Second City Capital Partners – both Vancouver-based private equity groups – since July 2007.
Prior founding Vistra, and to joining Gibralt Capital and Second City Capital, Mr. Dowle was a portfolio manager for one of the world’s largest investment managers, HSBC Global Asset Management.  While with HSBC he was the lead manager for the firm’s global equity strategy offered to Canadian high-net worth investors. Prior to that, Mr. Dowle held various investment management and research positions with HSBC and M.K. Wong & Associates.
Mr. Dowle has more than 13 years of experience in the investment industry, is a graduate of the University of Western Ontario and holds the professional designation of Chartered Financial Analyst (NASDAQ:CFA).  Mr. Dowle is also a past instructor for Stalla’s CFA exam preparation program covering equity valuation techniques and capital markets theory.
Vistra Capital Management is an investment management firm founded with the philosophy that an active, flexible and opportunistic approach to investing provides the best opportunity for generating positive investment returns across a variety of market environments. The Vistra Fund is a long/short fund focused on event-driven opportunities and special situations.
Question 1: Mr. Dowle, in the face of the recent volatility in the stock market, a number of commentators are citing the over-valued nature of the markets based on the economic realities – what would be you’re view of the market (U.S. and Canada) right now?

Looking at the broad market indices in North America, I think that we are in for a bumpy ride over the next few months. Since early March, three factors have spurred this rally: first, realization that all companies were not going bankrupt; second, a dramatic injection of liquidity and other stimulus measures; third, corporate earnings results surpassing low expectations due in large part to severe cost-cutting. Underpinning and related to all of this, has been a huge increase in investor risk-appetite, albeit off of very low levels. In order for the markets to continue an uninterrupted climb, many companies need to grow into their current valuations, and for that they need revenue growth – costs can only be cut so far. Broadly speaking, I think we are bound to see some disappointment. But, having said all of that, volatility creates opportunity and I’ll be on the hunt for opportunities as volatility increases.

Question 2: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction (i.e apt to short) and one sector that you believe to be oversold and due for a bounce and why?
Looking at things from a short-term perspective, I’d have to say financials looks to be somewhat overbought here. The TSX Financials sector is up almost 90% since early March and the big banks in the index are trading at about 13x forward earnings – not inexpensive for a bank. While Canadian banks are healthier than their global peers and the credit environment has improved dramatically, I believe we’re going to see a slower growth economy coming out of this recession and financials will be challenged in such an environment.
It’s tougher to single out a sector that looks oversold right now with most being markedly higher over the year. I tend to look at things from a bottom-up perspective while being cognizant of the sector specific and macro risks. I’m still seeing interesting opportunities in the technology , energy and basic materials sectors, however based on recent performance, I certainly can’t say they are oversold. I really think you have to pick your spots with individual companies in this market.

Question 3: Given the tremendous rebound in Asian (particularly China and India) economies, what are your views on investing in stocks or themes related to these economies? Do you have any particular trades/themes you could elaborate on?
Asia is giant economic force that will undoubtedly continue to become more dominant over the next few decades. Like any economy it’s going to get ahead of itself at times and be subject to business cycles. There are a few different ways investors can take advantage of the growth in China, India and other Asian countries and emerging markets. Energy and basic materials are the obvious themes. I also like the agriculture theme. As huge populations in these emerging economies urbanize and per capita income rises, they will consume more of everything – from basic materials, to energy, to food and to water. Sprott Resource Corp (SCP) is an interesting way to play all of these themes in a single security – it invests directly and indirectly in natural resources, minerals, oil and gas, water, forestry and agriculture.

Question 4: Can you please highlight 1 stock/option or pairs trade that you think offers the best risk/reward potential moving forward and your reasons for liking it?

think GLV Inc. (GLV/A) has attractive upside. GLV Inc. is a global provider of engineered processes and technologies designed for industrial, municipal and environmental applications. Said in English, they design and produce equipment used to treat municipal and industrial wastewater, and water used in industrial processes, and pulp preparation and sheet formation. Water scarcity and quality is going to be a big issue. By some reports almost half of water use for irrigation is lost to evaporation and waste – this is a serious problem with an exploding global population. As emerging market diets become more meat/protein-based, agricultural use for water increases. Over half of cities in China suffer from water shortages. Major developed cities lose water through leaking pipes due to old and aging infrastructure. GLV won’t solve all these issues itself, but it has strong growth prospects, trades at a reasonable valuation and it’s one of many companies that should benefit from the ‘water’ theme.
Question 5: Lastly, how about we play a game where you're only responses can be Buy, Sell or Hold to the things mentioned below: 

Sure, but I’ll have to specify whether it’s a short-term call or a long-term one by specifying ‘S/T’ and ‘L/T’ respectively:

Gold: Buy (S/T)
Base Metals: Hold
Canadian Dollar: Hold
Agricultural Commodities: Buy (L/T)
Oil: Hold
Natural Gas: Buy
TSX 60 (XIU): Sell (S/T)
S&P 500: Sell (S/T)
Clean/Alternative Energy: Sell (S/T)
Canadian Real Estate: Buy (L/T)
For real estate it, of course, depends on location, location, location. For the rest of the asset classes it’s all about price, price, price. The price you pay eventually determines your return. Happy investing!

Thank You Mr. Dowle!

Disclosure: No Positions