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

Markets. S&P 500 chart shows a nice upward trend, but has a short-term Sell signal in place right now. This was kind of expected 2 weeks ago. It is now a question of how deep do we get. There was a bit of rotation with some areas not doing too badly, consumer staples, energy and utilities. It’s the next phase of the intermediate frame that we are in that is more important. Thinks this dip will be bought. TSX chart is pretty similar. There are certain components of the TSX, such as energy and gold that have actually have a little bit of floor beneath them.

Copper. Copper is supposedly meant to tell us where things are going economically, but it’s predictive abilities was only about 30% over the last 20 years or so. Expects this has been really skewed by what has been happening in China. In the band of between $2.85 and $3.10, if it goes below that, he calls into question demand going forward. Copper needs China to participate.

Market. We are in the early innings of an investment super cycle that will see nearly $1 trillion in spending by 2025 and over 1 million jobs created. These are numbers published by the American Petroleum Institute on a study they did in December. Last year there was about $90 billion spent in North America on energy infrastructure and we are only a few years into this super growth phase. She launched a fund last year to take advantage of this on the basis that you can make returns that are just as good as the energy producers, but with less volatility. She had about a 20%-30% lower volatility than the TSX energy index with returns up about 22%.

Markets. There is the view that resources have been a tough place to be, but there have been some rays of sunlight, like gas companies. Uranium and gold have shown some life. There are some continued opportunities to continue to invest. There are early indications that people feel better about uranium even if nothing fundamental has started to happen. Nat gas has the strongest fundamentals over the next 5 to 10 years. The cold weather only highlighted something fundamental underlying the commodity. We are at a level of inventories in the US that we have not been at since 2003. Overall growth in the US has been slowing down. We have to go back to normal by the next heating season. We would have to put more gas into the system than we have ever done before. Indications we will not get back to normal by next winter and that will be good for Natural Gas. He is assuming normal summer and normal winter. The whole market needs to take a breather and build a base ready for the next cycle. Everyone is waiting for it but it is what is the catalyst for it to do that.

Interest Rates. 10 year Bonds have gone from 1.5% to 2.7%, about a 100% increase. Rates are getting higher. As the Fed tries to taper, the selling of the fixed income market will continue and that will generate higher rates. He is not talking about the short end of the curve, but the long end of the curve. The Fed needs to keep buying. If you look at their balance sheet, they have been the buyer and they have to continue if they are going to control the yields. They are going to have to print money and REITs are going to go higher. This is involving bigger and bigger economies. It has the feel of the 30s as to how it is involving the whole world.

Natural gas? If you want to have participation strictly in natural gas, U.S. Natural Gas Fund (UNG-N) ETF is the way to play it. There has been quite a cleansing on the natural gas environment, in that a lot of drillers had to switch to a lot more oil than gas because of the price. We have had a great winter for natural gas and inventories are down again.

Markets. A bit concerned about what the smart money is doing. Institutional investors are having a tendency to take money off the table and are raising cash positions. Usually markets kind of peak out when “retail investor” money starts pouring in. 60% of world growth has been attributed to China and we are seeing numbers coming in indicating they are not that great and doesn’t know that China is going to pull the world along. You also need to look at P/E ratios on the US market. Forward earnings on the S&P are trading just a little bit below 16X. The consensus is that the average is about 15X, so we could probably get to 17X-18X and everything will be fine. Historically if you actually look at forward PE’s you are going to find that, except for perhaps the tech bubble in 2000, the market rarely trades above 16X. He is using stop losses and carefully watching things for his clients.

Markets. There is continuing evidence of a very strong underlying demand for equity ownership underneath the surface. Every pullback we’ve had in the last 12 months has been relatively shallow and relatively short-lived. He feels there is under-ownership in equities. Valuations are reasonable, especially against the backdrop of interest rates. Interest rates do not look like they are set to move dramatically anytime soon, so the extra return you can get buying equities, versus yields on the 10 year bond, are very attractive. Ultimately we know that private investors and pension funds under-own equities as a percent of their total values. Over a long period of time, at the bottom of secular bear markets you tend to get down to 15%-20% equity ownership as a percentage of net worth, at the household level. In each of the last long-term 20 year secular bull markets, by the end private investors were close to 30% equity exposed. Today they are sitting somewhere around 18%-19%. He is mostly equity focused, focused on dividends and specifically dividend growth with companies that are paying out little of their earnings but where they are showing a willingness to increase that. The risk is enough of a slow down in emerging markets that they wind up with credit problems or their currencies come off enough.

Markets. Most of the stocks in his portfolio have moved up, therefore there is a better chance for them to move up further and to get to the initial Sell targets giving him a chance to get out. He was reading a statistic that indicated that there were less people in the US involved in the stock market now than at any point since 1998. It is very rare that he buy stocks at this time of year. After mid-April, it is even rarer. He does most of his buying in November/December. However, he watches the annual cycle and the presidential cycles because when you see something happens 75%-80% of the time, it is a clear indicator of how one might react. So much of this game is simply probability.

Cdn$ in relation to the Québec elections next week? If you think the PQ is going to win, then you should short the loonie. If you think they are going to lose and that there will be a Liberal majority, that will probably be good for the loonie.

Markets. Feels we are in the midst of a bull market. Had been expecting a pullback and we got one in January to early February. However, the market quickly recovered and now with the quarter end, the TSX is up 6% and the US market is up just under 2%. She has money on the sidelines waiting for a pullback. Thinks that profit growth is going to be the primary driver this year. Right now, consensus expectations is that corporate profits will grow in the 10% range. As long as the economies are recovering and manufacturing is relatively healthy, that is positive for earnings and the market slowly climbs higher.

China. History says that they can usually execute on what they are targeting and they are targeting 7.5% GDP growth. Over the long-term, she feels their GDP growth will slow because their economy is getting bigger. They want to focus on increasing the percentage of their population in urbanized centers. Right now it is just below 54% and their target is to get it up to 60% by 2020. Manufacturing numbers that came out today were soft.

Markets. High frequency traders getting advantages. He thinks the markets still work and are not rigged. It is mostly high frequency traders trading with other high frequency traders. The bid/offer spread is narrow because of these high frequency traders, who add liquidity into the market. If the liquidity goes away, the market goes to ‘no bid’. You have to understand the market and deal with it. Maybe high frequency traders will come out with their own retail business in the future.

Educational Segment. The Downside on Oil Prices. Deferred futures contracts have been trading down for quite some time. End of 2022, we are at $77 a barrel. This is fully priced into the market. The US is considering trying to hurt Russia in terms of oil prices by releasing reserves to add supply to the market. Looking at a chart of oil futures, the front month contract has been pretty steady, but the 5 year out contract has been dropping. Yet spreads between WCS and WTI prices have narrowed. Canada needs to get moving on east west pipelines.

Markets. Markets are directionless right now. Very good stocks are getting shaved because people are noticing a big win. There will be some rotational rallies, surprise ones.