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

US banks. Rose with the prospect of higher interest rates. Banks basically like this, even though what we saw was a flattening of the yield curve. People had expected long rates to rise steepening the yield curve, but what we saw was that short rates actually rose, flattening the yield curve, which traditionally isn’t good for the banks because the net interest margins that the banks sort of live with is low. We have to dig in as to why the banks rallied today.

Market timing. Looking at the TSX or Dow market curve, would you buy stocks today or wait for the in investable downturn coming this year? This is a very important issue. What if the market messes us up and goes up 15%, and then corrects back, but is at a higher level after the correction? He uses an asset allocation model. Each client comes in and he looks at where their asset should be placed, based on their own personal circumstances and their risk/reward and he ends up with a balanced portfolio. This mechanically forces him to Buy low and Sell high. As the market goes up, the equity portion on a percentage basis will rise and he is forced to trim off. Conversely, as the market drops, the equity portion becomes less of a percentage and he starts to edge in and Buy low. (You can find this article on his website.)

Markets. Dow 30 chart shows a bottom of 7533 in March 2009. He likes the Dow because it gives you a birds eye view of what is going on in the US. They call it the “Dow Industrial Average” but he almost prefers “Dow Consumer Average” because half of the Dow stocks are actually consumer related. Chart shows 3 uplegs. Normally you would have 3 uplegs which would be the peak. However, this extended through 2013 because it was Fed induced, not a natural advance on the bear. At the end of 2013 and into 2014, there are a lot of issues that are not making new highs. This sets up a probable A-B-C correction. Basically an A-B-C correction occurs after we’ve had a 5 wave advance. In this case, it is a 7 wave advance. The ideal peak in the Dow is probably early January. It corrected down to point A in early February. The 1^st corrective period is always thought to be a buying opportunity. It then rallied back and we are fighting now to make a new high. If you are going to reduce, this is the ideal point to lighten up. The next wave down should take us below the previous low of around 15.2 and we should end up lower in maybe 6-8 weeks. That point is unpredictable.

Markets. The market feels very topish right now. Very hard to find really outstanding value. Not a lot of momentum from a technical point of view. Most of the technical indicators are suggesting that a correction is coming. Doesn’t see any economic storm clouds, but thinks the market is a bit ahead of itself. Has positioned his portfolio in anticipation of a correction. A good time to be gathering cash. Look at your lowest conviction names, the things you have the weakest conviction with and not the portfolio. Typically some time between April and June we will get a correction and most things you are interested in owning will be cheaper, so he wouldn’t dillydally now. March is a good time because there are still a lot of RRSP inflows so now is a good time to clean up your portfolio. Raise some cash where you can.

Markets. Fed meets this week but it is probably a non-event. Thinks the upcoming meeting will be a status quo meeting. Slowing in January was probably weather-induced. The underlying economy is strong because money is cheap. Doesn’t think it can handle normal interest rates. We had a corporate default in China. DSUM-US is an ETF that shows this.

European ETFs. EUR-T and ZEA-T are examples of how to play it. Be careful about currency risks. VGK he got out of for this reason. You want a hedge with Europe.

Educational Segment. We are into the 29^th month without a 10% correction- second longest rally ever. This rally is in the category of extreme extended range. Believes possibility of a 10-20% correction could play out. Review his ‘sleep at night’ portfolio. People should consult their advisors to see what they should do. ZUE is the S&P 500, up 45% and ZWA is up 18%, both since 2011 lows. ZWA is going to go down only about 70% of a correction, but you participate in any further rally. XIU vs. bonds has done much better but would be impacted much more by a pullback.

Markets. Ukraine crisis. The markets don’t like uncertainty and now that the referendum had a 97% result, the markets have rallied. Resource, energy and materials stocks are doing better these days. Likes industrials, techs and cyclicals also. In the copper market he is not worried about China stock piling it as a collateral and upsetting supply/demand dynamics. He has been adding copper stocks. Primarily he goes south for tech stocks. There are areas of the market that are in a bit of a bubble, but when you look at cyclicals in Canada, they are really trodden down.

Markets. Feels the risks are more sided to the downside than to the upside. 2013 was the strongest year in the S&P since 1967. Every major developed market was up strongly so we are up 20%-25% ahead of where we were at the beginning of 2013. Things are getting frothy. You look at all the IPOs that are coming. People are selling holdings because their valuations are good. At the same time, Crimea in the Ukraine has reminded people that political risks are still out there. China’s slowing growth is a major concern and you have seen big slides in the price of commodities like copper and iron ore which are used as collateral by lots of Chinese lenders. Thinks you should be taking some off the table, not necessarily in Canada which was a big laggard last year, but for the ones outside of Canada, whether it is the US, Europe or Japan.

Market. Looking at his “S&P 500 Price to Book” chart, it shows that the S&P 500 has gotten back up over the 2X Book Value and is trading once again between 2 and 2.5 times Book, where it traded for nearly all of the early 2000’s. For those people who think the market is really expensive, it has been here before and has actually been a lot higher. The question is, are the earnings going to come through. Looking at the 1^st lot of the S&P results, there is a really interesting phenomenon. Earnings are coming through at about a 10% growth rate, but the growth in sales is about 1%. This means companies are earning money, but not generating activity. This indicates it is not going to be the fast recovery that the Fed would have us like to believe. The market is just in a comfortable place. If we saw the market dropping 8%-10%, there would be something like a 3 alarm fire at the Fed and we would see a renewal of aggressive quantitative easing.

Uranium. His opinion on nuclear reactors is that they are things we have to have. We can’t have a planet that is being polluted by coal and we can’t keep burning up natural gas, etc. In the long-term, nuclear reactors are really important. The problem is, the fears overhang the whole industry.

Banks. When you are looking at the banks, you always try to buy the laggard because banks tend to move together. If you wait a while and let some banks go and then you buy the laggards, usually you will get a catch up, and you’ll probably beat the average bank stock. He has been using the strategy for decades and it is just amazing how it works.

Markets. Likes the structural reforms that are going on in Europe, including labour issues which will bring costs down, and hopefully will expand margins in European blue-chip stock companies. This would be following the footsteps of the US of 3-4 years ago. The emerging markets are what is currently giving the market a little bit of nervousness. Essentially what is happening in China and some of the other emerging markets is currency and the growth coming out is what could crack the growth globally over the next 18 months.

Natural gas. Because this market is so landlocked in North American, it is starting to resolve. Over the next year or so, we will start to have some export facilities in the US, being able to export LNG to the global market. If we continue to get drought and dry weather on the West Coast throughout the summer, all of the West Coast utilities will not be able to generate much in the way of Hydro, so they are going to be drawing on natural gas as well as coal all summer to produce electricity for the US. That could be a tailwind for natural gas throughout the summer at a time where there is not a lot of gas in storage. We have the least amount of natural gas in storage in a decade. It may stay at $4.50 all year and trend towards $5 by the end of the year, but in his opinion, we are not going to see gas move back to $3-$3.50.

Oil. WTI to Brent (the world price) is still approximately $10 difference. This has come down over the last 6 months or so. Canadian producers on the light side are getting a pretty comparable price to US WTI and some of that is the effect of our currency. Heavy oil producers, Western Canadian select, would be getting about a $16-$20 differential to our light oil, however that blew out as wide as $30-$40 last year, so it is much tighter than it was last year. This is why you are seeing some money flow into the heavy oil producers in Canada. A lot of the refineries in the US are changing over to take more heavy crude, which is a benefit to Canadian producers.