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

Economy. He is bullish on the markets. We are getting a global scenario where it is coming together again. US is doing fine, Europe has seen the bottom, Japan is getting better. Although people are worried about emerging economies, there is still long-term growth there. Interest rates are going to stay low. Corporate profits are at record levels.

Markets. Constructive on US and Canadian stocks which got off to a little bit of a rough start and data was a little bit weaker than what would have been expected. The weather had an impact. Feels US economy is well on the road to recovery. Looking through 2013, the housing recovery seems to be well underway. Consumers’ confidence is still up. Hiring is not fantastic, but is not terrible either and is moving in the right direction. Looking for a reasonable growth of the US of about 3%-3.5% and this will trickle over into stronger growth in the Canadian economy.

Markets. Thinks that the pullback is now over. You have the Fed tapering, a hard landing in China and some emerging-market issues, but if you look at the emerging markets they had a big swoon in the summertime and this dip is not that big a deal. If you look at earnings reports of S&P 500 companies, 55% have beat expectations. He is going to blame the slow down in US numbers on the weather. Dow is up 90% in the past 5 years and since then we’ve had 18 corrections of 5% or more. It’s just a correction. The whole idea is to Buy low and Sell high. A lot of stocks have come down to 200 day moving averages, have bounced higher in the last couple of days and this is a great buying opportunity.

Markets. There is no secret formula for his 44% returns. He spent years reviewing strategies. If you want to succeed you need to have one style and stick with it, but have a few different tools in your tool kits. 28-28-28. Markets came off a bit in the last few weeks. There have been 28 declines of 10% or more since the late 1950s. We are in month 28 since the last major decline. He is positioned for markets going up and also for markets going down to the same extent. 83% of the time the S&P goes up after a good year for that index, so it may not go down this year.

Markets. This year, everybody was waiting for a correction. When emerging markets started showing a few cracks, we finally found our culprit and started blaming emerging markets. Very orderly selloff. Almost every large, blue chip US company was down, almost in unison of about 50% from their recent highs. It was too orderly to get him worried that it was a macro or an Asian contagion. There are some good things going on out there. He is definitely feeling there is a lot more room to run in this economy. Valuations have come back down to around 15X forward earnings. Gets a little bit worried about what is coming out of China. Growth is still great. You wonder how much they have stockpiled. Canadian investors really have to keep an eye on this. He is heavily underweight in resource stocks. Sitting somewhere around 6%-7% energy, which is vastly underweight the market. Feels the US economy is going to run at a less than optimal level, but we don’t have to worry too much about the market. He is worried about the US market and is particularly worried about the Chinese market and the growth rates of those economies. But we seem to be getting through this.

Shorting Natural Gas. Natural gas has had a great run in exactly 2 months. He just recently reduced his natural gas weightings by about 35%. However, he is not sure he would be interested in going Short. The good news is that one year ago, natural gas storage was about 25% below where it was and 17% below where it was 5 years ago. The issue is that the drawdown is going to give us some support on the way down. This means some of the gas weighted names are going to be good.

Markets. Every single time the market has pulled back, since the beginning of the S&P 500, it has gone higher. Focus on what matters. “Income”. Do we hear any company saying they are going to cut their dividends now that the Turkish lira has gone down in value? No. These things happen. As an investor, you have to use 2^nd level thinking i.e. you can now Buy stocks that you have always wanted but at a cheaper price or a company can now buy back even more stock at a cheaper price. Earnings season is a great time to look at stocks that you may have missed. Ignore the noise because none of this matters in the fullness of time.

Markets. This market pullback is needed, healthy and welcomed by him. Had been expecting it, but it just took longer to get here. People had put off selling for capital gains. Also, there had not been a 10% or more correction in over 2 years. We still haven’t had a 10% correction and he thinks that is needed. He couldn’t find stocks to buy because valuations have gotten ahead of fundamentals. Not looking in North America but looking at some of the emerging markets, especially in Asia.

Coal. There are 2 different types of coal. Thermal coal is used in utilities for electricity and metallurgical coal is used to make steel. He is invested in the metallurgical side. Natural gas would have to go up a whole lot more in order to make coal more attractive as an investment. (See Top Picks.)

As a portfolio manager, do you let your winners run or do trim when your winners get to a certain percentage of your holdings? As long as the fundamentals are still favourable, he likes to let his winners run. Too many people sell their winners too soon but keep their losers forever. When it gets too big in his portfolio on a relative basis, he cuts it back.

Markets. You can almost time your calendar on a currency crisis. Argentina has gone broke a couple of times, Turkey has rolled over a couple of times and now everyone is concerned about what is happening in emerging markets. It’s really about capital flows. US interest rates are going to go higher so why would you want to invest in a dangerous market like Turkey when you could come back to the US and make more money. People are panicking because they haven’t seen a correction yet. TSX is down, maybe 1% year to date. The fundamentals are that interest rates are low and probably going to stay low, earnings are high and probably going to improve. There is still a shift from bonds to stocks, there are still dividends being increased and there is still that trend where that old fear of 2008 is still there which is keeping valuations lower than where they should be under current economic conditions.

Markets. This is a minor pullback and is not expecting anything too severe. S&P 500 had a negative January, down 3.5% and she thinks most of the damage has probably been done. Maybe a couple percentage points more will get it down to its 20 day moving average. Market probably got a little ahead of itself and all the sentiment indicators were very overbought, but there are long-term positives out there. We have a benign inflation environment, which means central banks can maintain a very accommodative policy globally, which is positive for equities. We still have positive profit growth. She is watching the earnings and based on companies that have reported, they are growing at just under 8% year-over-year. We are seeing stabilization in Europe and maybe expecting some growth this year. US continues to grow slowly as well. Her thesis is that emerging markets is the area that is going to grow over the next couple of decades. There will be uneven periods of growth but she wants to be there long-term. China is a big part of that emerging market picture. Inflation is receding in China and their central bank doesn’t need to put money into the system and she thinks they will engineer a soft landing. Considers this pullback as an opportunity.

Markets. Chinese numbers are spooking investors. We broke some key US index numbers. S&P broke a support level just this morning. Same for Dow. A continuation of the correction we are in. There tends to be some weakness coming into February, so this isn’t good. People are watching the 10 year bond in the US. They are indicating that the economy in the US is weaker than we first thought. Consumer discretionary has been the weakest sector over the last 6 weeks. XLY is in a distinct downward trend and not showing signs of bottoming. Staples are not doing well either. There are short term concerns here, but they are somewhat typical of what happens this time of year. March to May, this is the time the economy starts to improve and it should happen again.

This is a time of year when precious metal stocks do very well. Jan to April, copper and precious metals do well. In terms of gold there are lots of ETFs. XMT does base metals. Now is a good time to own them. This is when precious metals and platinum, palladium and gold increase, so stocks respond.

Educational Segment. Super Bowl and US Election. When a national conference team wins, it indicates the markets will go up. But when January goes down in the first 5 years, it says the market will go down in February. With mid-term election seasonality, the market usually goes down in the start of the year. Then in April it goes higher. Then the market goes lower until September. It is the weakest year of the 4 year cycle and the low in September is the lowest point in the whole 4 year cycle.