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

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.

Markets. What we saw last year was an unprecedented pessimism in the precious metals. Gold was being sold to buy equities. The pace was unprecedented. China stepped up in a major way, but India stepped back through tariffs and quotas. It is putting a dampening effect on gold demand. When any asset class is down this much it represents a buying opportunity. ETF selling looks to be tapering off. Many mines will not be developed in this price environment. The velocity of money has collapsed. Fiscal balances are a mess and indebted sovereign level is getting worse.

Gold as Opposed to Silver. He is more bullish on gold than silver. You have emerging economies buying gold. It is trading well into the supply curve. Silver supply is exploding, growing at 5% a year. Low cost mines coming on line over the next few years. Your cost curve is much lower in silver.

Markets. Thinks this market retreat is just profit-taking. S&P 500 chart shows the market has formed an uptrend and has created a channel. The drop we have seen today is a continuation of what we’ve seen since the beginning of the year but is well within the predefined channel. We have had a significant rally and it is not unusual to see this kind of a drop. Feels the Canadian market is going to have more of a reversion to the mean and have more potential to outperform. He is pretty much fully invested right now.

Markets. Has been cautious because markets have advanced significantly, about 2 years without a 10% correction, which is unusual. There is usually one 10% correction per year so we are overdue. There is a lot of uncertainty with regard to tapering that is going on, as well as emerging-market currencies impact. On a technical analyst perspective, the original pain point was $1706 on the S&P 500 and we crossed that in the last couple of days. Now where to from here? The next level is down about 3% followed by a 52 week moving average down about 6%. He thinks there will be very positive surprises in the market overall but investors should be very selective.

Markets. He had been looking for a pullback for several months that hadn’t really happened but has finally started. In his view, this is simply a “risk off” trade in a response to volatility and emerging markets. People are pulling money out and putting it into bonds and into the market in general. This is not a financial crisis. It is healthy and he is looking to be buying. Markets are doing very well in terms of their recovery from the crisis. We are definitely on a growth period and he doesn’t think it is going to be that difficult for the market to survive nicely. Also the market has deleveraged a lot in terms of the banking system. There are a lot of paths here that are pretty much straight ahead. We have gone through all the crisis in Europe and have done quite well so he is not worried about the current situation.