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

Markets. Hostile bid for OSK-T by G-T. It is a continuation of the trend for takeovers because of depressed prices. Great if you bought it last week. Lots of investors will see gold stocks be taken out at prices lower than what they bought them for. Gold stocks are beaten up enough but there are no clear catalysts. There is obviously base building going on. He is not racing at it but he thinks these stocks have probably bottomed out. He holds 50 stocks in his opportunities fund. He is up 43%. He is still seeing opportunities.

US$. Hang on to them. You have a strong trend occurring at the moment. CAD$ is at $0.91 now. A resources boon could help it, but more likely it will help the markets.

Energy. Expects another pretty good year. Energy index was up about 13% last year and thinks this year is going to be relatively similar. Brent oil has been over $100 for about 17-18 months. Oil market is probably much tighter than people are expecting. We seem to get a $2-$3 vacillation every day when there is talk of Libyan oil coming on stream. Look at all the political barrels that are off-line right now due to political issues. E.g. oil fell $3 because of one single field in Libya that was supposed to be coming on stream. The country has 9 militias with some of them better armed than what the government has got. Saudi Arabia is currently exporting 6 million people out of the country, 25% of the population as it has been speculated there is concern about potential uprising. Global oil market is very, very tight because demand was much stronger last year than people expected. Global economy is recovering and had a much stronger rate than people were expected. In North America, we are seeing differentials between WHI and Brent because of US domestic oil production exceeding the increasing demand. Feels there is a potential that US growth may not meet some of the loftier expectations as there were some people thinking production may be up as much as 1.2 million barrels per day. In Canada, you have the impact of the loonie. Typical oil producers just received an 8% price increase because of deterioration of the loonie and, at the same time that difference in price has narrowed to about $5. First time in 5 years that the value of Canadian oil actually exceeds that of US oil. Shipping by rail is hugely significant, and is an expensive means of getting oil out of bottleneck Alberta, but for as much as $60-$70 transportation costs receiving Brent, you’re looking at about $90 US, almost $100 Cdn, so even by rail it is not a bad solution.

Natural gas. Had a huge run on the back of extremely cold weather. There’ve been huge drawdowns on natural gas storage. Spot price has increased materially but the “later-out” months this year and later years have come down pretty meaningfully. If you were to go out even to 2020, you can’t get above $4.50 in MCF so it has been a flattening of the curve. As we are heading into warmer weather and, as well as the next couple of months last year were very, very cold, the year over year comparison is very challenging. Could be a 5%-10% correction.

Markets. We are in a secular bull market, which he defines as a bull market over at least 10 years. Feels the bull market started in March/2009, so there is still a long ways to go. When he thinks of bull markets, he thinks of a return between 8% to about 12% per annum. You should expect, over a very, very long term, (over a century) equities should perform around 6%, so you are getting about 50%-100% better return than your average markets. Believes the US started to lead the recovery and they are restructuring now so that things are slowly improving. Everyone is looking at the very slow job uptake in the US and feels this is just a natural result of global economics in trade and labour arbitrage.

Economy. Looks at inflation from a labour wage standpoint. When he sees the volatile numbers coming through on a monthly basis, his focus is on what are wage increases doing, as that is where inflation pressure is really going to come from. Inflation pressure will start from the US. Doesn’t look likely this year, but it could be next year.

What percent of your profits are generated by Short Sales? Because of his bullish view on the market right now, he currently has 100% of his fund invested in equities. From there, he restricts Short Sales to 30%-40% of that Long position. After he shorts the 30%-40%, he takes the cash and adds it on to the Long position. "In the end, he gets 130-140 to 30% Short position in the fund".

What percentage of a portfolio should be in equities and what percentage in fixed? As a broad rule of thumb, take your age and that is the percentage of what you should have in fixed income oriented products. However, he presents about a 10% skew according to what the investment return is. E.g. for someone 69 years of age, no more than 60% of your income should be in fixed income products. This is because he has a very bullish view on equities and a very bearish view on bonds. Also, how much do you really need in terms of cash? If you do not need a cash return over the next year or 2, you should be in more growth oriented names.

Vanguard FTSE Developed ex-NA (VDU-T) or Vanguard MSCI EAFE Index (VEF-T)? If this is purely a currency question, he would advise you to be in US$. If it is Euro$, there is probably a little bit of an upside versus a Cdn$. He would almost take an unhedged product in any US$ or Euro$. Sometimes hedged products have tax implication that comes back to Canada. Really doesn’t know the specific of these ETFs.

Stocks. She is very driven by numbers and looks from a bottom up to see what companies are doing and how they may be mispriced in the market. You always have to keep an eye on the macro and the top-down but she tries to take the “stock specific” approach and run a more concentrated portfolio and really not pay too much attention to what the index really tells her to own. She just looks for the best opportunities and invests in them. Spends a lot of time on how to protect capital. If you have good companies with a strong management team and good balance sheet, typically these types of companies can withstand any sort of a market downturn and come out even stronger. Feels she is well-positioned in owning a more concentrated portfolio of 25 stocks with the best names. Has about 25% of the portfolio allocated to companies with growth above what the economy in general can do.

Heath Care Industry. In bull markets and great markets, it tends to do very well. Thinks it will do well going forward, but would prefer cyclical sectors. He owns stocks in this sector with specific drivers. KCP-O is up over 200% today because they seem to have a blockbuster drug out.

Economy. Expecting GDP growth in the US to be 3% plus this year. He is still into cyclical stocks, particularly US ones. Expecting to see some increase in consumer spending. However, retail results for the companies that have reported lately have not been very encouraging, but thinks this will pick up later in the year. His average equity allocation right now would be about 28% US and wouldn’t be surprised to see it go up to about 35% by year end. The very bad weather, both in Canada in the US certainly affected retail sales in the last 10 days of the year, which will affect quarterly results. However, for manufacturers and durables, they were pretty strong. Expect earnings will come in as expected.

Industrial sector stocks? This sector suffered greatly during the recession both in Canada and the US. We are now seeing a return to North American manufacturing. He is playing this through autos and auto parts such as General Motors (GM-N), Magna (MG-T), which he feels are industrial companies that can do pretty well. You have to recognize that the reason those manufacturing jobs were lost was because of low wage competition, chiefly from Asia, but also from Mexico. Most of those jobs will never come back. The glory days of North American manufacturing may never return.

Energy. Many people focus on West Texas Intermediate or Brent, but there are many other focuses we should be looking at in the Canadian oil/gas network that makes a big difference on big change for some of the companies involved. He likes to look at Canadian prices (Edmonton par price), which should be looked at carefully. On natural gas, we should be looking more carefully at Canadian AECO "C" prices. Within that, there are subsets of other prices in the whole complex. These setups are very interesting investable trends. This is one of the times when we have the most amount of freezing off of natural gas wells, so the supply has been taken down. Also, there is the weather demand coming at the same time. Both of these forces are driving natural gas to current levels. Looking out over the spring and summer, we are going to be driven more and more towards investable levels, rather than these peak levels.

Markets. US markets were incredible last year. Historically, when they go up that much, there is a 75%-80% probability they go up double digits again the following year. In Canada, it’s a different ballgame. Cdn$ has been getting hit again, real estate seems really high and banks are really high so we could be in for some skittish times. There have been warnings about an interest-rate increase. He has more of his portfolio in the US than he has ever had before. November/December are his major Buy times, but he only bought one stock last year, partially because most of the tax loss selling was done in the 2-3 previous years. January he is still ready to buy, and even into February, but after that it is pretty rare that he buys until the end of the year. His portfolio was up 49% last year, giving him a five-year annualized return of 33.5%. One caveat going forward. There are 20 stocks in the portfolio with 15 up and only 5 are down. If 5 were up and 15 were down, that would bode better for the future. His 10 year average return is 12%.