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

Energy. Regarding the spread between Western Canadian Select and WTI prices there has been a massive change in the last 6 months. At the turn of the year, it was horrible as we were suffering with very low net in Canada prices and watching what Brent and WTI prices were doing and we could only dream. Now, with those prices coming back really sharply, there has been a huge change in the rail abilities to get around pipeline bottlenecks and other types of market clearing mechanisms. There are a lot of refinery turnarounds that take place as we go from the summer driving season into the heating oil season. There is less demand from the refineries around the Gulf of Mexico so expects we will go through a little softer time, but not very much.

Natural gas. The big blow out we had in the differentials between the Canadian and US oil prices is also taking place between Canadian natural gas prices right now. NYMEX is at $3.50 US and AECO pricing is about $2.30, which is a huge range. This happened because TransCanada (TRP-T) had some interruptible services on their system that moves gas from Western Canada to Eastern Canada and the US. National Energy Board changed their tolling procedures and increased the tariff to $0.50 MCF. That automatically reversed the gas flow back to Alberta so storage caverns in Alberta have been filling up at a very fast rate and it looks like we are going to be going into another one of these very distressed prices for natural gas in Alberta. There will probably be a 5%-10% selloff in most of the gassy type of names and this would probably be the time to be buying them.

Markets. The US market peaked on Aug 2/13. We are in an intermediate corrective phase. Will last until the beginning of October. Between now and then, there is Tapering, analysts revising earnings estimates and hurricane season. Now is the time to be careful. Dow has decline 5% in other years at this time of year. You might want to be in energy (middle of July until beginning of October). We are in the period of seasonal strength for gold. Gold/gold stocks go higher. Tech stocks normally weaken. A number have rolled over.

Regional US Banks. Since November of last year, regional banks in the US had phenomenal growth. Now we are getting signs the sector is starting to weaken. First warning sign of them going into a corrective phase. Seasonality turns positive in January. Get back in then.

Gold – When to get out. Went above its 20 day average for a buy signal, took off and then went lower. Just yesterday we got a reversal. The key is that you had a second opportunity to buy for a seasonal trade (July 12 – Oct 9)

Silver. Above 20 day moving average. Outperformed TSX, and is in a trading range. When it gets above resistance level you have the third requirement for a buy signal. Play it through SLV-T, SIL-N or individual stocks. Keep it until the first week in October.

Markets. We are in a reasonably constructive environment. Investors are slowly moving from fixed income to equity camps. This provides opportunity in the dividend camp as the fears of interest rates are overblown. Interest rates head winds will be less significant in the last half of this year. Housing market has pent up demand for renovation and that half of the housing market is not interest rate sensitive, whereas homebuilders are.

Markets. The last few years have been a Fed induced rally, not really an earnings generated one. Forcing people to take on more risks because interest rates are so low at the short end of the curve. Basically Bernanke has said to retirees that you are going to have to take on some more risks because if you sit on GIC’s or cash, you are going to run out of money during your lifetime. Doesn’t expect there will be a major correction, because we are slowly grinding forward but, there is that outlier that if GDP in the US is running at 1.7%, as well as inflation, then real growth is negligible. It is nice to be invested, but at the same time have a little bit of cash on the sidelines just in case which he can put it to work when needed. The growth rate now is in the US, but we are starting to see some upticks in other countries such as Great Britain.

Economy. We got better than expected export data out of Germany today and even the Chinese had more import/exports on the go. Those numbers of course get revised and can change from quarter to quarter very quickly. Thinks that a lot of corporate profits are growing on the backs of a deflationary environment where technology is helping them keep costs down, where they don’t have to pay full-time benefits and hiring a lot of part-time people. You are getting a lot of stickiness in the labour market. It is usually wage increases that really spike inflation so he doesn’t see a whole lot out there right now.

Proportion of a portfolio that should be in non-North American based companies? To what extent can one globally diversify through investing in North American corporations and what is the minimum of a person’s portfolio that ought to invest in non-North American corporations in order to have adequate global diversification? Because we live in Canada, if we decide to retire in Canada, we can’t be 100% foreign because we would be exposed to currency risks. He tries to have about 2/3 of a combination of “stocks and blends” that are in Cdn$ and the other 3^rd would be outside. In equity portfolios he has about ¼ in Cdn$, ½ in international and the rest would be in the US. Look at where the revenue stream is coming from, not where companies are domiciled. Most Canadian stocks on the TSX have almost 100% of their revenues in Canada and the US despite the fact that long-term returns of international stocks are about 2% higher, compounded annually over a 20 year timeframe.

Interest rates. The Fed has released so much money supply through buying the outstanding bonds and literally quantitative easing the whole situation. That was the last 3 years. Now that we are in healing mode and reaching normalization of the economy, you have to adjust for higher interest rates. The bond market has already adjusted for higher rates. With the employment numbers out last week, the Fed is going to take out its buying program of 30 year bonds.

Markets. This is still a buying opportunity. He is tired of the “tapering” talk and hopes that everyone else is too. The fed is going to be cautious and if there is any sign of an inflationary spike, he is sure they are going to be there and ready to be less aggressive on tapering. Unfortunately, job numbers were a little weak. Interest rates have to go up. A lot of bond guys like to hear that but maybe there’s a secular movement and negative rates in fixed income. If interest rates move up, that is very bullish for equities.

Investing. A big fan of value and he is finding value in technology and financials. Technology is always trading at a discount because you don’t know what the future is going to bring. Valuations are cheap and what you have to do is discount it back to today’s valuation and your expectations for the future, as this is where he is finding value. On the financial side, there were a number of opportunities this summer with Canadian banks and mortgage lenders. People worried about short-sellers coming in so he scooped them up. US names are still cheap as well. US banks are still trading at BV.

Real estate. CMHC has made a decision to pull in the reins on securitized mortgages on the banks. He doesn’t see the Canadian banks taking on the excess risk so it might slow down some of the marginal mortgage buyers which could result in another slowdown in the Canadian housing market. However, so far we haven’t seen any slowdown.

Gold Stocks. In the last 4 downturns, we have had 2 week or 3 week periods where the market just didn’t have a bid, particularly on the small caps. We haven’t seen this yet. In his experience, coming out of a bad market, the very best of the lower end of the juniors performs the best.