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

Energy. Looking for late blooming cyclicals in the energy sector. Going back to the beginning of 2012, he noticed things that were happening in other parts of the Canadian market that led him to believe that energy is probably going to have its day. Some of the segments in Canada that have done well, financials and consumer discretionary, are typical indicators of economic recovery. Thinks the next phase for this attraction to energy will not necessarily be in the yield names. Instead, names that offer good growth at a reasonable multiple of cash flow without over levered balance sheets will be where the market goes. Although he is not abandoning yield names as this is a necessary component of getting the right exposure to energy companies looking forward.

Markets. In the last week or so, Canadian market has been a little bit rocky but generally over the midterm he is positive on equities. More biased towards US than Canadian equities. A lot of good things going on in the US with an improving situation, particularly with the housing market which is driving a lot of change. Has been moving capital out of Canada and into the US, particularly into things like automotive and housing. Near-term there have been big moves in the US market and a little bit of concern about the short-term divergences with emerging markets and commodities not performing well and yet US markets still near their highs. Even in the US we could be in for a short-term underperformance over the next few months. A 5%-10% pullback would be healthy for the market. He has 30% in cash in the funds that he manages.

Gold. After a historic drop like gold has had, the biggest in 33 years, he would just stand back and wait to see what is going to happen. Has a very small position in gold in his funds. When you see that dramatic a drop, it is hard to understand what all the unintended consequences might be, whether it is margin calls, liquidation in gold funds, redemptions of managers who owned too many gold stocks, etc.

Markets. Chinese growth still 7.7%. China slowing down is not a new story. It is probably going to grow in the 5-7% range. We are entering a bit of a panic phase in gold. We are right at the bottom of the low end of the recent channel. We are looking at a new range of low 1300s to 1500s. We hit the low end of the channel today. We don’t know what the low will be. It could be today, but we don’t know. Below $1300 for gold he thinks 30% of global production just stops. Suspects there is another up cycle to gold at some point.

Educational Segment. How much Equity Exposure Should I have. Old rule was age is percent of equities. He thinks this is nonsense. You need to know your tolerance for risk, your need for income. Means – do you have enough? That helps you define how much risk you have to take. It is not about age. With interest rates at 2-3%, you need to get 15% on stocks and 3% on bonds to get you the rate of return you need. XBB shows Canadian Bond Market has done well with much less volatility.

ETF Risk And Return:

Markets. Gold has been on the bullion side for the last three days. It has been the start of the profit taking on the equity side. It blew right through the Fibonacci level of $1450 into 13 and change. Looking at Energy, look out the window, you are using it every day. Gold had different uses (or lack thereof) compared to energy, which is the biggest industry in the world when you include petrochemicals. Most projects require $65 oil but marginal projects require $80 oil, but this is his view of the downside of oil. When it is down at $80 he tends to go and buy oil stocks. Late spring has helped the price of gas.

Gold. Gold had the biggest drop since 1980. If any asset goes down 10% in one day, it is not fundamentals driving it. It probably happened because gold had gone through $1500, which triggered a lot of selling from technically driven trading programs, margin calls being triggered, etc. It is still the best performing asset class even after today’s $140 selloff. Precious metal assets are likely to provide good performance over time, as long as central banks continue to print money.

Markets. Equities are still the place to be this year. In terms of yield and valuation this is probably the roughest patch we are going to have. Once we get through this we are likely to see, as we have seen in the last couple of years, a bit of a move up in the 2^nd half of the year.

Markets. He likes to buy companies that he can understand and what drives that business. Gold companies have been littered with issues such as cost overruns, etc. He doesn’t see a bottom in sight for gold yet. Still very constructive on certain sectors, outside of materials and energy in the short term as well as. There are a lot of technology companies that he likes as well as the telecom space, which represent decent value for dividend paying companies.

Gold. This is a very seasonal product. You want to buy gold and gold stocks around the middle of July and play it right through until around the end of September. You should not be in gold at this time of year.

Markets. Seasonality occurs because of a series of recurring events. Markets tend to go up from November right through until the end of April. Has done it again this year. A couple of things to watch. First of all, you have 1^st quarter earnings reports. You also have economic reports coming out. Next week, economic data is not going to be so great either. First-quarter results on the S&P 500 and TSX 60 companies are expected to be zero on a year-over-year basis. TSX 60 stocks have started to hibernate. TSE composite’s had a double top pattern on the downside that was completed about 3 weeks ago. Stay away from the Toronto market.

He was on the show in May 11/12. For the next 6 weeks, the S&P 500 dropped 10.5% so it was a good time to be in cash or cash equivalents. The same thing happened with the TSX which had a 9.4% drop. It was a good time to hide. He went 100% cash. He has the same recommendations this year in his 2 Top Picks.

Buy 90 day treasury bills. Doesn’t stay in this all the time. Last year he went into fertilizer stocks around the end of June and went into gold equities around the beginning of July. Those 2 sectors have very strong seasonality at that time.

Markets. Currently, he has the most favourable outlook on Nat. Gas. Last year it bottomed at $2 and is at $4 now with considerable upside from here. There are vast amounts out there but it is a question of at what price is it economically viable to extract it. Recently, US Nat Gas companies have been performing better so for the time being he would look at the Canadian companies. Gold – he subscribes to the longer term thesis that with central banks racing to debase currencies it will result in inflation which drives gold. There was some talk in the fed speech of withdrawing QE.

Markets. In real terms, we are only back to 1997 levels. Although we are back to 1997 in real terms, inflation-adjusted, earnings have risen 45%, so we have much better value today than we had in 1997. Feels there is a lot more pessimism in this rally compared to the late 90s. Gets more worried when things are going really well because he sees opportunities when things aren’t going well. Investors should be very, very careful. Some of the safe/conservative investments are getting to levels that are outside their normalized valuation ranges. They are there because people are looking for a place to hide or gain an advantage in income or yield and they think their capital is absolutely safe. Some of these investments might be ahead of themselves in terms of capital depreciation.