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

Oil. There has been almost a $9 drop in 3 days, which historically is a heck of a move. He is feeling pretty confident that $90 WTI is going to hold. Feels that Saudi Arabia is concerned about demand destruction from too high oil production. They want a high oil price but they don’t want to kill off demand and bring on substitutes. Thinks their comfort price is at around $120-$125 Brent.

Natural gas. We are in a shoulder season again. Historically gas dropped about 19% in shoulder season, which would imply about $2.65. Kind of irrelevant now and he is looking out to 2013. Demand was very, very high this summer because of the heat. At the same time, there was a lot of fuel switching from coal to natural gas. As gas has increased, that economic incentive is coming off the table. Looking out to 2013 he is looking for a recovery of around $3.50 Cdn (around $3.75-$4 US). As soon as gas approaches $4, he feels producer hedging will increase.

Oil/gas. He is seeing a move into the cyclicals, in particular into oil and gas names. Rotation happened in some of the large cap names first and as valuation multiples expanded, it tended to trickle down into some of the smaller names. Stocks were so oversold earlier this year that it was bound to happen at some point. Also, there is more enthusiasm that Europe is going to sort their problems out and the US Fed is willing to step in and support the recovery process of quantitative easing, which is good for commodity stocks in general. He was holding about 10% in cash and is now taking it down to get in this rally.

Oil. Oil price is not supported by the fundamentals of demand. It is more driven by geopolitics and the fear of supply disruptions, which is not a particularly healthy spot for the market to be in. If peace breaks out in the Middle East, we are in for some risks on the oil quote. If oil can hang out in this $100-$105 range, a lot of the oil companies can continue to put up good production per share growth and generate value for shareholders.

Markets. Over the last 12-16 months, there has been a constant tugging in 2 directions. Soggy economic conditions on one side, which has tended to drag the market down over periods of weeks at a time. On the other side there is a very determined set of world central bankers trying to push liquidity into the system. Consistently through the period, there are certain groups that have performed pretty well. That has been largely dividend growth with pretty predictable cash flows. And then you have had bouts of risk on and risk off. In the last few weeks money has rotated to riskier assets. You have to pick your spots. He has taken some tactical exposure in yield producing energy and in gold as well as consumer, as the big beneficiary of low long-term interest rates is housing.

Gold. In the last 6-8 weeks, gold producers have started to outperform the commodity. That tends to be a pretty good tell that there is a more significant move on the go. When the stocks are leading it tends to give you a little bit of a tell that you could see a more extended move.

North American rail sector and the effect of the Bakken on this? He has a pretty significant ownership in railway companies. Transports as a group are not behaving very well except for the railways. We have a boom in energy production but there is not enough infrastructure to move it, so the rails are the big beneficiary in the short and intermediate term. He owns Canadian National (CNR-T), Canadian Pacific (CP-T) and Union Pacific (UNP-N).

Markets:

Junk Bond ETFs. There has been massive growth in this area. Hedge funds use high yield bonds. E.g. JNK-N. The yield is historically low right now. It will add some volatility. There is a lot of money going into this sector because of the need for yield.

The French have been downgraded like the US. They are being counted on along with Germany to save the basket of European countries. Germany cannot save the whole Euro region on their own, so he is really watching France.

Hong Kong has massively unsustainable real estate pricing. There are real estate bubbles in a lot of places.

Markets and the Fiscal Cliff: Governments are choosing to monetize debt. They are trying to smooth out the 'bad'. QE is like a sugar high. Now the fed is looking out 3 years, not 6 months like before. This is good for gold. It will not go up in a straight line. We will go through periods where the economic numbers do improve. You have to be a trader. It's not as easy as buying and holding here.

Markets: He is skeptical that trades run out of gas. The dividend trade is still on. Weakness is a buying opportunity. There are some cyclical stocks that pay dividends and can increase them. Utilities or REITs that have been beaten up are opportunities. Likes real estate, energy including nat gas producers. Last year you had a warm winter that depressed prices and storage levels have come down and a lot of generation has changed from coal to nat. gas and if we have any kind of a winter it will be good for nat. gas. With the Telecom sector you are buying for the dividend. If you look at valuations, they are at the high end of the range so choose companies that can grow and increase dividends.

Economy. There have been some very positive developments including the German courts decision that participation in euro bonds was not unconstitutional, Netherlands voted in a party that was not anti-EU, and the US instituted QE 3. Not time to be popping the champagne corks yet. QE 3 realistically means that things have not recovered as quickly as they had hoped with QE1 and 2. The steps are in place to get over this hump but we’re certainly not out of it, particularly in Europe, and it is going to take a while.

Markets. He is looking more at the defensive sectors right now, including Covered Calls including some of the ones that are available from Bank of Montréal (BMO-T). (See Top Picks.)

Iron Condor options strategy? Basically means that each side of the Spread has 2 arms, so you are dealing with 4 positions. A combination of 2 vertical spreads where you are looking for something to happen between the various legs of the spread. He doesn’t like these strategies as they are not for the retail investor but are for the pro-traders. If you are a retail investor, you have 4 commissions in and 4 commissions out, the difference between the bid/ask spread 4 times over.

Bear Call Spread? Because it is a Bear, you are negative on the stock. Instead of just buying a Put, what you are trying to do is generate income. Example, stock is $50 and you sell a 50 Call, expecting the stock to go down, you’ll get possibly $2.50 for the Call. To protect yourself, you might buy the 55 Call which may cost you $.05 because it is a lot further away from the price of the underlying stock. He doesn’t use these because you have to watch them like a hawk.

Naked Puts. Perfectly good strategy, but you have to be prepared that there are risks. It is a directional trade and could go against you. His biggest concern is that they are supposed to be an equal risk to buying a stock and selling the call. The problem is the way people use them. Often they leverage these things and often 2 or 3 to 1.