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

Energy Bull Markets Comment. He is near term bearish on oil prices, but thinks this will help fuel the next bull market in energy. The Reserve Life Index has fallen to 5-6 years – the lowest level in decades. Companies want to see flat production in 2018 and will pay dividends and pay down debt with surplus cash flow. He is bullish on natural gas stocks, but sees about 20-30% downside on oil company stocks in the next quarter. This will set the stage for the next long-term bull market. He sees WTI at $100-$150 in 3-4 years from now. Many companies are priced below book value today, but have room to go to 2 times book value – a 400% upside potential.

US Natural Gas Market Comment. He is very bullish on natural gas prices in the US. Cold weather has knocked inventory down, with 93 bcf drawdown this week. He expects US LNG exports to rise from 2-3 bcf per day up to 9 bcf per day in the next two years creating more markets for Canadian gas into the US.

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This is the widest divergence between oil prices and Canadian energy stocks he's ever seen. We're in a multi-year bull market with a big drop in oil inventories in the past year. Investors don't appreciate how demand is up. The bogeyman
is U.S. shale, but there is a labour shortage in Texas (2.5% unemployment rate there) so this is a constraint. In Canada, we have a profound pipeline shortage with maximum flow for oil and natural gas happening this August. These constraints along with continued rising demand amounts to supply shortages for the next five years. He's very bullish about oil prices. It's going to take time for Canadian energy stocks to rise, but the wide differential between WTI and Canadian WCS has been narrowing.

With regulations, taxes and problem getting our oil out through pipelines, would a Canadian oil company buy back shares? Differentials (WTI vs. WCS) are wide because of limited pipelines, but has narrowed from $30 to around $21 and will continue to improve when railway capacity comes on. Light oil is not as impacted by pipeline constraints. Carbon tax is a reality. Federal vs. provincial political conflicts will endure. So, what else can a Canadian energy producer do but buy back shares?

Market Outlook. The US Dow Jones is probably the most watched index in the world and probably the worst index in the world because it is only 30 stocks and the price weight as opposed to cap weighted. Last year was the least volatile year in history, it’s become more volatile and that is a good thing. Somebody in somebody’s office in the US is acting completely unpredictable but, in the end, common sense will prevail. In the meantime, companies in Canada are being hurt.

What percentage of your portfolio is in cash in both your registered and non-registered accounts? His company doesn’t differentiate between registered and non-registered accounts. They look at cash differently. Recently they have been using cash and bringing cash balances down. His clients now are between 3% and 7% in cash.

Larry Kudlow just named as Trump's new economic advisor today should give the markets some confidence. He's stable and mainstream which will appeal to Republicans, though he's a free-trader which is contrary to Trump's views. As for his threatened tariffs, Trump has a strong bark, but then backs away. He has sued people around 4,000 times. This is his strategy and we will learn to react to it in time. Technology is so concentrated in the US. that the U.S. government must block the Qualcomm deal, which gives him pause. Corrections are useful in that they turn stretched earnings (that are rising currently) to an acceptable level.

General Market Comment. He thinks the recent Atlanta Fed Reserve GDP downward forecast to 1.9% growth is not unusual as they usually start with high outlooks. The US economy is facing headwinds, but he feels President Trump’s tax reform is moving in the right direction. He sold all his Canadian dollars at $1.02 CAD/US and thinks the trend towards a slower Canadian equity market relative to the US will continue. As interest rates tick higher and the US economy continues to grow (he thinks 3% GDP growth this year), the bond market will take a break and he thinks we might see a move above 3% in the US Government bond markets.

Institutional Ownership Comment. The ETF sector is gaining huge strength as money is entering. Valuations of stocks are being positively impacted by institutional investors, if the stock is included in the Index.

We're seeing elevated turbulence in the past few weeks, a huge change from the start of the year. Investors are dealing with tigher monetrary policy and inflation pressure. In Canada, we must be cautious due to the NAFTA overhang, high debt levels and minimum wage issues in some provinces, which is why we are lagging other markets. He likes the U.S, Asian, parts of Europe and emerging markets. There's optimism outside Canada. He sees it in
strengthening data, fiscal stimulus and a tax package in the U.S. Earnings season is basically over and most companies beat. That said, there will be more volatility going forward this year. Buy the dips. Hopes that Trump is merely posturing with his tariff threats.

Market. He thinks the market is at a decision point. The market has retraced and is in a consolidation. The rising trend might continue after a consolidation or reverse. We don’t know yet which way it will go. A lot of money has been invested recently. The December rally looks like desperation investing, which is common near the top of a bull market. The market statistics are dominated by the FAANG stocks because they are the 5 biggest companies. In Canada, energy stocks will continue to hold back the TSX because they are so heavily weighted. There will be good trading opportunities, but you have to be very cautious in investing in these. Rex Tillerson was fired today--he expects this to introduce short-term volatility and that generally, political events have a short impact on the market.

Comment on Portfolio Management. The essence of portfolio management is how you trade your stocks: Position size over time. You could pick a random set of 10 stocks in the TSX and your success will be determined more by how you reduce or increase your position than on the stocks themselves. He looks at a 25-stock portfolio, nicely diversified. If a stock is volatile, he limits it to 3%. Low volatility is 6% maximum. His initial buy is half of that. So with a high volatility stock, buy 1.5%, get out a notebook to record your thoughts, set goals and a sell price ahead of time. If the stock goes up, buy more.

Market. There may be a looming banking crisis here and in China. We are the two biggest countries at most risk from a consumer debt level. This is one reason that interest rates cannot go up a whole lot. The consumer is much leveraged to small increases in interest rates. He thinks the economy will slow a lot. We will see how the markets handle that this year. There is job growth in the US but not much growth in wages. There are pockets of inflation pressure building on the wage side.

ETF Diversification. Two or three products for diversification. VBAL-T, VGRO-T, VCNS-T. You have to know what your comfort level is and what category you fall into. In a retirement situation a balanced fund would fit the best. The cost on all of them is just 22 basis points. The question is if you can handle the ride. Bonds won’t protect us like they did in the past.