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

Balance. Bonds and stocks have sold off at the same time recently. Equities have much more volatility than bonds so you need both to reduce overall risk. How much of each depends on your needs and your tolerance of risks. Equities may continue to be soft while bonds may rally.

He likes actively managed strategies in the preferreds. They can go to reset preferreds or to fixed preferreds if there are risks depending on what he thinks interest rates are going to do.

Real Return ETF or Rate Rest Preferreds? Reset prefereds are a good way to play the rising rate environment. He would be buying these into dips.

Educational Segment. Last week was quit challenging. The average correction is 5% or more. It was 13% last week. We are seeing an oversold condition on the broad market and a bottom. We tested the 200 day moving average. It is typically a good buying opportunity when it happens in a rising market. If we get above the interim high it will go up but if we don’t take out the highs of last month the bears will win out. He thinks you can trade the market on a rally.

Market. In January he was looking for weakness and was expecting oil to get hurt. Last week we had a blow out number. Natural Gas liquids also went up. It was a shocking number. The price of crude backed off on Friday. He is bearish on oil and bullish on natural gas. People don’t realize that most people heat with natural gas. People are not taking into account storage. Mother nature has the ability to eat into storage. It has had a bigger draw down than in prior years. February and March may have a big draw down in storage. Then the play is whether they can rebuild storage during the summer with the air conditioning season. He is predicting $4 for Nat Gas.

Market. Volatilty isn't over after a couple of really wild weeks. Don't blame ETFs or short-sellers. There were so many factors. It's bounced a little but hasn't returned to previous highs. Dow 50-week moving average of 22,500 has got to do some work to return to earlier highs of 26,600. Expects it to go lower. To feel more confident, he would like to see markets consolidate, which is once you go higher you come back down and test previous levels from where it moved up. We haven't done that; we just drifted higher. Wants to see weeks or months of trading at a support level--we're far from 22,500. The old highs of 26,600 will become short-term resistance. Once it reaches that, it has to show him it will bouce above that.

S&P. Expect it to hit that low again? He doesn't expect last week to happen again. It was a blip. But it was the start of something that scares him a little. Could happen within six months. He finds it hard to buy something that's gone straight up without a down tick. Expects serious support slightly below 2,500, then spend some time there. Then, the next regroup will take it that much further.

Gold. Used to be a safe investment. Likes gold. $1,400 is a level that gold will struggle to break above. Needs to see gold break this level for multiple days or months to build his confidence.

Oil. Bullish or bearish? On the fence with crude around $60. Expects to see it in the low-$50s. Won't see oil stay at current levels based on recent levels. Doesn't see much upside.

Market Outlook. Last year there was a massive dislocation between what oil did and what oil stocks did. This year oil was up close to 8% and the average Canadian company is down about 20% from the high on January 26th. He is seeing unbelievable opportunities in the oil stocks. Some names are down 30%. It is craziness. He is seeing the greatest breakdown in history between perception and reality. There is a misunderstanding of US growth oil output and how that fits into the global context. You need growth. The market is already undersupplied. Demand is up – Goldman Sachs is saying 2 million barrels this year. We are in a multiyear bull market for oil because we experienced the largest drop in upstream projects spending globally. Oil price should remain very strong for the next 5 years.

Can you recommend a non-Canadian producer to invest in? He typically doesn’t buy the mega-cap companies. Their growth rate is fairly modest as they are basically a proxy for the price of oil. It has been topical to go out of Canada. He is 40% in the US. Repatriated some to Canada over the past month given the implosion in share prices. He likes WPX Energy Inc (WPX-N) in the US. They are deleveraging. Trading at a 2-point discount compared to its peers. Good mid-cap company with good balance sheet. Main thesis: high quality multi-decade running room and management the he likes.

What is the US reserve for fracking oil? Big debate on shale oil. Arthur Berman a couple of years said that there is a decline rate of 80% or more after the first year. In his opinion there was a fallacy as he didn’t recognized wells that were brought on. In his mind is not a debate on oil shale. It is more about quality of acreage. When you look at the best rocks. Because the marginal economics when you move to your tier 2 erode very rapidly. Companies are drilling longer, and efficiencies are flat lining. He sees that some evidence that high grading is eroding.

How is Alberta going to sell their oil down the road? Not going to solve the problem until you have pipelines either going East, West or South. Right now, the Government have given full support to Trans Mountain. But there are delays. We remain short pipe. It is impacting all of us.

Market Outlook. Looks at this kind of sell-off as a correction well needed. It had to come. The question is whether or not this is the beginning of a bear market. He thinks it is not. Because the US economy is growing, profits growing at 18-19% with the tax cuts. The problem is that when investors see this type of volatility they tend to catastrophize. Interest rates are still historically low. What is really wrong? We can expect further weakness from here, we can also expect some bumps like today. Be calm, take the dog for a walk.

What is a cost-effective way to protect my portfolio from a downturn? Very simple way. Go to www.m-x.ca which is the Montreal exchange. You will see pages of stats. Pick a month and a strike price and go from there. Now with more volatility they are a little more expensive. Buy put options. You might go to slightly out of the money and they are less expensive. The problem with options in Canada is that there is not that much volume.