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

Markets. We have seen a nice rebound, but a lot of it has to do with oil. Oil drove the Cdn$ stronger, drove a lot of stocks in Canada, helped the metals as well, and also there was a good jump in the banks. All this happened very quickly in the last couple of weeks, so he expects there will be a pullback. Is oil going to trade at $45 when people in the shale business feel they can bring on capacity at between $50 and $40? Oil also went down because inventories were 3X higher than expected. The issue is still around, but we are not seeing the equilibrium factor settling down, so there is going to be more volatility. That will create a weakness in the Cdn$ along with weakness in other sectors in Canada. He was taking profits in some of the recent strengths, bringing down his oil positions a little. Expects oil to settle down at some point in 2017, and then you want to own them. We have a very robust energy industry in Canada, and owning the right stocks you could do quite well. Hopefully the world will start to grow in 2017-2018 and we will see a better number in oil. A terrible problem in Canada is that you cannot get the governments together to create a flow of oil across the country. That has to be sorted out. At some point he can see oil sitting at $50-$60 which probably works reasonably well for large companies in Canada.

US Banks? J.P. Morgan (JPM-N) and Wells Fargo (WFC-N) are 2 of the best banks and incredibly well run. They have some of the best management in the US. They are also the most expensive banks on a Price to Book and PE basis. 2 different types of banks. Wells Fargo is relatively a domestic retail bank with a growing, but small investment banking franchise. Their real business and energy comes from growing their retail business and getting more share of a person’s wallet. J.P. Morgan is a global bank with retail, investment banking and corporate banking.

Global Markets. The US is his major focus. In the global market, it is 50% of the index, and really drives the economy for the whole world. The US economic situation is fairly benign, i.e. it is slow growth that we will continue to see for the foreseeable future. The big question mark going forward is what the Fed will do. At first it was to be 4 to 6 hikes, now it’s down to 2 to 4, and he expects it will be 2. Doesn’t think it won’t be too aggressive because of the impact it would have on emerging markets, China in particular. Knowing what is going on in China is critical to his analysis. The Chinese government is now going through a stimulus program that has raised some eyebrows, but in a positive sense. He is fairly optimistic on Europe with fairly robust auto sales. Their banks need to be healthier in order for the economy to be healthier.

Japan? The government had been adamant that they were going to raise the consumption tax, but there are lots of strong voices that are saying that this is not the right time. Japan’s economy is slowly eking out some growth, but there is a lot of fear that a tax hike right now would destroy any recovery that there has been in the market. (See Top Picks.)

Banks in India for a long-term holder? HDFC (HDB-N) is a very strong bank in housing loans. There is also ICICI (IBN-N). He doesn’t love the banks, but does have other investments in India.

Markets. Volatility ironically gives him opportunities. When you are in a one-way market, it takes everything with it, the good and the bad. That makes it difficult for people who want to distinguish between good companies and bad companies. Stock picking, after been out of favour a few years, has come back and allowed people to do well if they choose carefully. His philosophy and process is to always take money off the table when companies become overextended. If a company does everything well, the market loves it and drives it up to a valuation level where it hasn’t been before, and that is the risk. In that case, you just take a piece off. As an example, he has held Apple (AAPL-Q) for 11 years, but he has trimmed it 7 times. He would have been better, from a rewards standpoint, to have held it throughout that time, but from a risk adjusted basis, he would not have.

Biotechs? A tough area. It has fundamental analysis, but also macro influences such as presidential elections, a lot of political commentary about drug prices, a Democratic presidential candidate who has a history of becoming involved in healthcare reform. A bit of a scary situation for potential investors. Have traded off to such an extent that some are quite attractive on a valuation basis and have some really fine growth characteristics. Biogen (BIIB-Q) and Celgene (CELG-Q) are good opportunities. He has stayed shy of the sector because of the macro influence of a potential democratic win.

Markets. Belgium, Germany, the budget. How will the news affect markets? Tragedies are unfortunate, but he is such a long term investor that it does not affect him. We have lived with terrorism all our lives. HBC has stores in Belgium and Germany. Companies with assets negatively affected in the long run, you have to take action. Real estate will be affected in Europe in specific areas from these events. Since 1987, he has been saying the volatility comes and goes. The federal budget: Effect on renewables: He has been a long term investor in this sector and not because of a particular platform being elected. The liberals want to spend a lot of money.

Markets. A big rise in the deficit and subsequent debt from the federal budget today. It has a lot of influence from economic advisors from Ontario. It is worrisome to him. We may be in low growth, but we are not in trouble. Going into debt the way we are is like we are in fact in trouble. There is no plan to ever pay it back. It will be interesting to see what happens to the Canadian dollar.

Where to put new money - Oil?. He identifies companies, not sectors. You should have a diversified portfolio, however. You have to diversify outside of Canada also. Oil stocks had a premature run, maybe short covering. Historically you don’t get ‘V’ shaped bottoms in commodities. Hold off in oils for the moment.

The Budget. Lack of help for Alberta – just training and EI, but that does not help the oil industry. By putting up roadblocks to pipelines, they are just slowing it down. The same goes for LNG in BC. The problem is future growth. The oil we produce gets to market at present, however.

Canadian Banks. He only owns BNS-T because it is the most international with the smallest Canadian footprint. He sees a lot of headwinds such as the oil patch. You are only now getting people defaulting on debt due to the oil price problem. He prefers US banks where there is a more certain economy and loan growth. He sees Latin American and Asia as the future growth area for banks.

Merger of CP-T and CNR-T. He does not see this being allowed. CP-T have not solved the ‘Chicago’ problem, either. What bothers him about CP-T is a hedge fund having a huge position in it and that fund had to liquidate positions in the past for margin calls.

Educational Segment. Why Raising Retirement Age is a Good Idea. A Lawyer and an Actuary penned an article about why it was a bad idea to roll back OAS from 67 to 65. We are all living longer. OAS started in the 1950s and life expectancy was 80. Now if you live to 65 you are likely to live to 85. We will be at 16% young people going forward, but the number of old people will be going up dramatically (16-24%). Governments are inept at dealing with people living longer. The kids are going to pay. Each one owes $38k right now. The US will be out of OAS by 2039 if they don’t change policy.

Foreign Exchange. He was hedged when investing in the US. He started buying US exposure recently because he thinks oil will peak around the low 40s. This is a technical trade rather than a revaluation. He is positioning with some US exposure while expecting the US$ to drift lower.