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

Owning only all the banks: ultra concentration risk. You are taking sector and country risk. Banks around the world have seen better days. They won’t come back to the way they used to do for a generation.

Markets. The US market is holding up a lot better than the rest of the world. The MSCI has shown the rest of the world to be in a bear market. The US indicates have not dropped enough to be considered in a bear market. There could be room for further downside, but it is not a reason to stay out of the US. You should sharpen your pencils. The Fed has concluded the QE program and started the move back to normalized interest rates. We are still operating in the wake of the great recession. Canada is still subject to the huge disequilibrium in the price of oil. We are at the mercy of being price takers in the oil market. It is going to be a challenging environment for Canada to replace energy with manufacturing.

Sector allocation. Canada is very challenged. China is in the process of transformation. Europe is 2 to 3 years behind the US in their process of economic recovery. The US is one of the best poised economies in the world to survive. You want to be diversified across Europe, the US and Canada. Be defensive at the Canadian sector level. Equal weight in Telcom and in the Consumer businesses that can withstand the storm. Utilities, also. Look for business with steady cash flow and an angle for weathering the storm.

Markets. There are 2 opposite views out there. One suggests we are just having a slowdown and an earnings correction. The other is that we are going to have a recession. Those 2 forces are creating all this volatility. She doesn’t think we are going to have a real recession. We might have a lousy quarter, but she is not expecting 2 negative quarters in a row, the definition of a recession. Emerging markets have an issue with the US$ dominated debt. Zero interest rates is another possible issue. Doesn’t think any one of them will necessarily result in a catastrophe.

Sectors you would invest in? Financials would not be her favourite. If the cycle is slowing down, you could see some of the banks start having difficulties. Consumer stocks, especially non-cyclical, is where the market is happiest to be, so that is a good sector. The trick is to find things that are not overvalued. (See Top Picks.)

Markets. There is a strong correlation between recessions and the economy, and if he can be ahead of a recession, then he will be able to preserve capital during a bear market. He is watching the economy very closely, because things have been turning down from the economic indicators that he follows. They are at a very delicate level where if they tip over, they could push the US into a recession. Looking at the price of some European banks, you realize investors are pretty spooked and a little concerned about what the follow-through is going to be, and the effect of lower commodity prices on economies. He is sitting with 40%-50% cash right now. Sentiment has really been pushed negatively. Looking at the AAII numbers, as to where bullish investors are, you are looking at decade lows. He is always watching for what the surprise could be. Has his eye on the US$, and if it should weaken, that will be great for US multinational companies’ earnings. It is also going to be fantastic for all the commodity producers globally.

Market Call information. If you are taking advice of anyone who is on Market Call, you really need to be monitoring and managing your positions. Just because a guest comes on and talks about a stock, you have no insight as to what they are doing with their position. Maybe they rely on Stop Losses or technical levels to get them out of part or all of a position.

Gold? Gold has been holding fairly well. That is a function of a flight to safety. The US$ has been fairly strong, and yet gold has been appreciating, which is not really what you would expect. As a result, gold companies are seeing higher commodity prices and at the same time they are seeing lower costs. He owns Richmont (RIC-T), Claude Resources (CRJ-T) and Guyana Goldfields (GUY-T).

Markets. Yesterday the market bounced off the S&P 500 level of $1950, the kind of marker he is watching out for, and seems to be in a bit of resistance. If we get past that, $2000 is the next level. We are probably going to see a lot of volatility this year. Lots of challenges, whether from global economic growth concerns or the uncertainty of the Fed and their pace of interest rate hikes, as well as the fixation on oil prices. There are some contraction earning estimates in US corporate earnings. There are also some non-traditional US presidential questions as well. If we don’t see a recession economically, we might see a recession in profits. In this environment, we will be range bound, and you want to take advantage of that nimble type of active approach in the marketplace, and choose your stocks, make money, and move out of them. There also seems to be a shift to more defensive areas such as consumer staples, telecom and healthcare. Those areas are starting to outperform on both sides of the border. His cash position has bounced between 10% and 15%.

Canadian Banks? On these, he is at best neutral weight, and probably underweight at this time. He knows of all the concerns around the banks with regards to what oil prices have done. More importantly, it is more of the ripple effects of oil prices falling. These are great cash flow companies, and you are getting a great dividend with some possible dividend increases going forward. In terms of capital growth, at best it is going to be flat lined and volatile for the next little while. Doesn’t see much downside, but not a ton of upside.

ETF for a TFSA? A bit difficult without knowing the situation. If looking for income, he likes the iShares Diversified Monthly IF (XTR-T), but if looking for equities he would look at SPDRs in the US. Prefers US equities over Canadian at this time.

Energy. The talk about whether Saudi is going to cut or freeze is all noise. The following is walking through how the fundamentals of supply/demand is going to take care of the oversupply by the end of the year. Today the market is oversupplied by about 1-1.5 million barrels per day. Consuming 95 million the oversupply represents about 1.6%. Demand this year is estimated to grow between 1 to 1.4 million which suggests that the current supply is largely taken care of by one year of demand growth. There is only one meaningful country that is adding volumes this year, Iran at 500,000 barrels per day. Where else are barrels coming off the market which are going to not only counteract the barrels coming from Iran, but also aid in the remaining barrels generated in the oversupply? The largest area of growth last year is estimated to be zero this year, Iraq and Saudi Arabia. The final remaining component is the US, where the rig count is down about 73%-74% from its highs. Volumes are now down on a year-to-year basis. 2 weeks ago, using weekly estimates, US production was at negative. From 40,000 barrels a day to now 140,000 barrels a day, that trend will continue until we get a resumption in drilling activity. Expects we will be at $50 by the end of the year, which is the beginning level required in the most economic base in the US. Between now and end of the year, we have another 1-1.5 months of crummy fundamentals. Twice a year Gulf Coast refineries go down for semi-annual maintenance and oil demand goes down and then comes back in April. Coming out of that refinery downturn, there will be a continuation of falling US supply, by 50,000 barrels per day per month, plus there will be an uptick in demand from those refineries, plus we have the continuation of global demand growing by about 1.2 million barrels per day.

Markets. This is a range bound market, and you shouldn’t be trading for the market that you want, but for the market that you have, i.e. a volatile market with ups and downs. When the S&P 500 gets towards $1950, maybe $2000, it is time to start paring back some of your risks. This can change for the positive, but with all the information that we have right now, it doesn’t seem that the market has what it needs to push through that. He is pretty cautious in this environment. He focuses on his positions and adds to them when they get dislocated because of emotions. This is a market where emotions take over very quickly. You have to follow on a daily basis.

Are negative interest rates possible? Doesn’t believe negative interest rates are the way the world is going, to get out of trouble. Seems this is just one of those weird fad things. We are not there yet, so he wouldn’t go there. You have to tread very lightly in the banks.

Markets. There could well be a resource rally. The move could be violent. The gold stocks are moving. ABX-T is moving and it is supposed to be one of the worst ones. He has increased investment in the mining sector but has been very selective. He holds banks but they don’t fit the definition of ‘special opportunities’. It is extremely dangerous not to be diversified. He is happy with Canadian stocks vs. US stocks. The Canadian dollar is in unison with the oil price, so if all the resources get going then you get a double barreled kind of thing.