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

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.

Markets. We are headed to a $30 billion deficit and beyond. Oil is such an important part of the Canadian economy. Cutting interest rates is not going to solve Canada’s current problem, which is low oil prices. If you look at the futures market, the oil price is between $60-$70, looking 5 to 10 years out. Ottawa’s forecast is $40 for this year. We are all living longer because of breakthroughs in healthcare. This is going to cost the governments extraordinary amounts in the future. OAS was cut back to age 65 when it really needs to go to 70. You need good spending to spur the economy. E.g. make every traffic light in Canada a smart light so when there is nobody sitting there it’s not red, increasing gas mileage and business productivity. We need more subways in Toronto, but don’t go breaking sidewalks and repaving them. We have to get used to slower economic growth in the world.

Educational Segment. Bear Markets. Once you are armed with the facts, you get a lot of valuable information about the markets. From 1928, the S&P (a third of the capitalization in the entire world), measuring all the bear markets, the average correction is 13% and this is where people start to panic. This is not when you should sell, but when you should buy. The problem is the 22 papa bear markets that are 19% or more and they average a 34% decline. And the question is "are we in one of those?" They happen because of extreme valuations (not now), or the financial systemic risk (not now), and the great depression. In the absence of those three, the average is 20% and no more. We just had a bit over 15% of a correction recently. He thinks there is another leg down in this bear so every time the market goes another leg up he takes his equity exposure down.

Markets. The macro picture is that we went through a terrible period in 2008-2009, and it was so bad he thinks it is going to take more than the normal recovery time to see a full recovery in the economy. That takes us out to maybe 3 or 4 years. There has been growth, but it has been spotty. He is looking out 3 years, but admits there are a host of things that could go wrong, any one of which would hurt the market. He is optimistic and is taking a three-year view. It is a very different picture than what we saw in 2008-2009. China is largely self-contained. 85%-90% of its banking is internal, and the government will take whatever step is necessary for them to recover. It could have a shock value, but it will be a short-term one. There was a period in oil prices in 1973 when they went from about $350 to $39.50 in 1980. That was a major dislocation to equity markets and the economy, and some people never really recovered. Fast forwarding 42 years, we are now looking at a reverse period where energy prices are stable and lower. Thinks that $30 oil is close to the bottom.

S&P 500 by the end of this year? Thinks it will be higher and doesn’t see much in the way of a retest of $1850-$1860. As the economy shows signs of picking up, then the market should pick up. He looks at consensus earnings per share for the S&P, $122 this year and $138 next year, which is quite ambitious. The S&P 500 should get to $2150 maximum this year.

Financials? Everyone expects financials should lead the market higher, but they continue to trade lower. This tells us that there is a great fear of a banking crisis. If “negative interest rates” became a policy of our chartered banks or the US banks, that would hurt earnings. The world doesn’t know what that would do to the banking picture. Right now it is energy prices and the potential risk of losses.

Are bank dividends safe? He cannot perceive, unless the situation is totally dire, that any bank will cut their dividends. The worst case is that they postpone any increases.

US Market. Corporate earnings are not that bad. People are taking in expectations for things to slow down, when we really haven’t seen much evidence of that. A lot of the focus is on Chinese growth and the type of growth they are having, so more to consumer led from infrastructure and a lot of the commodity implications that there has been globally. A lot of money going into places that in hindsight are not economic, and there are questions as to whether they are going to be able to pay debts back. Fear is just exploding through the market and attacking equities as well. There has always been this credibility of the Central Banks that they fix everything, and you don’t fight the Fed. Now people are questioning, and figuring out that they don’t know everything. It really didn’t help raising .25%, and then looking like they were backpedaling. Still believes the US is the strongest place to be, but a lot of that is being muddied by the huge currency movements that we have seen. A very dynamic environment, and when you have a lot of moving parts, that is what leads to the market volatility.

What percent of funds would you put in US versus Canadian stocks? She is about 70% in the US and 30% in Canada. Finds the US to be a structurally sound market at this time. In the Canadian market there is a lot of money locked in Canada that simply can’t leave. Looking at the top 10 performers in 2015 in Canada, 9 out of 10 had less than 20% revenues tied to Canada. She is concerned that because those stocks did well, it seems dislocated from underlying fundamentals of the company, and more of a fund flow question. Feels US companies are trading more on their fundamentals.

Markets. In Canada we have about an 800-point cushion right now, with 12,000 being support, but it will stay under pressure because of obvious reasons. Crude below $30 is not good, and doesn’t see that getting better in the short term. The US is a little bit different. Dow has had a nice bounce with lots of triple digit days, but is now getting closer. It’s around 16,300. 15,800 is where the base is going to be built, and he expects that base to go on for months before we do anything positive. Resistance on the Dow would be 17,200-17,300, the 50 and 100 week moving average, so resistance is big there and is not going to go much further. S&P has 2,000 as resistance and is sitting at around 1,900 now, so there is not a lot more upside. He likes to see the history and where the market has stopped and where it has run with historic issues such as crude, gold, some kind of market movements that happens globally. For whatever reason, indexes stop at certain points and go at certain points. Looking back 10-20 years gives him a little bit of leverage when there is no leverage. It looks like when we are falling it is going to keep on falling, and when it is running, you can’t wait to Buy it. He tries to stop some of the “sucker rallies”, where it has been falling and then rallies very, very quickly, thinking the momentum has changed, but it hasn’t. S&P has been acting quite well and is now toying with upper levels of the index. As opposed to the Dow that is working on support and trying to find a base, the S&P is at a point where he is trying to find a top. It’s a mixed bag. The S&P shows that you want to be Long the market a little bit, while the Dow shows something completely different. The 200 week moving average is a very important line, and it is very important that it holds those markers, otherwise that becomes resistance instead of support.

Crude. Tested the mid-$20 earlier, which is quite scary. Even after the powerful rally we have had, it broke down through $30 again today. He is very concerned with crude and thinks we are going to test the mid-$20 for sure. Even if it does hold, it is going to take time to get back out of here.