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

Gold? Thinks gold’s range is $1050 to $1340. There is probably $100 upside. Doesn’t see a lot more in gold. Would have no problem in taking profits here.

Canadian Banks. He prefers US banks to Canadian. However, in the near term he is seeing improvement in Canada. You could get a nice total return. Down the road we may have some poorly performing loans from the energy price. He would prefer TD-T of the Canadian ones, but would prefer to focus more on the US banks.

Ranking the 4 US railroads. Transports were performing very poorly last spring and it was said to be because of a slowdown in crude by rail. In the last 4 weeks we saw a turn in the transport sector. He would pick CNR-T because it has a lot of north/south traffic. He would pick NSC-N for a US railroad. He would suggest an ETF, IYT-N also.

It is a very confusing time for people right now. We are completing a correction in a long term bull market. There are all kinds of negative news to worry about in the press. In order to get to the late stages of a correction there has to be a lot of worry about. Only 17% of investors in the US are bullish, and this is a good sign for the market. You have to go back to the second after the 1987 crash to get that few bullish investors in the US. He believes we are headed into a much better environment. The time to invest is when it is scary.

Markets. We really haven’t seen anything to get capitulation in the market, to bring valuations down, to make expected returns high enough that people can feel confident walking in. At the beginning of the year the expected return of the market was roughly 3% growth, hardly exciting. Now we may be looking out 12%-15%, by many people’s numbers, given the fall that we have had from $2056. Doesn’t think that is great enough given that valuations still seem a little stretched, and has been driven largely by oil and the rumour that there is going to be some sort of limit put on, ostensibly by Russia and Saudi Arabia. The track record between these 2 countries is abysmal. Russia always cheats. It is really much to do about nothing. Doesn’t think we are close to a bottom yet. It’s been tough sledding for investors, and there is a fatigue that settles in. Doesn’t know where the catalyst for growth is going to come from.

Lumber for a short-term trade? Most of the companies are linked to US housing. Overall they are attractive. There’s macro weakness, coupled with a sector that looks attractive, and companies that look generally attractive. However, the timing is a bit off. See how sustained this rally is, and if you see another week or so of stability with the S&P breaking above $1950 and heading back to $2000, then you could safely invest in this, for a short period of less than 6 months.

Markets. The US has GDP growth of 2% and unemployment at sectorial lows with pay increases. He wouldn’t be surprised if he saw a short-term 3-9 months’ rally in Canada relative to the US. Feels markets will go up, but will be quite volatile.

Markets. Historically about every 2 years, we get about a 10% or greater correction. The job of the market is to shake the tree of the unsure investor. This time around, it is doing a pretty good job. The market has been quite volatile and it is probably not over. Thinks this is a classic relief rally within a cyclical bear market, that is in a bull market. Cyclical bears tend to be very volatile, scary, like a roller coaster ride. Secular bears are often related to economic malaise and put you to sleep. In secular bear markets, good investors survive.

US Markets. It is very sluggish and there is nothing to get terribly excited about, but they are pretty close to full employment. There are rising wages and low interest rates, and it is a great capital market. He is overweight the US by about 35%. There is probably going to be some kind of a rollover coming in here to a degree.

Calling Covered Calls back? It depends on the relationship between the price of the stock and the option. Quite often, when he has sold them out 6 months, he just waits and sees. If the stock basically stays in the same place, and he can buy the option back for $0.25 on the dollar, he does that and then buys another right away. If it starts going deep in the money, that eliminates the time value of the option too, so he can take a loss on the option and do well in the stock.

Writing Naked Puts? A Naked Put gives people the right to sell you a stock at a certain price. If the price of the stock goes down, you are still on the hook. Basically you are selling a Put and you have cash to cover it. It is the flipside of a Covered Call. The strategy works until it doesn’t, and he has seen this happen many times. Because the people who are doing Put writing are never actually taking delivery of the stock, it is all treated like income unlike Covered Calls which are treated as capital gains.

Markets. Doesn’t believe we are going into a recession. The market was just overextended and just needed a correction, something in the 10%+ range. Central Banks are still in a mode of easing, outside of what the Fed is doing. Growth has slowed down, profits have turn down a little bit, but valuations have come in, and are more attractive for a lot of companies, than what we have seen in a while. There is a bit of a shift from growth to value, which can benefit Canada a little more. Also, we might be seeing a peak in the US$. Bank stocks have been absolutely hammered. His hedge fund, which was 80% net Short at year-end, is now basically 80% net Long.

Markets. Looking at Price to Book Values on the TSX, it looks like a market bottom. There are lots of value signs, but stocks can stay cheap for a long time. Valuation is not a great catalyst for things to change. A 3^rd of our market now trades below Price to Book. That has only happened 3 other times, 1982, 2000 and 2008. All 3 near cyclical lows for value stocks, 2000 being the exception where the market continued lower, but it was the high growth Internet stocks that rolled over, and more traditional cyclical value stocks did very well for the next couple of years. We are also 21 months into the bear market in Canada, which is well beyond the average of 11 months. From a US investor perspective, which does matter, Canada is down 45% from its highs. That should ultimately attract them. A US buyer not only gets the currency play, but also access to stocks that are well below Book Value in many cases. $7 trillion of government bonds globally are now trading at a negative yield, so the world is now pricing in this deflation scenario, this risk of global negative interest rates. It took a Fed rate hike to get treasuries to rally and yields to fall off. There is irony that the Fed is trying to raise rates, and the only thing that has happened is that rates have gone down. This is because Japan, Europe and other countries are using negative interest rates as a policy tool, which is what is crushing their banks. Overall the market is discounting this scenario of a US recession, which probably isn’t in the cards. He sees weakness currently in manufacturing in the US. Not particularly surprising given that energy is a large part of CapX. Energy is dragging down that part of the market, but we are seeing strong employment growth and wage pressure increase, which ultimately translates lower profit margins for companies, but more discretionary spending by consumers, and we are seeing a really strong service sector. The overall economy, when you combine it, is still strong. Doesn’t think we are on the precipice of a new recession, and thinks stocks are starting to discount that.

Energy. In general, stocks are cheap and a lot of them are trading below BV. For a 10 year hold, from a sector perspective you want to be rotating into them. However, on a case-by-case basis, some may not make it. A lot have far too much debt and will have to do some restructuring, whether it is issuing equity which will dilute you, reducing or eliminating the dividend, or the worst-case scenario, the bondholders becoming the new equity holders. You are probably better off getting into something like iUnits S&P/TSX Capped Energy ETF (XEG-T), and at least you’re balancing your exposure between the good and the bad. Or look for the strongest balance sheets that can at least generate cash flow somewhere in the 30s or 40s. Be very selective.

Gold. This rally looks very sustainable. Gold and precious metals in general do very well right through until the prospectors’ convention Mar. 6^th to 9^th this year. That is a typical period of seasonal strength and it looks like we will have continuing follow-through. Just be aware that you will have only 5-6 weeks to go.