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

Markets. Some of the technical indicators from a market perspective started breaking down last summer, so he started getting a little more defensive. Now he is starting to see some economic signs as well. The US ISM Manufacturing number has been ticking down pretty aggressively. From a profitability standpoint, any time it is below 50 means the economy is contracting. Below 48 the probability of a recession really starts to go up, and below 46 pretty much gives you a 100% probability of a recession. Right now it is in the 48 range, so we are definitely getting into the danger territory for the US economy. If there is a US recession, that is not very positive for markets globally. You want to be cautious and careful where you are positioning and what you are looking at. He has a fairly high cash percentage in his portfolios at about 50%. There might be some kind of bounce in the market which could be a chance for people to lighten up or get out of positions they are not comfortable with.

Currency. There is increasing speculation that Canadian rates may be cut again, seeing the dramatic decline we have seen in the last couple of weeks. She had moved heavily into the US in her clients’ accounts a couple of years ago, which has worked out nicely. It is now at an inflection point as to when the trade starts going the other way. In the foreseeable future, it is hard to see the US$ depreciating the Cdn$ given that the Fed had increased rates in December. They have indicated that they will continue to do so, probably predicated upon how growth materializes and what goes on in global markets, but nonetheless their economy is growing much stronger than Canada’s, so her clients continue to want exposure to the US. Canadian tourism trade should benefit, but on the flipside, retailers tend to source a lot of their goods in the US and have to pay in US currency, a potential squeeze on margins.

Canadian Banks? A good time to start buying. Even though they outperformed the TSX last year, banks were generally down as well. There will be some catch-up. Doesn’t think there will be a collapse in housing, and feels the Canadian economy will slowly improve.

Markets. Investors tend to have very short memories. Oil in 1998 actually fell to $11 a barrel. No one can make accurate short-term predictions. There is no question that when momentum is moving in a certain direction, global economy is struggling, and usually in those situations, OPEC and other oil producers would be cutting back production. This time all those countries are so desperate for cash, because they are running huge deficits, they are still pumping full out. With Iran coming fully back on stream, that is just going to add to supply in the near term. It is going to take a fair bit of time. Supply is going to be constrained at some time, but it will take a while. When prices are high, you have to hold some cash and wait. Patience is always going to be the winner over time. Also, avoid value traps i.e., buying highly indebted companies.

Doesn’t think the Cdn$ will fall a lot more, and if it does it will be for a very brief period of time.

Canadian or US lifecos? Prefers the Canadian insurance companies Sun Life (SLF-T) and Manulife (MFC-T) because they have great franchises here, and also phenomenal growth globally. They give you a lot for a pretty low valuation. The US lifecos tend to be much more local.

Markets. The Chinese market has gained an average 6.5% each year since 2002. Their market will continue to be volatile. He feels their markets are fairly valued and are trying to form a base. The US banks’ top line numbers struggled to grow last year. US banks are all about earnings this year. They are not expensive. The markets will have 10% downside and 10% upside this year.

Europe. EWL-N gives you Switzerland. EWU-N gives you the UK. He recommends non-Euro developed countries. You will have the currency risk between CAD$ and US$ as well as between the US$ and the local currency.

Educational Segment. The Relative Strength Index (RSI). It looks at the average gain and the average loss over the last 14 days. The average RSI of SPY-N (S&P 500) going back 22 years is about 54. The standard deviation (volatility) is 11. It hit below 2 standard deviations (32) last Friday. Historically following this point the return has been 3.11% vs. 0.82%.

Markets. It was not the broad market that was headed in the right direction last year. In the later stages, it becomes more important to pick stocks. He has been quite bearish on commodities for about 4 years; however he does not see significant downside in oil prices. It is not the time to step into oil stocks yet. He is comfortable waiting and missing a falling knife as well as missing the first 10-15% of rise in oil stocks. He thinks there is a high probability that Canada will head into recession. He thinks the bank of Canada may cut rates again.

Longer Duration Bonds. Benefitted from the Bank of Canada drop in rates. The challenge in long term bonds is that the credit quality can change while you are holding it. You may need to sell it before maturity. He does not advise against long term bonds, but cautions against a change in credit quality.

Portfolio consisting of a Single Balanced, Global, Diversified fund. You have to dig deep and see if it is good management. He does not currently have exposure to Europe. He prefers to use the multinational companies in the US.

Canadian Dollar below $0.70 and Oil below $30 a perfect storm? If you are in energy it is a bad thing, but if in US stocks, they benefit.

Markets. A lot of people are questioning if this is 2008 all over again, but there is no evidence of that. 2008 was a collapse of the US financial system that spread, and was based largely on the US market. What we are faced with is cheap money, cheap commodities and China uncertainty. China had been the stalwart, growing 7%-9% for 2 decades. It is clear that China growth is slowing and it is not clear what it is going to settle at, 5%, 6%, etc. The Shanghai market is a very volatile market, and is not an indicator of the Chinese economy. The volatility is scaring people. The big question is, is there more to the Canadian economy than oil. There are things you can buy in Canada that are not correlated with oil and the Cdn$. Has put a fairly significant weighting into the US in the last couple of years. Doesn’t think China is going to be back as a big supporter of higher prices and commodities, but they still have a growing economy, and still buying 18.5 million vehicles a year. Their demand for oil is not going to drop, it is just going to grow more slowly. Also, the Chinese are very deliberately moving from an export led economy to more of a domestic economy.

Lumber? Had thought this was going to go higher, but it hasn’t. They’ve gone lower, and he is puzzling over this. His thesis was that housing starts go up in the US, Cdn$ is down and lumber is priced in US$s. It is hard to imagine that the fundamentals of the lumber stocks won’t get better as the US creates jobs and builds houses.

Canadian Banks? Historically it is hard to go wrong buying Canadian banks. He has been buying US banks, but continues to own TD (TD-T), which he views as more of a North American bank. Also owns a little Royal (RY-T). If he didn’t own any Canadian banks, he would probably step into them gradually. They are going to do a little better when interest rates go up. If you are buying Canadian banks, you should do it for the long haul and just be patient.