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

Money Market Funds? Like all mutual funds, these never mature. They are typically invested in commercial paper, not entirely risk free. He would rather see individuals buy treasury bills, GICs and bonds. You never get your money back.

Bank Rate Reset Preferreds resetting in 3 to 5 years? He has bad news for anybody having only preferreds with the reset happening this year. Already they had resent spreads that were narrower than ones that were issued later on. Was the last drop in 5-year bond yields, that pretty well sells the fate for any of the 2016 resets. It changes in 2017, 2018 and 2019. The resets start to get wider. Hopes that interest rates will be higher a couple years from now, but there is no guarantee they will. Buying the new ones that have come out with a 5.5% annual dividend plus the massive reset spread, pretty well guarantees that you get a chance to have your money back in 5 years.

Markets. History has shown that if there is one thing the market doesn’t like it is uncertainty. Volatility has been mostly attributed to how wacky oil prices have been. There are a lot of rumours and a lot of chat, but until we see production cut, everything else is just noise. Saudi’s have come this far, and he doesn’t see them changing their tune at this point. It is not just an oil issue, it is a geopolitical issue, so you are taking a matter that is already complicated and adding a few layers to it, just to add more volatility to the market. He has been underweight energy because he had thought it was overvalued by $15-$20 a barrel when it was $80-$90. There was a lot of geopolitical uncertainty and a risk of supply disruption, but had no idea $30 oil was in the cards. Thinks this is year when there are going to be fewer players remaining online, because it just doesn’t make sense anymore. This is what OPEC and Saudi Arabia are waiting for, and until we get that, oil prices are going to remain volatile.

Oil Sands. Alberta just announced they are going to leave the oil sands royalties unchanged, but are going to implement a 5% flat rate for non-oil sands output, until their costs reach payout status. Then it will become a sliding scale. They are also going to simplify the payments and incentives. New drilling completion costs will be based in Cdn$ rather than volume or time, which will recognize the cost of producing crude and natural gas, and make it consistent across the board, so that it is easier for everyone to understand. If and when the oil price does go up, then the effect of the increased drilling programs will start to benefit all of Alberta. They are set to increase royalties in Alberta by 50% by 2023, which is when they will start to really reap the reward.

Oil Sands. Very pleased about the decision on royalties. There were all sorts of rumours that they were going to stick it to the guys. His only complaint was that they took a long time to do nothing. Considering Alberta has been in the royalty business for a long time, he can’t imagine that it would be too much out of line with most other countries. It’s going to get tougher before it gets better. We are going to lose some smaller companies. It should have been obvious to the Saudis that their strategy was wrong months ago. They haven’t accomplished anything. The moment the price does go back up, and it is going to have to go back up as some point, those producers in Texas will be right back in there producing.

Markets. Commodities have been in a relentless decline. A small number of stable companies are leading the way and everything else is under a lot of pressure. We are down over 35% from a year and a half ago. He goes for the liquid names. They need very stable underlying business characteristic. He is not interested in volatile, speculative companies. The FANG stocks have been leading the US market. Breadth has been declining. A lot of bad news and volatility is baked into the prices of stocks. He thinks it will be very volatile for the next 6 to 12 months. He does not think the Fed will raise rates again soon, just one or two small hikes over the next 12 months.

Markets. This is a silly market. In the last 4 days we have been up 200 and down 200. Hasn’t seen this type of volatility since 2011 when we were nervous about every single European country going bankrupt. Volatility makes you lose sight of what investing is all about. He is a long-term investor and he plans, when buying companies, to hold them for several years. Remember to keep your focus on the long-term. Sees a lot of opportunities with this volatility. To make sense of the market and to rationalize it on a day-to-day basis, is a complete waste of time. He is not doing a lot of trading. For the most part, there is no reason to make any dramatic moves. Fully invested and does not believe in sitting on cash.

Markets. We have not seen energy commodities leading the commodity space. That means there is more to work out. Oil is up $26 to $31 and he would like to see the stocks rebound this much. You haven’t seen a whole host of assets turn up so this is not the end of this.

US equities and currency exchange. The bulk of the US/Cad$ trade is done. There is precedence for the US$ falling rather than rising since it has already been pre-traded. You have to be cautious. He thinks it is much better investing in the US. There are US hedged ETFs.

US Housing Market. Wage inflation is coming through. Home builders are at lows right now. HD-N is not as torqued and he prefers it. Stay away from the home builders.

Healthcare. There is more volatility here. He took his healthcare exposure back to market weight in September because technicals broke down. Since the lows in Aug/Sep, there has been good performance. It has been a risk off environment.

Markets. The Fed gave the market exactly what it wanted. The market did not do much and then took a dive. Interest rate hikes are still on the table, as early as March. You have to manage your portfolio according to the guidelines that you have set up with respect to asset allocation, for example. This is very different from ’08. We had levels in the market that we had never seen before and will probably never see again. The financial system was on the verge of collapse. We are not seeing signs that we are heading into a recession this time. We have seen slowness in the reinvestment side in commodities. But we still have employment growth in the US, great housing numbers came out today. Canada is different because of our reliance on commodities, but North America is healthy.

S&P 500. Feels we are not in a bear market, but we are in a correction. After a 10%-12% correction this year, there is a whole lot of focus on whether this is the time to get back into the market again, but he thinks not. When he came into the business in 1965, every other year for the 1^st 17 years, had a bear market correction of 20% or more. Then in the 80’s Alan Greenspan, who was dedicated to not having volatility, came along. To some extent, he exceeded brilliantly. However, as time goes on, the efficacy of the federal reserve board is sort of oozing away, and furthermore decided last year to start raising interest rates. He wonders if we are going to get another 10% downside from here, which is his target. That only takes us back to 2X adjusted book value for the S&P. That was the same as the bottom for 2002, which was a wonderful time to buy stocks. Doesn’t think that the market is finished yet. In the past year, every rally has been a sucker’s rally. We need to get a nice solid bottom, and then it will be safe to buy.

Market. Oil is not behaving very great and Asian markets are down. This morning, just as Europe was starting to close, oil started to rebound. This sort of domino effect around the world is going to continue. It is very evident that this has very much to do with what is going on with oil. Until that correlation breaks, the market is not going to look at any of the fundamentals that are out there. There were clues in December as to what was happening. The Santa Claus rally did not show up and some of the sectors underneath the market have been correcting for quite a while. He has been raising cash in some of his portfolios and has been a little bit slow in deploying cash, but it is still not enough. It is pretty hard to avoid what has happened this month. It is going to be more of a “wait and see” situation. He is going to watch the earnings. A concern is that the US banks are not leading the charge. He thinks they are going to have to if we want to get to a next leg higher.

ETF’s for a young investor with about $5000? He is not a huge fan of the broad market. There is nothing wrong with the SPDR S&P 500 ETF (SPY-N), or for the lowest cost, the Vanguard would have a couple of Cdn$ dominated ETF’s with exposure to the US. Also, the Horizon’s Seasonal Rotation (HAC-T) has delivered through all sorts of different environments.