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

Markets. The oil market may not be balanced until 2017. He would have thought it would have expressed itself by now, so he expects the fundamentals reach a balance by the end of 2016. There is a big drop off in the investment in future production. OPEC is 2/3rds of the world’s production. Non-OPEC supply will adjust. We have to be careful about the growth rate in oil demand. It will be 3-4% over the next 10 years. He looks at gold as a pretty safe place to be. However, in Canadian dollar terms you have seen no change in the last year. We have accepted that the floor is between $1000 to $1100. The key for him is to focus on companies that can excel in that price range.

Markets. This has been an emotional selloff. There is a storm of investor anxiety, some new, and some old carried over from 2015. This has caused the equity markets to have one of the worst starts in history. We are looking at things like the economic deceleration in China, falling commodity prices, a decline in corporate earnings expectations, strong US$ headwinds are still out there, and we have some new geopolitical tensions that serve as a backdrop to start the year. Investors have pressed the Sell button first without really looking at underlying fundamentals, which aren’t that bad. S&P is trading at about 15-16 times forward earnings. If you take a 10-15 year history, we are pretty much average at this point. Selling in the equity markets has certainly been overdone. From a technical perspective, we are oversold. For patient investors who are picking away at equities, we’ll see some sort of relief rally. Continues to like US equities over Canadian equities. The US economy is still going to grow at the 2%-3% growth rate this year, and earnings per share on the S&P 500 should grow at around 7% this year. He was about 12%-15% in cash at the beginning of the year, but is now down to about 8% cash.

Economy. Global economy is growing slowly which makes it more vulnerable to shock. As global growth comes down, the economy is more susceptible to shocks, positive or negative. With a higher number it would be more sustainable, but we are not seeing that right now. He is forecasting only 1.5% growth in Canada. Generally, growth consensus starts out the year higher, and always seems to come down through the year. His forecast is low to start, and he would rather ramp that up. The TSX is in bear market territory, and about 40% of stocks in the US are down more than 20%. China is a huge economy and they are trying to grow it as best they can. Some transition comes from manufacturing to service, and that is going to be lumpy.

Healthcare? Expects there will be a fair bit of political pressure in the upcoming year with the US election and the turmoil in the US with pricing. Healthcare is split into a bunch of different sectors. Pharma biotech will be the one that comes under the most pressure because of pricing and the news. Equipment manufacturers offer good value, and a good demographic going into the next few years.

Are dividends safe and will stocks go back up on Canadian Banks? The dividends are absolutely safe, and he would have no concerns. He would have more concerns with growth potential. You are going to see some increased losses because of the price of oil and the loans outstanding to oil companies. That will take some time. Also, there is potential for slowdown in the Canadian housing market.

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.