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

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.

US Stocks? Wouldn’t buy these just to be in the currency, but with their economy growing 2.5%-3% a year, and Canada struggling to grow, there are some good reasons to have a US weighting, particularly if you spend any time in the States. It’s good to have the US income.

Pipelines? Likes Inter Pipeline (IPL-T), Pembina (PPL-T) and Altagas (ALA-T). This is because the smaller pipelines have been able to continue to get good sized projects approved. The big, big projects have run into political troubles. Some of the pipelines have “take or pay” contracts, meaning they are going to get paid no matter how much oil is shipped. Inter Pipeline with its 7% dividend is a screaming bargain.

Canadian Small Cap Markets. It is difficult to be optimistic on the Canadian market. Very tough with oil prices where they are and commodity prices moving down overall. He is finding pockets where he can invest and feel fairly comfortable. It is going to be another difficult year, especially in the short term with the macro trends that are negative towards Canada and is hard to find stocks that will benefit from the lower Cdn$. Had been buying things in anticipation of a weaker Cdn$, but if you are just moving into this area now it is a little bit more difficult. Most of the damage has already been done. Thinks the smaller cap Canadian IPOs are going to dry up, but he is anticipating a few IPOs that should be coming in the next year or so that are quite interesting. Has about 10% in cash and is being very selective.

Markets. The January barometer is receiving a lot of discussion in the last few days, especially with the dismal start we have had this year. It has a 75% success rate, which implies we are going lower. The first 5 days of the year has determined the performance for the rest of the year. However, looking at the negative Januarys over the past 65 years, it has only determined the success or the failure of the market for 4-years only 42% of the time. A negative January does not determine a full year of negative performance. However, technicals right now are not too favourable. S&P 500 broke through significant support at $1,990 in just the past few days. The 200 day moving average is slowly creeping lower, which implies a negative longer-term trend. You might want to take profits here. If we break down through $1,990, you can imply downside potential all the way to $1,700. The TSX has been in this decline for quite a few months. Each time it has tested resistance, it has moved significantly lower. This declining trend line came about after hitting a double top resistance in early 2015 which could imply further pain ahead. Markets, for the most part, have been strongly correlated to the price of oil. Even the US market, which doesn’t have a large constituent in energy companies, has still been heavily influenced by oil.

Gold. Gold has gotten a bit of a bid over the last couple of days. Obviously all the geopolitical risks have caused it to bump up a bit. On a seasonal basis, miners/producers will bottom in the month of December and then move higher through to April/May. Gold tends to be pulled along through to February. However, metals have been sinking to new lows. If we do not have the backdrop to drive them higher according to their seasonal norms over the next few months, it is best to stay away.

Markets. The back drop for stocks is not that bad. We had a volatile start to the year that we had to deal with. He reminds us it was like this last year. Financials almost everywhere in the world look good and are the biggest weightings in his funds. Commodities, especially base metals will remain weak for some time. We have real GDP growth accelerating in 2016 and reasonable valuations, high single digit earnings growth across the world. The emerging markets story is not performing well right now.

US Dollar Investments. He took his currency hedges off a couple of years ago and just in December, he put them back on. He took half his US$ currency exposure of the table 3 weeks ago and will take the rest off in the next few months. The Canadian dollar is going to strength a lot.

Refocusing from China to countries with expanding manufacturing. China is moving from a manufacturing based economy to a service based economy. The problem is that those markets are closed to retail investors.

Markets. The China situation has been a tough start for the year for everyone. Doesn’t think this is over yet and there will be more volatility going forward. When they shut the market in China for such a brief period of time, there were a lot of people wondering how much further could it have gone. His perspective is that what we are seeing is the end of a bull market to some extent. There are adjustments happening in the economy that are going to ripple through. It often is a violent looking period, but what is happening is that you are getting a lot of restructuring into a lot of industries that will inevitably lead to their longer-term health. Energy is a good example of that as we have seen tremendous pressure on some companies. Some of them have been more farsighted and very quick to cut back on capital expenditures, and reduce dividends if necessary. Those companies with strong balance sheets are the ones that will eventually really benefit from this kind of environment. The question is, how long does it last. As a value investor, he doesn’t try to guess what the market is going to do or when, but uses his valuation disciplines. A lot of his portfolios are balanced portfolios, so the shift between equities, fixed incomes and cash get shifted over time, and hopefully you are selling when the market is raging ahead, and buying when the market begins to get into a position like it is today.

Markets. The US market is a bit extended. There are some overbought and oversold sectors, and you have to be a bit ginger about where you are stepping for the next little while. There is a risk that the US$’s big run flattens off, or even ends. When big currencies move, they follow a pattern. The pattern here is that the US$ should have a bit of a rest to allow everybody else to get aligned up again. Looking at overbought sectors, income has been bid up. Retirees have to get income and cash flow, and the bond market doesn’t really offer it. The bond market, preferred market and the income part is where people would normally want to go, but thinks have been bid up pretty heavily for the last 2-3 years. There is no room for error in that part of the market. China is being blamed for almost everything, but looking at some of the numbers coming out of China, PMI (manufacturing) it has been in a bit of a downdraft. However, at the start of their original five-year plan, they told everybody they were going to deemphasize manufacturing and emphasize the service part of the equation. The trend is looking better, and is also trying to turn.