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

We are having technical problems, so will be processing today's shows posted on Jan 1st New Year's Day.

Our Apologies

Bill

Energy. Not expecting oil to get much above $60 for the next 2-3 years because there is adequate supply in the major 3 type basins in the US. Any time you approach the $55-$60 level, you will see a very significant ramp up in activity. It’s a long way from $35-$36 to somewhere in the $60s, where he thinks we will be this time next year. Today’s price is at a level where most companies are bankrupt. At $35 oil, companies have almost no margin and the cash flow they are generating is not enough to offset the decline. All companies have decline issues, because wells decline due to natural loss of reservoir pressure. A company’s decline rate is about 30%-32% in Canada. If they stop drilling totally, production will fall by 32%. As the price has fallen, availability of cash flows to spend on drilling has gone down hugely, and yet they are still fighting these decline issues. This is true in Canada, US and globally. That is why the US, the rig count is down about 67% from the highs in late 2014. With drilling down 67%, production is falling. US production down about 400,000 barrels per day. That trend is going to continue until we get an oil price recovery. In order for companies to generate enough cash flow to offset declines and maintain flat, they need at least $50 oil. The market will be undersupplied this time next year unless we get a response in the oil price. Because of Iranian oil coming on and a weak period for refineries, Q1 is probably going to be crummy.

Small Caps. Hoping for a better year in 2016. The index is down about 13% year to date and his fund is down about 1%. The challenge is twofold. 1.) There have been a lot of US Shorts, i.e. hedge funds attacking Canadian names by issuing Short reports and stocks falling 40%. This has been happening repeatedly. Consistently those reports are found to have no merit yet the stocks still fall. 2.) A lot of names have acted like oil stocks, even though they are not. Some have limited exposure to oil, but have been annihilated. If he is correct in his oil call for next year, there are many small-cap names that should benefit as a 2^nd derivative trade on oil. A rising tide lifts all boats.

Markets.In this kind of market, his philosophy is that the hole you dig should be shallow. He is down about 3.3% relative to the index and on a total return basis about 8%. 2015 was a difficult year globally. As an asset manager, volatility can help in some ways. If you see companies you really like, that is the time to go and buy them. There are a lot of clouds on the horizon that makes you question what Canada is going to look like in 2016 as well as the US and Europe. Oil continues to perform poorly and thinks it is probably going lower. The weak Cdn$ helps the oil business. Expects there will be more volatility in 2016 and not sure that you are going to see interest rates increase or high growth in the US as much as people think. Thinks the 1^st half of 2016 is going to be tougher in Canada, but that the US can chug along at 2%. Europe is probably going to continue seeing quantitative easing.

US banks?Likes these. On average they are trading at close to Book or below, and thinks the dividends are going to go up over the next little while, simply because they are over capitalized. They have to do something with their money such as buying back shares or giving you back dividends, and he thinks they are going to do both.

Markets. 2016 is going to be interesting. 2015, and for Canada 2013 and 2014 have been really bad years. It’s all about oil. The good news is that everybody thinks oil is never going to go up again. This is all wonderful because you can’t really bottom until nobody believes. He sees blood in the streets. It is now just a matter of waiting, and he has cash to wait with. Has about 25% investable cash. Had anticipated this last year. Stocks that are up 20% tend to be concentrated in the consumer area. These stocks have been strong because they are safe, but are now too expensive to own.

Pipelines. These are unique to Canada. They represent a very large chunk of our investment market, unlike any other place in the world. They have been built around a utility like model that looks pretty good. We have shipped more oil to the US last year than we ever have, and will probably ship more this year. These companies benefit from that. The dividends are in really good shape. Why have they got whacked? It is the oil price and fear. (See Top Picks.)

Best copper play? He owns 2 copper exposed companies; Teck Resources (TCK.B-T) and Hudson Bay Mining. Teck has copper and, unfortunately, metallurgical coal. It is generating cash in all of its businesses. This is the most liquid play. However, it has a Short interest like he has never seen before, primarily in the US. The more levered way to play copper is Hudson Bay Mining. At some point, sentiment will return, and when it does, these are the kind of names that can triple.

Markets. Back in late 1999 and into 2000 the S&P was hitting new highs, and it was something like 5 stocks that were causing this. The rest of the stocks were all falling to the wayside. Because the S&P is market cap weighted, the bigger they got the more they influenced and it was self-perpetuating. Right now, the average stock in the US is in a downtrend. He has cash that he is looking to spend, but his problem is that he believes valuations are extended on a lot of stocks. He is waiting for a pullback.

Energy. Since 1980, there have been some big ups and downs, but there is a lot of the market for oil that is really bouncing around between $20 and $40. Are we going back to a period when oil fluctuates between $20 and $40 for an extended period of time. If that is going to happen, that has to reset how you look at valuing companies, and even how governments get their revenues. The street is putting in $50-$60-$70 assumptions for next year. What if that is too much? This is something people have to think about. If he is going to put money back in this space, he would like to see prices stabilize for an extended period of time and start to go up. One of the safest places to put it in is the majors that have refining capacities. In the past that has proven to be an area of stability.

Markets. Thinks there was a Santa Claus rally, but thinks it came out early in September and October. We have a two-tier market. There are some things that are pro-cyclical doing really well, and then a bunch of defensive names that are doing really well. The risk/reward on the TSX is a pretty good market to make an investment in at these levels.

When 20, 50 and 200 day moving averages intersect at the same time, stocks normally takes off. When it comes to moving averages, he prefers what traders are looking at, which tends to be the 125 day. To check this out, do a 20, 50 and 200 day moving average on your chart. Mark out the inflection points. Then do a pure 125 moving average, and see if it is a little bit simpler. You might see that its gets rid of a lot of the noise and is a little bit better.

Market. Expects 2016 will be more of the same, i.e., volatility and uncertainty. There seems to be a lot of interesting things from a techno analysis perspective going on. The US 10 year 200 day moving average has turned up, which is usually a pretty good indicator that the trend has turned, and that happened at the end of October, in advance of the Fed raising rates in December. The two-year US yields have been rising for quite a long time, and popped again quite recently from October onwards in anticipation, so the yield curve is flattening. As long as it doesn’t get to the point where short rates go above long rates, then we are happy. Gold seems to be very close to giving a quarterly techno analysis Buy signal, and that will be the surprise in the 1^st quarter of the new year. The Commodity Research Bureau (CRB) Index, a basket of commodities, is pretty close to giving a new monthly Buy signal. Thinks inflation might be a surprise in 2016.

Markets. It has been very challenging, especially if you were a Canadian oriented investor. Diversifying to European and US equity markets is a theme that will need to continue into 2016. He thinks there will only be one or two rate increases next year. If the Fed were more aggressive it would mean there is more inflation. We are in a slow growth economic environment. You will see a lot of volatility next year. It is going to be tough for most investors to time the volatility. You have to be long term, be patient, and look for dividends. There are cheap equities in every sector because we are starting to price in recessionary risk to Canadian equities. Canada could outperform the US in the equity markets.

Mortgage REITs. They make money by borrowing short and lending long. It depends on how much rates are increased by the Fed. If the yield curve flattens it means US REITs may have to cut the dividends.