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

Energy. OPEC expects a balance in the oil market sometime in 2016. Incremental oil demand globally is up by 500,000 in 2013 by 1.8 million barrels a day by 2014, and this year it is going to go up by 2.5 million. There has never been a time in modern history where oil/gas has had 2 years in a row of negative capital expenditures over the previous year. It looks like next year’s forecast will be down by 10% versus 20% from the previous year. The Canadian oil product is probably the lowest price on the planet. Companies who cut their capital expenditures to below cash flows are the ones that are going to be sustainable in business.

Vermilion (VET-T) or Suncor(SU-T)? Doesn’t think a portfolio should be built on highly concentrated positions, so he would suggest looking at mutual funds or ETF’s (such as iShares S&P/TSX Energy (XEG-T) that give you some advantages of diversification.

Natural gas. Now going more and more towards base load electrical generation, but there are always going to be large swings that come with heating and cooling degree days. There are massive amount of production coming off the Marsalis that seems to be swamping the continent. We are going to be living with lower price natural gas for a while.

Markets. Relatively bullish in the intermediate term. We are still in a nice up trend. The market retested the August lows, which he had expected to happen. The market has surged a lot faster than expected, so we are in a period of consolidation. One of the big themes in the market is the Fed and when it is going to raise interest rates, which is supposed to have a large impact on the market. He is not so sure the increase is going to happen. The Fed has been relying on the market as an indicator of whether or not they should raise rates. In the US they are talking about negative earnings growth and negative revenue growth, and it looks like it is going to come in negative, including the Q4 numbers, for the whole year, which is not a great environment to be raising rates.

Economy. The global economy is struggling, led by the US and China. Still in growth mode. 6% seems horrible relative to the 12% of 5 years ago, but is still pretty robust growth. We are seeing an environment that is conducive to further positive equity returns. Slow growth is not the worst thing in the world. These things move along at a decent pace, and hopefully we see dividends increase in regularity. Eventually there will be a rotation back to more of those more core dividend paying sectors and more of the value bias going forward. The big thing will be the lift-off from the Fed. Once that happens, that is going to make it harder for all companies to grow. Rising interest rates, by and large are tough for all asset class returns. Expects the market will rotate back to a more conservative stance.

Pipeline dividends? Enbridge (ENB-T), TransCanada (TRP-T), Pembina (PPL-T) and Altagas (ALA-T) all raised their dividends this year. The commodity price downturn, even though these projects are long life and can survive another commodity price downturn, potentially has taken some of the growth off the table. Still views dividend growth as being pretty robust. These companies deal in volume (which is increasing) of oil and gas, not price.

Markets. We had a tough summer with a 10% correction. We are back to the starting point. We had 6 pretty good years so a lot of stocks are getting expensive. Selection of stocks will get very important. The Fed is likely to start raising rates, but there is plenty of liquidity around. There will be some volatility regardless. We are not going back to the 3-5% growth from the past. You need to choose stocks that will grow organically in revenue and earnings. The US has the strongest economy in the world. They were first into and out of the crisis. So this has been a big focus for him. He thinks the growth will spread out throughout the world slowly. Eventually he will see a rotation into energy (3-5 years). He trimmed his portfolio down to core positions and then opportunistically deployed his cash after the correction.

Where are we in the Business and Stock Market Cycles? Cycles have changed quite a bit compared to what it says in textbooks. Post-2000, they have been long and slower. The recession was deep and the recovery slow. It is difficult to say where we are. Given the slow recovery and that the rest of the world has not caught up to the US, we are only half way through.

Markets. Goldman Sacks closed their BRIC fund after coining the term. India has a very young demographic and great growth trajectory. Nigeria also has great growth potential. China is no longer going to be the economy that is leading the world in growth. Their population will start shrinking in 15-20 years. Emerging markets in general may still be the leading source of growth for next decade or two.

Better Returns. There is no buy-and-hold approach that he believes will work. Bonds don’t look good. REITs are interesting, covered call strategies give you an enhancement of yield but limit growth. He advocates smart, tactical rebalancing of portfolios. He likes equal weight ETFs such as ZRE-T for REITs.

Global ETF that would not take a hit if CDN$ rises. There is not one at the moment, where all currencies are hedged out. ZDM-T is currency hedged. You can get the world by choosing as little as three global ETFs.

Educational Segment. Asset Allocation vs. Stock Selection. The market could care less where you bought the stock. Most people don’t know how to get out of a stock. Over the last 60 years, equities were the best choice, vs. bonds, but the problem is tolerance for volatility. By combining different asset classes, you can lower volatility. It is more important than stock selection.

Markets. Sometimes it is all about people wanting bad news and what the Fed will do with interest rates. A December rate hike is almost a certainty. The question now is how big the rate hike will be. He views this as a necessary thing – normalizing. We are still at very low levels of interest rates. The domestic US economy is a real bright spot. They don’t rely on other countries for growth. He is definitively looking at the US as a place to invest. In Canada he looks for companies that export. US financials and Canadian forestry companies are of interest. He is focused on a mix or large and mid-caps. He is looking for higher quality, more liquid larger companies.

US Economy. Employment numbers were pretty solid and this is one of the things that he has been looking for. Thinks the Fed will be really comfortable about raising rates. Monetary policy had gone into a very different field when they decided to do quantitative easing. It was very stressful to the Fed, because in normal times they understand the consequences of their actions, but this time around there was a fear that they were not quite sure of the unintended consequences. 25 basis points does not seem like a lot, but in this monetary environment, it is fearful for them because they are not sure about what is going to happen. There will be some volatility, along with some opportunities to buy and sell some stuff, depending on valuations. An increase in interest rates is very important for the banks. He looks for companies that have relatively large businesses in the US and are generating assets that can be converted back to Canada.

Markets. The US employment trend has been pretty consistent for 5 years now. Unemployment is consistently coming down over time and more people are finding work. About 95% of the US population is now working. We are almost back to the top of 2007. A lot of Americans are working and that provides tons of benefits which means a lot of ammunition for the investment side of the business. The S&P had a wonderful bounce September through October, and he feels we are just going through a digestive phase. If we didn’t have a bit of a sideways move here, he would be concerned. We could go a few weeks or months sideways, or even give a little bit back, but it doesn’t break the double bottom showing on the chart. His cash position is currently below 10%. He has been investing through the entire fall, especially after the 2^nd bottom went in. There is still a lot of room.