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

Markets. Prefers US equities versus Canadian today. The economic outlook in the US is a little bit better. They have a recovering economy. Unemployment is coming down a lot. Low oil prices, in the US in particular, are very good for consumers. Relative to investing in bonds, we have high quality and growing companies which is creating a lot of free cash flow. It is inevitable that interest rates in the US will be raised this year, but will probably be gradual. The key for investors is to try and position in sectors that will benefit from rising rates, such as financials. The financial banking sector in the US has struggled with a low rate environment for many years.

Markets. Everybody is waiting for the US earnings season. Their big financials are coming out in the next couple of days. He continues to be optimistic on the US. The longer it takes before there is a correction, the more likely there is going to be one. It’s just a question of how volatile it is going to be, but that is something you prepare for by using bonds so that you don’t live in fear of volatility, but take advantage of it. Very little European exposure, but he is about to go back in. Regarding the weaker Cdn$, he wants to be hedged. This whole issue of oil is very much a geopolitical event, not a supply/demand issue, and it could change virtually overnight, and you could get a rise in the Cdn$. Not that he expects it, because all of these hedges are basically against a decline in the US$, which he doesn’t expect is going to happen. Instead of buying US equities in US dollars, he is now going back to things that are hedged.

Gold. He doesn’t hold any gold at all. It surprises him that gold is not bound at $900 an ounce. He has been negative on gold for years. If the US$ is strong, and shows no real indication of weakening, why would you expect gold to go up. Gold seems to have stabilized here and could be a trading vehicle.

VIX ETF’s? This is a bad time to be holding these. These things are a gambling device, not an investment device. This is for day trading or weekly trading, but there really is nothing to these things. He doesn’t use these.

Natural gas. He is not a big fan of natural gas and he really doesn’t see any reason for it to be going up. There is lots of the stuff.

Main advantages and disadvantages comparing Canadian REIT ETF’s and Canadian Dividend Stock ETF’s? He is more inclined towards the dividend payers. If he wants the income, he goes with the Covered Calls, such as the BMO Covered Call Cdn Banks (ZWB-T).

Markets. We are at a crucial point here. If there is a settlement with Iran, and it looks like there will be additional supplies come out, there could be some more weakness. There is some concern about the amount of oil in storage. If it gets full there could be problems. Feels that is a little overdone as the guys out there are smart enough to know where to put oil when they buy it. We are in a transition. He is projecting a lower price, with a $60-$70 range, but not until late this year or early next year. There is a lot of tight oil globally and technology is in place, and they will use it. Lower energy costs are a worldwide bonus, particularly in North America because we are the biggest per capita energy users. The Canadian economy is going to face some drag from Alberta, but he still thinks we can manage between 1%-2% growth. Being next door to the US and with a lower dollar, that is going to help us.

Gas. A few years ago, prices were in the $6 range, and everybody was predicting it would go to $8. Then, along came the Montney and big gas discoveries. The cost of wells dropped and people didn’t think they could survive at $3 gas. We are now at $2+ and they are still producing almost excess amounts. We are in the process of building export facilities, but in the meantime gas is going to be very cheap in North America for the foreseeable future.

Markets. He thinks we are in extra or late innings in this market. At some point we will correct. You should start building cash. He is at 40%. You don’t go broke taking profits. You could start looking at resources, looking for more momentum. A retail investor can wait for momentum unlike a fund investor because of the lack of a need for liquidity in the stocks.

Canadian Dollar. If the US raises interest rates, he does not think Canada will do so. It will not be good for the exchange rate. If oil prices stay low that will put pressure on our dollar. He is not repatriating US dollars any time soon.

Markets. Looking a little fatigued. If you look at the internals, they are starting to move a little sideways, a few percentage points so far this year, but we have really been pretty much flat since December. There is also more volatility which is caused from concerns around corporate earnings growth, especially in the US and Canada. The higher US$ headwind is hitting Canada a little. Also, the timing of rising interest rates is something he is looking at. On the TSX and S&P500 S&P 500, we are at the higher end of 18 or 19 times PE, so we are little bit stretched in terms of valuation. Also, volatility levels have picked up. The VIX level was up 14 last year, and so far this year we are looking at about 16.5. We need to see some more earnings growth, and that may happen later on this year. This quarter and next quarter, the expected earnings growth has stalled a little in the US. He would stick to the more reasonably priced better valuation type of stocks. He still likes the cyclicals. The economy is still moving along, just not as robust as he had hoped.

Europe. We are seeing a mirror image of what the US did in terms of QE. This is taking hold in Europe and is pushing the stocks upwards. He is also seeing positive economic surprises through the indexes. Estimates are coming in anywhere from 10%-15% in terms of earnings growth on the European side.

Energy. The worst is going to be in the 1^st half of this year. Essentially the glut from the shale oil from the US is occurring in the 1^st half, because of the wells that were drilled late last year/early this year that were budgeted. They came on with very rapid flush production that tails off. Assuming oil is still in the $50 range, you will actually see the data points of the production dropping. Front page news looks bearish, but we are forming a base here. Thinks Saudi Arabia has not cut production because they want to see how much demand gets stimulated at $45-$55 oil across the globe. They also want to protect their slice of the pie by ensuring the world knows that they are the lowest cost producer, and they will push out higher cost barrels whether it is from Brazil, Canadian oil sands, lower quality oil shale plays globally, that have costs at $70-$80. He thinks we will have a slow grind higher over the next 2 years.

Gas. We are in a glut of Marcellus cheap gas, and we need the demand to catch up. It is going to start to catch up. We have pipelines going down to Mexico and some big petrochemical new projects coming on in November in the US. At these levels you have a secular trend of coal to gas switching. Every year there are a couple of coal plants that go down and then gas goes up. On LNG, you have Cheniere facilities starting, so we are going to start to export gas. It is baby steps this year, but if you look at 5 years, it is material. All this leads to gas being $4.

Markets. Markets have been pretty good for the last couple of years, and whenever that happens, he worries about investors getting a little bit complacent. He likes to follow the leading economic indicator out of the US versus its 18 month moving average, and has found that when it is above the 18 month moving average, that is a good sign. When it crosses below, typically that leads to a recession, probably within the 6-18 month timeframe. Right now it is in very good shape. Margin debt is back to a new all-time high. It is not really the level of margin debt that he is concerned about, it is that he doesn’t want to see margin debt all of a sudden be retracted quickly, because that is the liquidity that comes out of the market. He is watching if the Fed increases interest rates. If that happens, and there is some pullback in the margin debt, it could really mean a lot of liquidity coming out of the market. The yield curve is a very good predictor of recession. When you pair it off with the leading economic indicator in the 18 month moving average and it starts to get inverted and short term rates are higher than the longer-term rates, that can often lead to recession and shows difficulty in months to come.