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

Interest rate drop. How does this look with the new issues of banking preferreds, high-yield, corporate debt, etc. You are looking at much, much lower yields, but he thinks there is a limit there, but doesn’t know what it is.

$5000 in an RESP to run for 13 years. Suggestions? He would suggest looking at either a fund or an ETF. You could also look at individual preferred shares.

Energy. The drop in oil prices is one of the catalysts to be looking out for going forward. This and the US$ are interrelated on the rise of the dollar. The key concern going forward which will bring more volatility to the North American market, is the level of debt on the fracing industry. A lot of this debt is not going to be able to be paid if oil prices stay here; you need oil prices above $85. He is currently under weighing the oils completely, but is looking forward to getting in. Thinks it is a great opportunity for Canada in the next couple of months. As the fracing industry gets destroyed because of debt, that production is going to have to be replaced, and Canada is that good supplier of that energy. This could be a pretty big hit to the economy.

Gold. Last year, this was the world’s 2^nd best performing currency. If you look at gold as money, it is finally catching up to the US$. Looking at the period between 1978 and 1980, when gold had a massive run from $200-$100, it started moving in tandem with the dollar, and eventually caught up and beat it. If you have a race to the bottom, gold is finally catching up.

Zinc? He thinks it is too early to step in. He would wait to see when the dollar tops, and then start to pick away at some of the miners.

Markets. Markets are always fooling us. This one is different in that we have the background of the significant fall in oil prices and with virtually no inflation. There are a whole lot of different problems going on out there. The world has changed in the last few years. He is keeping his powder dry right now. Europe is finally doing their QE and that should be positive. He is looking at companies that trade into Europe. Exports should be cheaper after the point and half drop in the Euro. He thinks we have seen the bottom in oil. The oil supply side is adjusting in Canada. He thinks there will be an upper kick in terms of demand in the future. At the moment you can buy oil and store it for 6 months and make money.

Economy. The European Central Bank finally pulled the trigger on quantitative easing. If they had not done this, it would have affected the markets quite negatively. The markets went up on the news and was a little more than what he had expected. This will help the ECB from slipping back into a recession later this year. If they hadn’t done anything that could have caused a ripple effect, it could have landed on this side of the ocean.

Markets. We have gone from a complacent and dormant situation with volatility, back to a more normalized type of market. Last year the VIX Index was about a 14 on average. The 10 year average is closer to 20, and we have seen that level a couple of times already this year, and it has moved beyond that. Thinks volatility will definitely normalize. It will be a little greater this year as we deal with higher interest rates potentially down the road with the feds and with geopolitical pressures, as well as what is going to happen overseas with Europe and China.

Energy. His energy exposure today is about 3%-4%, the same as it was 6 months ago. He would look to take advantage of the lower prices at some point. Doesn’t see any major catalyst for energy prices or energy costs to rebound in the very near term, but feels that in the back half of the year, as supply conditions tighten a little bit, that is where you might see a catalyst for oil and oil stocks to start rebounding a little. Energy is the wildcard for Canada in the back half of the year.

Markets. The Bank of Canada cutting its key interest rate to 0.75% was a surprise. They are trying to prevent a shock, and will be fine in the back half of 2015. The 1^st half will be highly dependent on where oil goes. Areas to consider for investing in would be Canadian companies with US exposure, including lumber as well as any companies that do things primarily in the US.

Markets. We assumed economic growth would slow because of the decline in oil, but he did not think the Bank of Canada would act so quickly. He thinks Target coming out of Canada was a huge shock also. There is going to be an election this year. He has been light in Canada so he is not changing his strategy. Canada will be a great place to come back to, but he had moved much of his investments to the US already. He also has a small tilt on the European markets.

Long Term Bond Funds. E.g. XBB-T. He feels you are too late. They are the riskiest asset class out there – US or Canadian. Interest rates are so low that the longer the term of the bond, the more volatile it is. Steer clear of long term bond funds.

Energy. Thinks we are getting close to a low in the actual price in oil. If you look at the price action of stocks relative to oil, oil itself was not up hugely, but the price of oil stocks had a huge rally, so there has been a positive divergence between stocks and the commodity itself. At today’s oil price the entire oil/gas sector is literally bankrupt. You can’t use current oil prices to compute stock values because it would mean the value of the stocks are either 0 or negative. He is finding better value in mid-caps because people are still risk adverse to volatility, and there has been a total abandonment of that kind of $1-$2 billion segment because they are flocking to the midstreams, pipes and large caps. If you are lucky enough not to have had energy exposure, dollar cost average over the next couple of months. In this price environment there is no clear catalyst to form a bottom in oil. It will be a gradual process. As we start to see the rig count decline, that will portend a future supply growth stalling followed by negative growth rate if the oil price oil stalls. Given the financial leverage of companies, they are now forced to only spend their cash flow. At current oil prices that realization will be the largest drop in CapX, year-over-year, in 2 decades. There will be a meaningful supply response, and he thinks this will catch people off guard at both the rate and the timing. Most people think it is going to be a 2016 event, but he thinks it is going to show up in Q3 of this year.

Eric’s comments on oil stocks. When he talks about a “Good Buy”, his view on the macro is that we have another 1 to 2 quarters of volatility, because he cannot identify a catalyst that is going to immediately get the price of oil going. It is going to be a slow process, and you have to take a 9-12 month viewpoint

Interest rates. As a portfolio manager, he looks at risk/reward. One part of him asks does he want to lock in 10 or 30 year rates at 2%, but that is crazy as the risk/return is not in his favour. The problem is there are so many ingredients in the cake called inflation. It started with Japan, has moved to Europe and is now washing on the shores of North American deflation. There are no wage pressures, oil is down which hits the inflation index, an economy that is growing but not to capacity and you have technology that is a great dis-allocator of inflation (machines are taking over production). Rates should track up from here, but really not that much further. He thinks rates are going to stay low for a long period of time. There is every indication that we are going to replicate Europe or Japan.