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

Markets. There is quite a bifurcation. Some of the safer sectors have really moved up as the market has rotated out of materials and energy and into utilities. Financials have been sort of treading water. Telecom stocks have really moved. Some areas of the market are extremely depressed and sitting on 5 year lows, while some areas are sitting on nearly all-time highs. However, volatility creates opportunity, and it is a good time to be looking around. Last summer he was pretty well fully invested in energy, especially on the infrastructure side, and had about a 20% weighting. He still feels very good about the energy infrastructure industry. Some of the growth projects might be a little bit pushed out or slowed down, but all that does is give them more distributable cash flow to pay dividends on existing projects. On the producers, he tries to own stronger balance sheets, good companies with good netbacks and cost of production, and those companies have held in decently on the downturn, and he is looking to average into them once he sees some stabilization in crude prices. There has been a lot of negative press on how bad energy prices are going to be for the economy and for the banks. While there is going to be some pain, there is also going to be some big positive offsets. The Cdn$ is down significantly year-over-year, and definitely down from the highs of above parity a few years ago, where a lot of the manufacturing in Ontario and Québec was significantly depleted over that time period.

Markets. There is this ‘Sell Canada’ thing going on here. But we are trading ahead of the long term average in oil price. Right now we have excess supply and no demand. 9 of 12 countries in OPEC have a break even cost of production of $75. OPEC is 26% of world production and are maintaining production and North America has 21% and is cutting back. Oil and related stocks are incredibly low. He is starting to pick away at stocks. Mid stream companies are not all that affected by oil prices. Companies that have already cut back dividends or spending are worth looking at.

REITs vs. Banks. Banks have better valuations, but he would buy both. Banks are only 3% oil so are not going to be affected as much. They are in the sweet spot of valuation. HR.UN-T and REI.UN-T are off because of the Target story. He holds all 5 banks.

US Dividends? You can never correctly forecast currencies or interest rates. You pick an investment that will go higher and unfortunately the currency will move one way or the other. You can get a Canadian listed, US dividend ETF.

Ontario Real Estate. Are we heading for recession? We may be seeing some signals, but he doesn`t think we are heading for recession. He likes situations that signal to the Americans that we are not like them, illustrated by Target leaving Canada. He does not see anything weakening because of Target leaving Canada and it should not significantly impact the REITs affected.

Markets. We have had a period of abnormally calm markets, probably driven in part because the direction of the market was pretty well orchestrated by the Central Bank. Their goal and role was to inflate assets, to inspire confidence, increase spending and the velocity of spending in the economy. They have been successful, and it led to a very long period of low volatility. Now we are entering a period where the banks are indicating they are going to raise rates. We are now going back to normal, which includes volatility. He tends to look a lot more at the companies than he does stock prices. Stock prices are a much more volatile beast than the companies themselves.

Energy. Hasn’t changed his strategy, because he had a good strategy coming in. The majority of his clients are in balanced accounts. His average balance account has about 8% exposure to energy. Within that 8%, he has gravitated to more senior producers. He likes good management. These are the companies that, during times like this, would take advantage of the weak and buy at low prices those distressed situations.

Is it wise for Canadian investors to be buying US stocks with the current exchange rate? The dollar is always a relative measure, but a good investment can grow to the moon. In the short term, it makes a difference, but the longer investor you are and the longer your timeframe, the less you will think about or talk about currency differences.

Energy. Saudis flooded the market in the mid-80s. They were trying to knock out the possibility of substitute production coming in at much higher costs. The dilemma this time is that their cost structure is way up. Although they export 8.8 million barrels, they consume 2.8 million barrels. The impact of cutting the oil price in half is going to be demand growth. This won’t come suddenly, but when people go to buy a new vehicle and it doesn’t cost them $100 to fill the tank, they are more likely to buy that SUV or something larger. Saudis are certainly trying to knock Americans off course in terms of energy self-sufficiency, and are trying to knock off some of the shale drilling as well as some of the future oil sands plans, but they don’t have much more production available. Estimates of leading world authorities for over the next 20-25 years is that we are going to need 25 million more barrels of oil a day. Thinks oil will be back toward $70 this year. The world needs more oil, not less. It looks like all the Saudis are achieving is slowing down the inevitable.

Are alternative energies having any affect on oil prices? He doesn’t think so. The main thing that is driving down oil prices is that there is a bit of a glut. Alternative energy is hitting coal more, where it is in stationary use for producing electricity.

Markets. The major economies of the world are largely consumers of oil, not producers. So a drop of $40-$50 in oil price is enormously stimulative to consumers in almost all of the major economies such as China, India, Germany and the US, and the burden is born by the major exporters, largely the Saudis. Because of this, he is a little bewildered that the world markets seem to think this is a bad news story. While we are sharing the pain as a producing and exporting nation, actually this was a stimulus that nobody was able to conjure up to get the world economy moving again. Thinks this is a net positive and that low oil prices will not last for very long. They haven’t the last few times. This is a time for courage and not throwing very good companies overboard because of a bit of investor panic. Copper and oil prices being lower, are all good things for job creation worldwide and for people to have better lives by being able to buy things.

Markets. On a Bull market, you look at the breadth of a market and things are always positive. Economic numbers have been fantastic, especially in the US. The LEI and Consumer Sentiment numbers are all hitting levels that we haven’t seen in 6-8 years. This is all very positive for the economy and very positive for the market. Then we have lower energy. People have focused on the damage it has been inflicting, but there is huge benefit here. From the consumer’s standpoint, just a savings on gasoline and home heating costs. Any of the producers that use energy as a by-product or an input are seeing a huge advantage as well.

On the Bear side there is usually someone saying there is a crash coming, too many signals, too much overvaluation, etc. That is probably a good thing because it means there won’t be a bear market. Bear markets typically show up when optimism is at its highest. When he sees all the strategists becoming excited about the year and things are optimistic, and the market is going to go nowhere but up, that tends to be a bit of a warning sign for him. Historically, that is when the market tends to peak out. He is seeing some signs that the market might be getting long in this uptrend and wouldn’t be surprised by an actual Bear market in 12-18 months. Now is the time to be cautious and a little more careful with your portfolio.

Canadian banks? The 5 major banks are very similar. Toronto Dominion (TD-T) and Royal (RY-T) tend to have more US operations than the others. Bank of Nova Scotia (BNS-T) tends to have more international operations. The one that he probably likes the best is Royal because they are the largest player in the business and are well diversified. All the banks are going to have some energy exposure, but they all have such diversified businesses, so would not be affected that much.

Economy. The streams for 2015 are divergence, inflation and oil. Divergence references that the US economy is the one that is maintaining or building a bit of momentum. The goose that lays the golden eggs for the US is jobs. About 235,000 jobs have been created on average per month. It is the consistency of the job growth and the dramatic move down on the unemployment rate. This is trickling down to better consumer spending on big ticket items. Auto sales are back up to 17.2 million units produced in North America, about twice the rate it was at the height of the great financial crisis. Housing starts in the US are north of 1 million. That really matters to the economy’s employment. Cascading from that is spending. Euro zone indicators are showing they are not growing. Japan has had back to back quarters of negative growth.

Should Canadian banks continue to be held for the long-term? You want to keep at least 2 or 3 of them. As we go forward, there is no reason that the Canadian banks shouldn’t deliver at least single digit growth going forward. The strategy is that you keep a couple of the banks in your income portfolio.