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

Economy. Weak energy prices are negative for the energy patch, but are very positive for the overall economy. Particularly in the US, there is an environment now where there is really strong job growth numbers, expanding manufacturing activity, business optimism is high and consumer confidence is high. Now there is another unexpected source of income in terms of lower energy costs. That is going to be beneficial for the US economy. She is starting to see revisions upwards for GDP growth because energies will be beneficial for overall economic growth. Also, lower energy costs and the strong US$ means all of their commodity prices are also weak and is really easing the inflationary concerns for the next year or 2. This gives central banks around the world more room to put in stimulus measures to get their economies going.

Markets. She has 40%-45% exposure to the US market, which continues to be warranted. Expects the US economy to be the strongest economy in terms of rate of change globally, and by that token feels US companies will also do well. She has not been adding to energy and had sold her service holding back in December when prices really started to decline. Still has a couple of energy names which have a yield behind them along with some infrastructure names, but for now she will wait to see the commodity stabilize before she adds any more exposure. Her exposure is around 14%, and the bulk of that is pipeline stocks.

Why would we buy US bank stocks with an almost 20% rate of exchange? This is a headwind if you think the US$ is going to weaken, but she thinks it will stay relatively strong. You are buying US stocks for exposure to the US economy. If the US economy is doing well, then US banks in general should do well. (See Top Picks.)

Markets. When you look at where Goldman takes their oil price forecasts from, they have been behind in it. The point is that when someone comes out with a big call like this, you don’t just run out and sell it. It’s an opportunity to add some value to your portfolio. Energy has not made lower lows, so he feels we will bang out a bottom here, although he does not know when. Testing a low would be a buying opportunity. He would be in complete shock if energy prices stayed where they are. You don’t want to be selling these things here.

Hedged US ETFs. He loves the ability to hedge or not hedge the US dollar. These are brilliant ETFs and will be the solution for the next 20-30 years. Currency becomes another source of returns. He is mostly hedged to the US dollar. He is only just starting to build in the Euro.

Can rising interest rates allow Fed to reduce bonds on the balance sheet? He thinks if they did, housing and car sales would drop. Does not think interest rates can go up.

When oil prices go down, refining margins go up, so integrated stocks don’t suffer as much, or even benefit. E & P companies don’t do as well in this case.

Educational Segment. Geopolitical Influences. In Jan. and Feb. we tend to get volatility in the markets. It seems geopolitical influences will be high this year. Greece will be next to impact the markets. Yields are rising there again. They may elect an anti EU party. He feels the only way to fix it is to get rid of half their debt.

Markets. It is pretty dangerous out there in the resource area. Commodity cycles don’t last in years, but in decades. They go up for a very long period of time and then down for a very long period of time. People lose money time and time again trying to pick a bottom in markets. There is lots of time to make money when it starts going up again. Canada is not that attractive. He would put his money into financials in the US and into the European markets. Most of the Canadian market is pretty fully valued here.

Big, well capitalized energy companies will be the winners in this environment. Having a rock solid balance sheet is important. Dividends, even in the big companies could be in jeopardy. In this environment the bigger will get bigger and the smaller will suffer.

How will Canada do in a 5-7 year $70 oil? Companies would be very happy for oil to stabilize as $70. Companies will adjust and there will be losers and there will be winners. Stick with companies that have better balance sheets that can take advantage of the opportunities that exist at $45 oil.

Pipelines? He likes TransCanada (TRP-T), Canadian Utilities (CU-T), Power Generation (??) and a couple of mid-streamers such as Keyera (KEY-T) and Pembina (PPL-T). These have been hurt, but they all survived 2008-2009. In the meanwhile, they gush cash. This is why he likes to stick with them.

Markets. US job reports are the strongest since 1999, which is consistent with what he thought was going to happen in the last few years. Just a slow and steady improvement. He is very optimistic about the prospect for wage growth to continue in 2015-2016, especially if they continue to add 250,000 jobs each month. As we approach the rate of national unemployment, he thinks we will see wage growth outstrip inflation and a really big increase in consumer spending power. This is how he has positioned some of his portfolios and why he has some US exposure, especially in the consumer sector. When looking at wages, you can’t just look at average hourly wages; you have to look at the number of hours worked as well. You also have to consider what happens to wages as you approach that national rate of unemployment. At every point in history, when we consistently approached the national rate of unemployment, you have seen wage growth outstrip inflation. The US Fed is contemplating tightening while major developed markets like Europe and Japan are going to likely continue to have accommodative monetary policies to support their economies to get inflation a little bit higher. When positioning your portfolios, you want to make sure you are invested in economies or stocks that have good risk adjusted returns. Europe is going through a deleveraging process and has likely got another year or 2. Very reminiscent of what the US went through 4-5 years ago, so you may be a little bit early if you are invested in equities there. In the US, you have the prospect for excellent risk-adjusted returns, and by proxy, he thinks we will see this in Canada as well, given that we are their largest trading partner. There are some really good buying opportunities in several sectors in the Canadian Market. The energy sector has pulled back because of the recent decline in commodity prices, so if you start to nibble away here with a long-term time horizon, you end up making a boatload of money. Real estate sector looks really interesting, especially if we have low rates for the next 6 to 12 months, with a gradual increase thereafter. Also, he can see several opportunities within the industrial sector to get exposure to really good dividend paying stocks. That is his bread-and-butter.

Canadian Banks? The biggest risk is if oil stays around $45-$50, you could see earnings estimates for Canadian banks get revised downwards by 5% or 10%. This is overhanging a lot of the banks, and when you look at the ripple effect, it is going to adversely impact capital markets activity and a negative impact on wealth management. However, the banks are all off and the valuations have compressed. If you are a very longer term oriented investor that just wants a good dividend, this is a good entry point. They are good value. The only time you would want to Sell at this point, is if you thought that Canada was going to go into a recession and you have a short-term time horizon. His Top 2 would be Royal Bank (RY-T) and Toronto Dominion (TD-T) because they have some US exposure. The ones he tends to avoid are the ones that made a lot of money issuing equity for energy related issuers in 2014, and would include something like a Bank of Nova Scotia (BNS-T) or National (NA-T).

Energy. Thinks oil prices will go back up to $65-$70 through 2015. This is also an average that he thinks is very reasonable for 2016. Gas prices should also move up to about $4, given where inventory levels are. If we have anything resembling a normal winter for the rest of the year, that should support inventory getting drawn down and gas prices pushing higher.