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

Markets. Macro Money Flows are important because when you see markets move, a lot of times it is not individuals or portfolio managers that is moving them, it is flows that are coming from offshore. There seems to be fewer and fewer players in the market, and they are bigger and bigger. Things are being pushed around that we didn’t see 20 or 30 years ago. The world has really shrunk in the last 20 years. You have to see where the money is going so that you can anticipate where you should be and what you should be doing. He had a chart that showed the euro versus the US$, which showed the euro has been beaten up for a long period of time. This means money is leaving Europe and is going to the US. You can see this in a number of the big currencies. The pound sterling held up pretty well until just recently, but then it broke as well. Portfolio managers are looking for trends as to where money is going. The long-term trend now is positive towards the US$. This means that if you are investing in US assets, you are going to have a tailwind with you.

Tax implications on holding ADR’s in either RRSP or taxable accounts? ADR’s are foreign securities that are traded in the US and are sponsored by a bank or a broker. There aren’t any implications in an RRSP because this is tax sheltered. There are no dividend tax credits because they are not Canadian securities and there is a withholding tax, depending on the origin of the country.

Markets. We saw all time highs at the end of the year in bullishness. We are now in a strong part, seasonally, of the year in the markets. We are only in the first or second inning of the bull run of the US dollar. He has a secular view on the US dollar, which means 5 to 7 years. Be prepared for a long run on the US$. Position yourself in the top 100 of the US equities. The world will be under pressure as the US dollar goes up. The Chinese market is going up because it is pegged to the US dollar.

Gold. For the last two years gold stocks have been uninvestable.

Oil. There is a lot more downside in oil. No one is making money except perhaps Suncor. Wait a couple of quarters before looking at anything to do with oil.

Gold. This has been rising along with the stronger US$, which is unusual. Gold began its precipitous drop during its strong seasonal period in the summer when the US$ was rising. His chart on gold for 2012-2014, showed a couple of strong touch points. Gold really is a currency, and what you are seeing now, in the last couple of weeks in particular, is a divergence between the two and there is not much left to kick the gold up, unless maybe we see the US$ come down. Just coming back a few percentage points will probably have a pretty big impact on gold, and it will probably thrust above the 220 level. (Not sure of this and wondered if he meant $1220. – Bill)

Telecoms? When compared to the rest of the sectors on a short-term and long-term basis, it is really strong. This is a reasonable space to be in.

Gold and silver? These both had 2 ½-3 disappointing years. He doesn’t know if they will break out, but there is a lot of pent up energy in these trades right now. Doesn’t mean it is going to happen, but your risk/reward is pretty good. Looking at gold, it is in the $1160-$1180 range and is really positive. Silver tends to react a bit quicker, so you would get a pretty good cue on both of them based on how silver acts. They have been pretty constructive in the last couple of months. It doesn’t mean something is going to happen though.

Energy. Reading all the popular press, you conclude that there is somewhere between 1.5-2 million barrels of oil oversupply currently in the market, which has been enough to create the situation now where oil prices are falling dramatically. It really comes down to a game between the Saudi’s and the US shale industry. The oversupply issue is a concern with the Saudi’s because they want to protect market share, and really becomes a question of who is going to blink first. You have to wonder how much pain the Saudis can stand with this big haircut in the price of oil. They have a huge budget deficit even at higher oil prices. He thinks things are going to come to a rapid halt. For example, big players in the Bakken trimmed their budget by 50%. We are starting to see that across all the basins. It is just a matter of time before production follows the budget cuts.

Natural Gas. The story is one of oversupply, principally coming from shale gas plays. The biggest is the Marsalis in the Northeast US. This is a little more sensitive to weather issues, but you have to look a little deeper than that and convince yourself that there is some serious potential declines around the corner. The Marsalis is on the verge of producing 20 BCF a day, which would be not quite a third of the total US gas production. However, they have a serious problem in that they don’t have enough take away pipe capacity to get the gas to market. On December 31, gas in the Tennessee region was selling for just over $1 MCF. That is not sustainable, so why would a company drill if the best price they are going to get is $1. Gas production there will decline rapidly if the drilling stops or slows down. He expects this will show up in gas volumes. We need to see a big correction like this to get the fundamentals on side. Expects the gas season will probably finish back to normal.

Energy. It has been a very precipitous decline and he saw nothing that was predicting anything like this. Whatever the reasons, we are in a new paradigm as far as energy stocks are concerned. As a value investor and looking out over a five-year period, what you should be doing is very selectively initially taking some position in the companies that are likely going to benefit most from a very bad environment. A number of companies are likely not to survive and will soon be victims of M&A activity. Investors should initiate positions in the very high quality companies. Doesn’t know where the bottom of this is likely to be, but suspects that we are below the threshold where the new normal might end up. Don’t think we will see $100 for some time. In a situation where you have supply greater than demand, there is going to be a period where things run off and it will take a while for that supply to diminish. A lot of these companies, particularly those that are highly levered, are going to keep their wells going because they have to make debt payments and they need the cash. That can only last so long because banks are going to start to stop giving credit. This will initiate a whole new reorganization in the industry.

Markets. Canada is going to be hurt by the lack of participation in the energy sector, but he still thinks we are going to see more growth. The US economy seems to be firing on all cylinders, and for the moment they seem to be carrying the weight of the world on their shoulders. He believes Canada will benefit from that. Our lower Cdn$ will help to some extent. Ontario and Québec will be carrying most of the weight. Going forward, he believes we will see growth beginning to pick up again. Just not sure how long this process might take. China is still growing at 7%, and could well be bottoming out in terms of how low that will go. They are already becoming a much more major factor in global GDP.

Oil versus natural gas. Natural gas did not participate with oil when it was going up and has been a little bit stickier as oil declined. There has been an oversupply of inventory in natural gas. At current prices, the marginal cost of production of putting new production in place for natural gas is somewhat higher than what current prices would justify. Longer-term he expects we will see natural gas prices recover. We will not see the volatility in natural gas that we are seeing in oil. You have to watch the companies you are investing in, because a lot of companies are involved in both areas. Look for companies with the best balance sheet and best management that will take advantage of any opportunities.

Markets. Tax loss selling is where investors, who have losing stocks, will sell them in December. The sector is supposed to rebound in January-February. He did a scan on December 12 and picked stocks that had the highest deviation from the 200 day moving average. He widened the filters to 40%, so that anything below 40% would show. Ended up with about 55 names and everyone was an energy stock. Last Friday the group was up about 20%, but they all got murdered yesterday and are getting killed today. This is unusual. It is kind of alarming when you have tax loss selling in the sector, and it should rebound, but it gets killed again in the new year. Very worrisome.

Energy. A chart running from 2001 to 2014 inclusive showed a broad climb running up from 2000 with a manic peak in 2008 where the trend was broken. This was followed by a swing failure in 2011, where it failed to make a new high. It also failed to make a new high in 2014. Swing failures are very negative. If you are trying to bottom fish now, you should postpone it. It needs time to work itself out. The bottom in 2008 took almost 6 months to resolve. We are now only 3-4 weeks into this, so there are several more weeks to go. Let the crude build a base. Long-term support lines in crude show the first one as at $51, which is where the drop should stop. The ultimate low in crude is $38.