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

Markets. The drop in interest rates and bond yields has forced him to rethink how stocks should be valued. Maybe stocks should be valued more highly, simply because bond yields are so low. When he looks at things like banks, telcos, utilities, REITs and the pipelines, he is seeing yields that are now probably 5 or 6 times as high as the yield on 10 year Canada bonds. Doesn’t think this has ever happened before. Price to earnings ratios are possibly not the magic measuring stick that he had thought they were, and maybe he should be looking at cash flow yield and ROE as better measuring sticks. When he discounts those cash flows into the future, using a lower discount rate because interest rates are lower, he comes up with a higher value for those stocks. He thinks everybody is rethinking interest rates. He is seeing a rush to the bottom on rates globally. Central bankers are dropping rates in order to drop their currencies. In the most extreme case, you have Switzerland that now requires you to pay .3% to deposit money in Switzerland. They are trying to get the value of the Swiss franc down. He doesn’t know how the race to the bottom can be ended. He can see the Canadian 5 year bond rate staying below 1% for a couple of more years.

Markets. Volatility can be a very good thing. Last year for the first 11 months, the VIX which measures volatility, didn’t move much and then went crazy in December. What he finds fascinating is how investors and media funds, when things are calm, worry because it is too calm, but when things are volatile they worry because things are too volatile. Volatility, especially for short-term traders, is a wonderful thing. It presents opportunities on the dips. He has been finding opportunities in the oil/gas patch. The key is to find companies with good balance sheets and low debt loads. In that industry, often when things are really good, they take on debt, but don’t prepare for the tough days ahead.

Investing in the US? When he sees people fleeing to the US for safety, it is like going to a danger zone as compared to a very, very dangerous zone. There are major problems with this, but the US$ has gone up nicely, which means a lot of people think this is certainly a good place to be. He has invested a lot in the US in the past 5 years, and 75% of the portfolio he manages is in the US. He would like to have more in Canada, but is comfortable investing in stocks in the US. It can implode to some degree, but the question is, who are the companies.

Uranium. This is a good space to be in, but you have to be wary of some of the small companies that don’t have good revenues and balance sheets. Long-term, if you can find good companies in this sector that have good strong balance sheets and good strong plays, you should do well.

Markets. There are 3 things driving the current market. 1.) The collapse of oil prices which has gone below what is economically sustainable over a longer period of time. 2.) The QE in the US which has ended which will ultimately lead to higher rates. 3.) Is the US economy strong enough to sustain the growth moving forward? Before this earnings season was announced, a lot of large caps in the US were telling us that it was going to be a great season, but what they ultimately forgot was that a lot of their earnings came from outside of the US, and we started to see the “earnings drag” hit because of the higher currencies. Thinks oil prices will ultimately move higher which will perhaps bring the Cdn$ back to a higher level.

European ETF, hedged or unhedged? He would rather go unhedged, because currency is part of the diversification by investing internationally. In terms of picking ETF’s versus individual stocks, he favours going directly. Thinks you will find mainly large companies in the ETF’s, and wonders why you just wouldn’t go direct.

Markets. [Larry was late as he was caught in winter weather.]

Do ETFs buy the actual stocks in them? When you put in a buy and there aren’t enough shares, they create them and have to buy the stocks contained. The reverse happens as well.

Educational Segment. If you don’t understand the markets are going to go up and down then you are not ready for the markets. The average investor’s return in the last year was 10% and the volatility was 10%. The ideal portfolio gives you the highest return possible with the lowest volatility.

Markets. He remains very cautious. The US economy is doing well, but investors don’t really understand what the central banks around the world are doing by creating all the liquidity to get growth going. It only gets to the banks, who invest it in more risk assets. It does not turn into growth. The global economy is a mess. We will continue to see volatility and little rallies. Money has gravitated to consumer staples and valuations in that sector are at all time highs. He is at 30-70% equities in his funds.

Oil. Prices will change. Costs are higher as they need a minimum of $70 to cover costs in the oil sands and $80 in the fracing world. It is extremely hard to say when there will be a recovery as there are a lot of moving parts. Certain oil stocks are going up every day.

Markets. He is looking for Canadian companies that can benefit from the weaker Cdn$, especially on exports to the US, or those that have revenues in the US. There is a lot to do and no reason to be totally negative.

Gold. Every portfolio should have some gold to balance out. Gold is reasonably stable. With the oil collapse where do you go for resources? You go to forest products perhaps and, selectively, you can go to gold. He is very interested in the longer term approach with Osisko Gold Royalties (OR-T), Integra (ICG-X) and Detour (DGC-T), which is absolutely phenomenal.

Minerals? Would now be a good time to start picking away at some of the companies? The time to buy them is when nobody else wants them, which is now. He would do some gentle buying in here. They are looking glamorous compared to oil and gas now. He would probably put HudBay Minerals (HBM-T) first.

Markets. Thinks the next little bit is going to be bumpy. You have lower oil prices which are showing up in the 1^st quarter in the US. The higher US$ is hurting international, which will also affect 1^st quarter earnings. The Greek fears will probably drag on for a while. However, you are going to have the compounding effect of European quantitative easing, which is going to help and underpin. At the end of the day, he thinks there will be a positive resolution in Greece. Lower energy, although it takes time, will eventually be a boon for consumers. A higher US$ will ultimately help American purchasing power.