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

Which bank, for a good dividend and lower downside risk? Bank of Nova Scotia (BNS-T) is the least tethered to Canada. If you think Canada is going to be a little bit dicey, this is one that you might want to look at. CIBC (CM-T) probably has the highest dividend and the lowest PE as well as having the highest capital levels.

Cdn$. A chart on the Canadian dollar dating back to 2005, showed it was at a peak in 2007-2008, and as the stock market and oil fell, the Loonie fell with it. A double bottom showed in 2009. This is happening again. He thinks we are going to see some sort of complex bottom, somewhere around the old lows at around $0.77 on the US$, and probably pretty soon. A similar pattern to oil.

Oil. Going back to mid-1980s there have been a lot of similar circumstances happening lately. Chart showed that oil fell from $31-$32 to around $10 in the mid-1980s,. The bottom in 1986 was complex with an up-and-down activity over several months. Oil then peaked at around $40 around 1990 and then dropped again and tested at around the same level in 1999. Again it was not a simple bottom. It then reached a peak early in 2008 at $147 and then took a big drop, but did not have a complex bottom. With this information, he feels there is a high probability of the former lows, high $30 or so over the next couple of months, but it will not be a simple turnaround, but will be like the last couple of times where there is a complex bottom. He plans on buying back in after the volatility has played itself out. There will be a great opportunity in oil, probably in the next 6-12 months. Watch the volatility and watch the breakout and it will be a great buying opportunity.

Markets. We are at an interesting point in economic history. The reality is that we have not had a point where the European, Japanese, Chinese and Bank of Canada are working together to add liquidity. In the long term this could contain some dangers. It is an inflationary phase that we won’t see until 2016. The next part of the equation is currency exchange. That will be more powerful than more people think. Now that we have a foreign exchange structure that is seeing the US dollar move dramatically against all other currencies, it will change things dramatically in 12 months or so.

REITs are pushing forward as much of the refinancing as they can. The lower interest rates are a benefit and then they want to lock them in for as long as possible.

Air Canada Bonds 7.625% maturing 2019 (Top Pick Feb 28/14, Up 14.75% Total Return) The slow down in Western Canada could moderate air travel for a few years.

REIT rules in Canada. He would love to see more flexibility. Changes in 2006 involved rules that were too draconian. He doesn’t see rule changes in the US coming to Canada.

Markets. Thinks interest rates will be lower, longer than people think. The Bank of Canada is worried about a slower Canadian Economy. We are in the phase where the oil price drop is now affecting other areas of the market. Oil is very little of the US economy compared to Canada. The world has not changed that much. Earnings came out from a lot of companies and all they said was that the dollar was affecting them. Yet commodities have collapsed. China may be slowing down faster than people think.

Is it time to get out of Canada? Nobody really knows where oil is going. He feels oil can still go lower as there is still excess supply. The other problem with oil is that it can be stored and eventually storage could get filled up. It has to settle somewhere. It will probably go up higher over a period of time. There will be a point over the next period of time when it is a great time to buy great oil companies [Canadian].

Markets. We are in the late innings of this bull market in Canada. Bull markets don’t last very long. You never know when they are going to end, but it kind of feels tired to him. Earnings are not impressing people. Consumers are tapped out. Growth is weak. The US looks a little better, but it is not that strong either. He is 50% cash right now. The best time to invest in stocks is after they’ve corrected. We saw that in March 2009. Anything you buy goes up pretty much, and that is when you want to be fully deployed. He is still buying, but is more selective. His 2 favourite types of investments are turnaround stories and small high growth/high risk opportunities. That is where he has done the best. He tends to avoid resources because he doesn’t like the unpredictability of the resource price. Prefers betting on really intelligent, motivated entrepreneurs, which he finds pays off the most.

Graphene. A form of graphite, one atom thick, and has an amazing potential if anyone can find a way to produce it economically. Some companies do produce it, but it is very expensive and not very reliable. Doesn’t think anybody has nailed it down yet. If it works out, it will change our world, because it has so many amazing properties. For now it is very early stage. It is very, very risky as there are no guarantees a company will ever be able to produce it.

3-D printing. Pretty fascinating and if they can ever get it to work properly, it will solve a lot of problems. Brilliant future if they can figure out how to make it work. Loves the space and the concept, but just doesn’t know if it is investable.

The effect of baby boomers retiring and depending on, or selling their investments for monthly income? Expects you will see low interest rates for a long time. As people get older they want to buy bonds or fixed income. That will increase demand, and therefore lower yield. Dividend paying stocks should do very well and will have a lot of buyers. There are a lot of great little private businesses that are run by smart entrepreneurs that work hard. These are probably baby boomers and possibly getting tired, so there are a lot of businesses for sale. Rollups benefit from this. This is an interesting trend.

Economy. The biggest overriding macro question and trend right now is what Central Banks are doing in these currency wars. We have had 1.5 years where everything calmed down, and now all of a sudden Europe is popping up. You have negative interest rates in Switzerland and Germany as well as Japan. Those are really unusual situations. You have a major dysfunction and dislocation in Europe, both politically and economically. There is huge unemployment. There is a situation where all of these countries are trying to devalue currencies. It is very much like the depression era where people were trying to “beggar thy neighbour”. The strong US$ with Euro falling recently, is putting real pressure on. People are waking up to the fact that earnings growth is going to be a little bit slower and potentially quite a bit slower than what they had originally anticipated. With some of the earnings that are being announced, we are seeing pretty big headwinds. The US$ seems set to move higher mostly against the euro, and because the European authorities really want their currency to move lower. Federal Reserve Board hasn’t done anything to alleviate the concern, and will probably begin to raise interest rates. He thinks money is going to continue to flow into US$ investments.

Markets. 2 years ago he and a lot of others were saying to get out of Canada and buy US. The concerning issue right now is that for a year now everybody has been saying that the domestic economy is much stronger than the international economy, so a lot of people are focusing on those domestically oriented names. Because everybody is focusing on that, it becomes increasingly difficult to be finding real cheap value. These low energy prices are really starting to bite with job layoffs. As long as you pick good quality companies, and if you are patient, you are going to see some good value come to it.