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

Energy versus TSX Composite. Basically looking at relative performance for 2014. Energy was a relative outperformer through the 1^st part of the year, and then in July-August, it began to decline when it started losing relative strength, followed by the absolute limit in November-January. We are still down in energy.

Gold versus TSX composite. Comparison chart was for 2014. Gold was underperforming from August to September, but things were starting to change in September, followed by a dramatic change in November-January. The gold sector is now starting to get relative outperformance. It is very early. There are certain levels that have to be broken through, but he would say that we are in the very early stages of a positive trend change in the gold sector.

Bond fund or bond ETF? When it comes to fixed income, there are several things to consider. You have to decide what percentage of your portfolio is going to be fixed. Depending on the size of your portfolio, sometimes there is an advantage to using a professional advisor that can buy bonds for you, instead of buying an ETF. Keep the duration down to 2-3 years in a bond portfolio.

Gold-Silver Bullion. Ratio is around 73%, versus the last 5-10 years where it has been around 60%. What would you buy and why? He has a comparison chart of the 2, which shows that the action was similar until around August when Silver started to underperform. Recently they have both started to turn up, so if silver is going to catch gold, it might be the better play, even though they both look favourable. He would probably play silver through one or 2 silver stocks and enjoy the ride.

Investors. Don’t sell out your entire portfolio. If you think the market is overpriced or toppy and you sell out, and if you are wrong, you never get back in. If you’re on margins reduce them. If fully invested, you might want to raise a little bit of cash. You also have to look for assets that are inverse or under-owned. Move away from crowded spaces. The REIT sector, not the individual ones but something like the iShares S&P/TSX Capped REIT (XRE-T). The Canadian utility sector looks safe. Japan has always been countercyclical, so get a Japan ETF such as the iShares MSCI JAPAN (EWJ-T).

Markets. Was surprised that OPEC decided not to cut production, like they have done over the past 20 years. In hindsight, perhaps he shouldn’t have been overly surprised because every 20-30 years or so they seem to do this to readjust the environment. He has definitely cut back, but at this stage this lower oil price environment will probably stabilize, but will stay low for the next 6 to 9 months. Meanwhile he will retrench to his best present ideas and best defensive names. The opportunity will come to pick away at these names over the next few months. All the geopolitical issues and risks are still here and still have the potential to get oil prices back up, but overall on oil per se, the supply/distribution needs a little while to catch up. The overall market will be uncertain for the 1^st half. He thinks it will be a mirror image of last year which started strong and ended weak, and this year might be just the opposite. He is constructive on the markets overall, and especially with the collapse of oil prices, expects to see great opportunities in the spring to buy these stocks.

US banks? From a relative valuation point of view, there is no question that the US money centred banks are a lot cheaper than the Canadian ones, probably because the business mix is quite different. Canadian banks are more of a super regional bank. Coming out of 2009, there has been a lot of regulatory change in the US and they are still up in the air as to how much ROE they can earn. They are cheap, and as long as the US economy can grow, there should be decent upside from them.

Markets. Looks like the year is going to start out on the negative side. He is tactical and moves his asset allocation. He was moving out of Canada and into fixed income earlier. So he is excited because he is looking forward to buying back into the market cheaper. He was saying to take energy money off the table during the summer but he never realized the pullback would be this deep. Gold priced in Euros is breaking the 1000 level. This is what 2015 will be all about.

US Dollar. A big component of the US$ is the Euro. He thinks the Euro will break up. The countries can’t stick in and fix the debt problems they have. The US dollar will stay strong for a while.

Auto Industry – Credit situation. Thinks we are in a liquidity trap. Interest rates need to stay where they are, near zero, for years to fix structural problems we have. He thinks Fed will raise rates a little this year and the economic growth will slow and the Fed will back off. We will be in the ‘QE trap’ for years to come.

Leveraged ETFs. Bad for long term holds. 2-3 weeks at a time max. Use them when they make sense.

Educational Segment. Will it be a year for the Bears or the Bulls? Lots of volatility in 2015. Since 1900, US large caps have always been up in a year that ends with a ‘5’. The fundamentals are nonsense. ‘So goes January, so goes the year’. That is nonsense also. About 40% of the time it is true.

Seasonality: The first couple of months of the year are flat on average and then you sell in May and go away.

Presidential years: The seasonals are almost twice as strong in the 3’rd year as any other and it is because of fundamentals. We should get a good seasonal rally starting in March.

Buy on dips starting in January. He would not be surprised to see the lows of the last few months to be tested once again on the TSX. You might want to raise some cash.

Markets. It does not appear there is a floor to oil prices. No one can predict earnings on oil stocks now. In his US portfolios he has no exposure to oil and has not for some time. He focuses on fundamental businesses with cash. Thinks heightened volatility will continue. Prefers domestic (US) companies rather than international. The US is in a very good environment right now. The equity markets have gone up for 6 straight years and the wind at the back is drawing to a close.

Markets. This may be the year of the Achilles heel of quantitative easing. The real issue is too much debt on the economies, and too much debt is literally crushing the life out of a lot of Europe and Japan and is not helping US or Canada. Because there are no more arrows left in the economy’s quiver, they just keep reaching for them, shooting them and hoping that something will work. The problem is, when you add all that debt from quantitative easing, all you are doing is pressing harder and harder down on the economy. Thinks that 2015 in Japan is the watershed year. Doesn’t know what is going to happen in Europe. He is concerned, because of the inflows of money into the US, that the US will look better, but underneath it all the US is weak,and, by the 2^nd or 3^rd quarter, we are going to be revisiting some form of quantitative easing again. It hasn’t worked so far, so why do we think it is going to work now? Against this background, the 2^nd strongest currency in 2014, gold, could have a good year.

Energy. Thinks it will be a couple of years from now before oil prices get back, to even $60. Why should low cost producer Saudi Arabia shut their production in, so that high cost in US shale and Canada’s oil sands continue to produce? Right now we have a surplus in oil and a weakness in demand, and it is just going to take time. Your best opportunities are probably on the Short side. He is Short with some of the large US integrated names, because he thinks they have issues with negative free cash flow. Most of them have budgeted for $70-$78 oil, and thinks oil will bottom in the $40 level, and they are going to be in a lot of pain. Thinks that most of this year and the following year will be in the mid-$50s, and at best low $60’s. (See Top Picks.)