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

ETF on US banks? The timing on US banks is excellent. The US money centred banks in particular are extremely unloved. They are blamed for the financial crisis, which to a large degree is right. Instead of an ETF, he would recommend buying a basket of individual names such as Citigroup (C-N), Bank of America (BAC-N) and JP Morgan (JPM-N). Just buy these and that would probably be your best bet.

Commodities. The uptrend that has been in place for about 16 years has now been broken. As a result, we are probably facing another 16-20 years of downside in a very long sideways trading band. Copper which is currently at $2.80-$3, could go down to $1.40. Gold could be at around $700. Oil could be at $35. Overall earnings estimates have been shaved dramatically on the TSE and are down about 11%, so he is expecting a pretty modest growth of 3.5% for 2015. Canadian banks could also be facing some challenges.

Gold. If the price of gold drops to $700 an ounce, the impact on the Canadian economy as a whole won’t be significant. However, the basket of 17 commodities looks like it has broken its uptrend, so lower prices would also apply to copper, zinc, etc. A large amount of gold companies costs are based on fuel and the cost of oil has dropped more than 40%. Also, a lot of gold companies have marginal properties and will put them into mothballs, and continue to work on the high grade opportunities. Also, there will continue to be a lot of acquisitions. A lot of gold companies will be facing a lot of challenges in the coming 12 months.

Markets. Santa Claus rally normally starts around the middle of December and goes right through until 2 trading days after the beginning of January. It is on track again this year. The question is, what is going to happen after that. All the economically sensitive sectors are probably going to have a difficult time going into the month of January and into February. Also on a technical basis, markets are overbought right now and are vulnerable to a correction, so be very careful after next Monday. The next big issue to watch is going to be 4^th quarter results. This year the big impact is caused by the US$. On average the US$ makes up over 10% on a year-over-year basis. This crunches earnings by the big cap companies that have international operations and means 4^th quarter results on a year-over-year basis is not so good for the big companies in the US. However, what is bad for the US is good for Canada. The Cdn$ has been coming down, so we have actually benefited from the currency. The average gain for the TSX 60 companies is about 7% on a year-over-year basis. Historically in a pre-election year in a US residential cycle, we have a huge run from the beginning of January right through until the middle of July with an average gain of about 12% over the last 85 years.

US$. Usually this comes under pressure late in the year because funds from international companies go back into the parent company. That has a tendency to put pressure on the US$, but that didn’t happen this year. It may go a little bit higher in the next 2 weeks because of seasonal factors, but we are probably getting close to a peak on the US$ Index. That will have an impact on commodity prices going forward.

Bonds. The period of seasonal strength for equities is from the end of October until the end of April. The period of seasonal strength for fixed income securities is from the end of April through to the end of October. Because of this, you can go from equities to fixed income and vice a versa. If you do that persistently, you can outperform the Canadian and US equity markets.

Markets. He has not changed his view that markets will grind higher. It may be a little difficult for Canada with oil and commodities, however. Interest rates may go up but not aggressively. Stocks offer better opportunity for dividends and capital appreciation. You will see a lot more M&A going on around the world in 2015. Valuations are not aggressive and lots of people are flush with cash. The other thing is what happens to oil and other commodities. It is probably China. There is far too much supply of the stuff. There are not many risks that the US will not lead the world in the economic recovery. The Fed will raise interest rates very slowly because it is too risky for them to do otherwise. You should be in stocks because you can’t get the returns from fixed income.

Markets. There is no one that can consistently forecast what the market is going to do in the short term. He uses a strategy that he thinks shouldn’t be dependent upon the direction of the markets or commodities, but just a strategy that can make money in all different market conditions. He tends to spend all of his time focusing on individual companies, as opposed to making calls on the market or forecasting what it is going to do. Always has hedging in place.

Resources. He is absolutely not tempted to put any money back into this sector. Made a decision a couple of years ago to pull out of direct exposure to the resource space. He likes low volatility in his fund. This just comes down to risk management, which means know your names very, very well. Doesn’t think anybody can know resource names as well as non-resource names.

Pipelines. The trouble is that it is a crowded trade and everybody owns it. Since 2008, everybody has been scurrying to the safety of pipelines, so they trade at very, very lofty valuations, relative to their historical band. Also, in a rising interest rate environment, they are going to be harder hit than other sectors because they tend to be dependent on debt. He prefers the derivative plays on pipelines. (See Top Picks.)

Markets. Sam Stovall of S&P Capital IQ is saying that he is looking for the S&P to go to $2,250, a very healthy increase. He is also looking strongly at the tech sector, industrials and healthcare. Along with a couple of others, he has been consistently bullish for the last couple of years, and has been absolutely right. It is just a matter of putting volatility in context. Most people look at volatility and think the market is either going to soar or crash. It is a lot more subtle than that. John Hood likes big Pharma, but also likes a couple of ETF’s that are little bit more diversified in terms of healthcare, providers, equipment, etc. He is pretty much out of Europe now.

ETF’s. Hedged or unhedged against currency? Depends on what area you are looking to buy. If he were buying Europe, he would definitely want something that was hedged against the decline in the euro. However, if looking at the US, he is happy to buy in US dollars.

Recently bought 2 levered ETF’s. What do you think of levered ETF’s? He wouldn’t touch them. If someone is going into these, and recognizes that what they are doing is gambling, not investing, more power to you. These things are meant to be traded on a daily basis, and you never hold them overnight. When they have to come back and rebalance the index, you can be completely right on the right side of the index and still lose money because of the rebalancing process.

Covered calls. How do you hedge the downside? You are probably suggesting perhaps putting an insurance Put on them. He doesn’t do that much. If he is Selling a Call to an income, and he is buying an equivalent Put at the same price, the cost of buying the Put offsets the gain of the Call. You would have to buy a Put several dollars out of the money for that strategy to work.

Markets. Santa Claus is really helping stocks this year. Usually you see from Dec 15 until the second trading day of new year (Jan 5^th this year) 80% of the time stocks go up. Look for a really strong end of the year because pension money comes in right at the end of the year. After Jan 5^th, look out because the focus is on earnings. In the US, with large cap stocks, it is based on the strength of the US dollar. The Canadian market, however, should outperform the US market until mid-March. Looking at a three year chart on oil, it tends to move lower until this time of year, which is what has happened, and then historically it bottoms around here and forms a base until end of January and then tends to go higher. Now is the time to be in the Canadian market until the first week in March. Technicians are seeing a bullish continuous wedge pattern in BB-T. The consumer electronics show in Las Vegas should benefit this stock, it does every year.