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

Markets. We have gone from a complacent and dormant situation with volatility, back to a more normalized type of market. Last year the VIX Index was about a 14 on average. The 10 year average is closer to 20, and we have seen that level a couple of times already this year, and it has moved beyond that. Thinks volatility will definitely normalize. It will be a little greater this year as we deal with higher interest rates potentially down the road with the feds and with geopolitical pressures, as well as what is going to happen overseas with Europe and China.

Energy. His energy exposure today is about 3%-4%, the same as it was 6 months ago. He would look to take advantage of the lower prices at some point. Doesn’t see any major catalyst for energy prices or energy costs to rebound in the very near term, but feels that in the back half of the year, as supply conditions tighten a little bit, that is where you might see a catalyst for oil and oil stocks to start rebounding a little. Energy is the wildcard for Canada in the back half of the year.

Markets. The Bank of Canada cutting its key interest rate to 0.75% was a surprise. They are trying to prevent a shock, and will be fine in the back half of 2015. The 1^st half will be highly dependent on where oil goes. Areas to consider for investing in would be Canadian companies with US exposure, including lumber as well as any companies that do things primarily in the US.

Markets. We assumed economic growth would slow because of the decline in oil, but he did not think the Bank of Canada would act so quickly. He thinks Target coming out of Canada was a huge shock also. There is going to be an election this year. He has been light in Canada so he is not changing his strategy. Canada will be a great place to come back to, but he had moved much of his investments to the US already. He also has a small tilt on the European markets.

Long Term Bond Funds. E.g. XBB-T. He feels you are too late. They are the riskiest asset class out there – US or Canadian. Interest rates are so low that the longer the term of the bond, the more volatile it is. Steer clear of long term bond funds.

Energy. Thinks we are getting close to a low in the actual price in oil. If you look at the price action of stocks relative to oil, oil itself was not up hugely, but the price of oil stocks had a huge rally, so there has been a positive divergence between stocks and the commodity itself. At today’s oil price the entire oil/gas sector is literally bankrupt. You can’t use current oil prices to compute stock values because it would mean the value of the stocks are either 0 or negative. He is finding better value in mid-caps because people are still risk adverse to volatility, and there has been a total abandonment of that kind of $1-$2 billion segment because they are flocking to the midstreams, pipes and large caps. If you are lucky enough not to have had energy exposure, dollar cost average over the next couple of months. In this price environment there is no clear catalyst to form a bottom in oil. It will be a gradual process. As we start to see the rig count decline, that will portend a future supply growth stalling followed by negative growth rate if the oil price oil stalls. Given the financial leverage of companies, they are now forced to only spend their cash flow. At current oil prices that realization will be the largest drop in CapX, year-over-year, in 2 decades. There will be a meaningful supply response, and he thinks this will catch people off guard at both the rate and the timing. Most people think it is going to be a 2016 event, but he thinks it is going to show up in Q3 of this year.

Eric’s comments on oil stocks. When he talks about a “Good Buy”, his view on the macro is that we have another 1 to 2 quarters of volatility, because he cannot identify a catalyst that is going to immediately get the price of oil going. It is going to be a slow process, and you have to take a 9-12 month viewpoint

Interest rates. As a portfolio manager, he looks at risk/reward. One part of him asks does he want to lock in 10 or 30 year rates at 2%, but that is crazy as the risk/return is not in his favour. The problem is there are so many ingredients in the cake called inflation. It started with Japan, has moved to Europe and is now washing on the shores of North American deflation. There are no wage pressures, oil is down which hits the inflation index, an economy that is growing but not to capacity and you have technology that is a great dis-allocator of inflation (machines are taking over production). Rates should track up from here, but really not that much further. He thinks rates are going to stay low for a long period of time. There is every indication that we are going to replicate Europe or Japan.

Markets. It has been a quantitative tease with the ECB. The DAX made an all time high. The consensus is now that QE with happen through the ECB. The Swiss bank said they will not continue to be pegged to the Euro. This was a black swan event. This wiped out some hedge funds. There is a gross under investment in people’s retirements. The bottom half of the population has almost no savings in their retirement accounts. The governments need to nudge people such as with the recent move to require companies to force employees to set up and contribute to a retirement savings account.

Amount of portfolio in US. The US is about 48% of the world in terms of market capitalization, vs. Canada at 4%. This means to him that you should have at least 50% in the US. But one of your most important factors investing outside of Canada is currency risk.

Silver. It is a tradable rally here. Not sure if it is the capitulation he was looking for. He thinks the deflationary risk in the world is still greater than inflationary pressures. This is probably not the take off and launch place for precious metals and we may make new lows later in the year.

Educational Segment. Volatility: Taking the Whole World into Account. Europe`s economic performance is horrible. Chinese growth is in question. US markets are really fluctuating. The Swiss Franc`s volatility wiped out some hedge funds. Out to twelve years, the interest rate in Switzerland is negative. People only buy the bond for the currency, not the negative interest rate. 70% of your return in global investments is based on the currency. The Euro is heading for parity with the US$.

Markets. There was a great Santa Clause rally, but Canadian and US markets peaked on Dec 29^th and will probably correct until late January. The key is that going into the 4^th quarter earnings reports’ results have not been all that good. After the end of January we go into the final phase of a presidential election in the US, which is the strongest part of the cycle.

The end of January until May, the economically sensitive sectors do well. That is when the economy picks up.

‘08/’09 Crash again? We get these volatilities in the markets and they have increased in the last couple of months. The sector that has been the weakest are the energy and financial services sectors, but these have the weakest seasonality right now. He is looking for an opportunity to enter these sectors as soon as he sees bottoming. We are seeing early signs of bottoming in the energy sector over the last couple of days. You want to watch to see if it is outperforming the index. You want to see support. You want to see it moving above its 20 day moving average.