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

Is it wise for Canadian investors to be buying US stocks with the current exchange rate? The dollar is always a relative measure, but a good investment can grow to the moon. In the short term, it makes a difference, but the longer investor you are and the longer your timeframe, the less you will think about or talk about currency differences.

Energy. Saudis flooded the market in the mid-80s. They were trying to knock out the possibility of substitute production coming in at much higher costs. The dilemma this time is that their cost structure is way up. Although they export 8.8 million barrels, they consume 2.8 million barrels. The impact of cutting the oil price in half is going to be demand growth. This won’t come suddenly, but when people go to buy a new vehicle and it doesn’t cost them $100 to fill the tank, they are more likely to buy that SUV or something larger. Saudis are certainly trying to knock Americans off course in terms of energy self-sufficiency, and are trying to knock off some of the shale drilling as well as some of the future oil sands plans, but they don’t have much more production available. Estimates of leading world authorities for over the next 20-25 years is that we are going to need 25 million more barrels of oil a day. Thinks oil will be back toward $70 this year. The world needs more oil, not less. It looks like all the Saudis are achieving is slowing down the inevitable.

Are alternative energies having any affect on oil prices? He doesn’t think so. The main thing that is driving down oil prices is that there is a bit of a glut. Alternative energy is hitting coal more, where it is in stationary use for producing electricity.

Markets. The major economies of the world are largely consumers of oil, not producers. So a drop of $40-$50 in oil price is enormously stimulative to consumers in almost all of the major economies such as China, India, Germany and the US, and the burden is born by the major exporters, largely the Saudis. Because of this, he is a little bewildered that the world markets seem to think this is a bad news story. While we are sharing the pain as a producing and exporting nation, actually this was a stimulus that nobody was able to conjure up to get the world economy moving again. Thinks this is a net positive and that low oil prices will not last for very long. They haven’t the last few times. This is a time for courage and not throwing very good companies overboard because of a bit of investor panic. Copper and oil prices being lower, are all good things for job creation worldwide and for people to have better lives by being able to buy things.

Markets. On a Bull market, you look at the breadth of a market and things are always positive. Economic numbers have been fantastic, especially in the US. The LEI and Consumer Sentiment numbers are all hitting levels that we haven’t seen in 6-8 years. This is all very positive for the economy and very positive for the market. Then we have lower energy. People have focused on the damage it has been inflicting, but there is huge benefit here. From the consumer’s standpoint, just a savings on gasoline and home heating costs. Any of the producers that use energy as a by-product or an input are seeing a huge advantage as well.

On the Bear side there is usually someone saying there is a crash coming, too many signals, too much overvaluation, etc. That is probably a good thing because it means there won’t be a bear market. Bear markets typically show up when optimism is at its highest. When he sees all the strategists becoming excited about the year and things are optimistic, and the market is going to go nowhere but up, that tends to be a bit of a warning sign for him. Historically, that is when the market tends to peak out. He is seeing some signs that the market might be getting long in this uptrend and wouldn’t be surprised by an actual Bear market in 12-18 months. Now is the time to be cautious and a little more careful with your portfolio.

Canadian banks? The 5 major banks are very similar. Toronto Dominion (TD-T) and Royal (RY-T) tend to have more US operations than the others. Bank of Nova Scotia (BNS-T) tends to have more international operations. The one that he probably likes the best is Royal because they are the largest player in the business and are well diversified. All the banks are going to have some energy exposure, but they all have such diversified businesses, so would not be affected that much.

Economy. The streams for 2015 are divergence, inflation and oil. Divergence references that the US economy is the one that is maintaining or building a bit of momentum. The goose that lays the golden eggs for the US is jobs. About 235,000 jobs have been created on average per month. It is the consistency of the job growth and the dramatic move down on the unemployment rate. This is trickling down to better consumer spending on big ticket items. Auto sales are back up to 17.2 million units produced in North America, about twice the rate it was at the height of the great financial crisis. Housing starts in the US are north of 1 million. That really matters to the economy’s employment. Cascading from that is spending. Euro zone indicators are showing they are not growing. Japan has had back to back quarters of negative growth.

Should Canadian banks continue to be held for the long-term? You want to keep at least 2 or 3 of them. As we go forward, there is no reason that the Canadian banks shouldn’t deliver at least single digit growth going forward. The strategy is that you keep a couple of the banks in your income portfolio.

Economy. Weak energy prices are negative for the energy patch, but are very positive for the overall economy. Particularly in the US, there is an environment now where there is really strong job growth numbers, expanding manufacturing activity, business optimism is high and consumer confidence is high. Now there is another unexpected source of income in terms of lower energy costs. That is going to be beneficial for the US economy. She is starting to see revisions upwards for GDP growth because energies will be beneficial for overall economic growth. Also, lower energy costs and the strong US$ means all of their commodity prices are also weak and is really easing the inflationary concerns for the next year or 2. This gives central banks around the world more room to put in stimulus measures to get their economies going.

Markets. She has 40%-45% exposure to the US market, which continues to be warranted. Expects the US economy to be the strongest economy in terms of rate of change globally, and by that token feels US companies will also do well. She has not been adding to energy and had sold her service holding back in December when prices really started to decline. Still has a couple of energy names which have a yield behind them along with some infrastructure names, but for now she will wait to see the commodity stabilize before she adds any more exposure. Her exposure is around 14%, and the bulk of that is pipeline stocks.

Why would we buy US bank stocks with an almost 20% rate of exchange? This is a headwind if you think the US$ is going to weaken, but she thinks it will stay relatively strong. You are buying US stocks for exposure to the US economy. If the US economy is doing well, then US banks in general should do well. (See Top Picks.)

Markets. When you look at where Goldman takes their oil price forecasts from, they have been behind in it. The point is that when someone comes out with a big call like this, you don’t just run out and sell it. It’s an opportunity to add some value to your portfolio. Energy has not made lower lows, so he feels we will bang out a bottom here, although he does not know when. Testing a low would be a buying opportunity. He would be in complete shock if energy prices stayed where they are. You don’t want to be selling these things here.

Hedged US ETFs. He loves the ability to hedge or not hedge the US dollar. These are brilliant ETFs and will be the solution for the next 20-30 years. Currency becomes another source of returns. He is mostly hedged to the US dollar. He is only just starting to build in the Euro.

Can rising interest rates allow Fed to reduce bonds on the balance sheet? He thinks if they did, housing and car sales would drop. Does not think interest rates can go up.

When oil prices go down, refining margins go up, so integrated stocks don’t suffer as much, or even benefit. E & P companies don’t do as well in this case.