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

Energy. We have a correction coming on top of a very long-term metals correction. This has clearly flummoxed people and is possibly going to stay down for some time. The planning seems to be for cutbacks in capital expenditures. It doesn’t really worry him. One of the important things to recognize is that in the natural order of things, it is better to have lower prices along with the rest of the world. The rest of the world does not have the US super dollar or the US economy, and now has a cheaper oil.

Gold. The real fundamental catalysts for gold would be no supply, poor grade. The shy might come onto it, because they are off oil. Everybody should have some. The time will come, but he doesn’t know when.

Energy. He is steering clear for right now, but there are going to be some amazing values. He is pretty much out of the energy sector and has been for a couple of months, but is looking at where some of the stocks are getting to and seeing some amazing opportunities. It is just a matter of where the bottom will be. He doesn’t want to jump in and try to time the bottom. Would rather wait for things to settle. From a consumer’s standpoint, the price of oil dropping is great, but from a GDP standpoint, there is an awful lot of economic activity that goes on in the oil business in Western Canada, but also in central and eastern Canada. It is going to be very interesting to see where things go next year from an overall GDP standpoint, and if one outweighs the other. It is too early to know where that is going to be. In 2015, we could certainly see the price of oil going up. In reality, the whole energy trade in 2015 could be phenomenal, even if we saw oil go from current prices to $75-$80. There could be a huge move in some of the stocks because they have sold off so hard.

Markets. The vast majority of gains are normally in the seasonal aspect from October and into May time frame. There is also the 3^rd year presidential cycle, which is the strongest, which has a lot of successful history from a probability standpoint. On top of that you have the real micro seasonality, which tends to give a negative week, this week in particular. This is usually followed by the Santa Claus rally for the rest of December, which could create some opportunities if history repeats itself.

Markets. 9 out of 9 years going way back shows the Canadian markets are up in years ending with 5. When he found this, he was a little surprised. Years that end in 3 tend to be fairly good, years that end in 4 tend to be lacklustre, and years that end in 5 tend to be really strong. That seems to be the same in the US and their data goes back further. 2013 was a really strong year for markets. 2014 is shaping up to be an OK year, but not a stellar year. It looks like things are going to shape up to follow that pattern into 2015. He couldn’t find any specific reason for this.

Energy. Currently his funds are at about 5%-6% energy, which he would consider his base level for energy exposure. Current conditions are all-out selling panic in the energy market. You should have some energy exposure in your portfolio at all times, because at any time, you could have some significant political event in one of the major oil producers and instead of a discussion tomorrow on how low the oil price will go, it will be how high it will go. From a longer-term perspective, you always want to be there. Everything gets driven in the short term by what the oil price is doing tomorrow morning. The coming year is going to be a bit tough, but there is still a trading range. 12-24 months from now, we will be talking about how high energy will be going. The US economy right now is the leader. Despite the fact that they have a significant shale oil industry now, it is actually a net/net a positive because, at the end of the day, with all the talk of energy independence, the US is still a net importer of energy. He thinks this will drive a little bit of economic growth for us. Some of our industrials are going to benefit from a falling Loonie. Valuations are all over the place. It has become such a momentum driven market that anything going up, continues to go up and, everything that goes down, continues to go down until it hits a real base level. Net/net, the overall equity market, he would call is still slightly undervalued. There is a big dichotomy out there. Some stuff is vastly undervalued with some that is overvalued.

REITs. He would say that Canadian real estate is a little bit ahead of itself, specifically on the residential side. REITs tend to not really be residential plays. By and large, Canadian REITs tend to do quite well and are conservatively managed. They pay out steady dividends and distributions. You probably won’t see quite the growth that we have seen over the last 10 years. Where you do want to be a little bit careful, is the mortgage lenders in residential real estate. The average loan to value has gone up, so there is more susceptibility to a back off in the real estate market. Canadian real estate market has been held in check much more by the Bank of Canada, then what has happened in the US. The more realistic scenario, from a residential real estate perspective, would be a sideways to a very slightly down market over the coming 5-10 years.

Markets. He sees 2 things happening. 1.) The rest of the world has been slowing down, and commodities have been catching up to that reality. There has been a dramatic decline in the price of oil, which has really been the leadership for the commodities on the way up and leadership on the way down. 2.) The realization that the US is actually growing quite well, a little too well, and interest rate increases are probably on the horizon. Because of this, the markets are adjusting to both of these realities. When you have 2 major movements, you get a lot of currency fluctuation, which spells a lot of volatility. Equities are risk assets, so when there is any uncertainty, they are going to feel it, regardless of whether it is permanent or not. People are just switching positions and trying to figure out how they need to be set up for these 2 long dated events that are happening. Midpoint of October to the end of March or April is usually 80% of your returns. He doesn’t think there is any reason to not trust that this year. However, we really haven’t seen an over 10% correction since 2011. If you are a long-term investor, ignore it and just stay in the market. Equities are the best place to be by a country mile, and we are going to see positive earnings growth and likely multiple expansion. Over the next couple of years, we will see interest rates go up, and there will be another leg up in equities, as a result.

Energy. He has no exposure. Sees the range as being between $50 and $70. There is definitely pain going on. You don’t want to step back in and get brave on energy related stocks until there is blood on the streets. You want to see companies go bankrupt and actual turbulence and trauma. Right now what you are seeing is fear. He plays energy by being typically Short energy related companies.

Banks. Canadian and US banks are valued about the same right now from a PE standpoint. The Canadian consumer has lived on its wealth realization from its houses and real estate, and it appears that they have quite a bit of debt. This has pulled forward consumption for the Canadian economy. When that happens and liquidity dries up, which doesn’t look like it is happening right now, we are going to see air pockets and there will be reverberations and there will be risk coming into Canadian banks. The US banks have really taken their hit from 2008 to about 2011, and are on the comeback. Going forward, he expects US banks to have ROE close to 17%-19% and Canadian banks closer to 13%-14%.

US Economy. This is growing stronger than what people would have anticipated a few months ago. Last week showed very strong payroll data with over 300,000 jobs, the 10^th consecutive month of over 200,000. There are very strong manufacturing activity measurements, such as the ISM. November was around 58. Anything above 50 means that it is expanding. Also, consumer confidence is up.

Energy. Lower energy is like a tax break for consumers, and puts more money in their pockets. Lower input costs will help corporate profit margins, which is positive for earnings growth next year. This will also help the countries globally, particularly emerging markets that have to import crude, which should be an overall boost to their economy. She has not been adding anything to her energy portfolios. You have to see some stabilization first.

Markets. The energy sector is getting stupid cheap and could stay there for 6 months. People are panicking. There is tax loss selling. This represents an opportunity. You have to be able to handle the increased volatility, however. If oil goes much below current levels, companies won’t make much money. Make sure you are diversified and don’t double down on your positions.

Diversification. The mining and energy sectors are those with relative value. But having too much concentration in any area is not a good thing. As banks pull back over the next couple of weeks that might be the sector to diversify into.

Educational Segment. The Science of Making Decisions. When there is Euphoria, you want to be careful. When there is depression, you want to consider buying. Sell into strength and buy into weakness. Partial buys and sells are known as ‘rebalancing’. Evaluate the volatility of what you are investing. Avoid influences that promote emotions.