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

A US healthcare ETF? The largest ones would be the iShares US Healthcare ETF (IYH-N), which will give you exposure to names like Johnson & Johnson (JNJ-N), Pfizer (PFE-N) and Merck (MRK-N), etc. There is also SPDR Health Care (XLV-N). You could also consider the biotech space. In the healthcare space, he would rather pick some of the individual names, which are a little growthier.

Oil. In general, OPEC has decided to remain dormant and continue to produce 30 million barrels a day, not less which would shore up prices. There is shale on the US side, where production is getting better and more efficient, so supply is getting better. We need to see demand growth continuing to move upward, and that is really through a rebound in the global economy. If you look at what happened before in the 3 or 4 times that oil had dropped so quickly, you tend to see them do well 12 months later, or they will actually outperform the market by double digits 24 months later. It’s a matter of patience. They are starting to look interesting, but there could be a little bit more pain to come. He would probably look at a broader based ETF, such as iShares S&P/TSX Capped Energy (XEG-T) to get that exposure.

Brian's Model Prices. For Brian’s model prices go to Google and type in “model price guy” and you’ll get his blog. His Facebook has 2000 companies listed where he gives his model price calculation (Fair Market Value) along with parallel lines which are called EBV (Economic Book Value) lines. These come straight from the balance sheet. Whenever there is a positive transit of these lines, it means the fundamentals are improving. A negative transit means fundamentals are getting negative. Usually the market responds before the fundamentals are known to the analysts or to the Street.

Markets. The drop in oil prices has made him more bullish on the US. There has been about a 38% decline in crude oil, and that is very welcome news. That will add about $1.3 trillion into the world economy. It reduces the drag on the lacklustre growth. With the fall in oil and all commodities, this is just one iteration of a strong US$. The Dollar Index is up about 10% against all currencies. However, we are only in the 1^st inning of this, and we are already seeing people shocked about the implications of a strong US$. This will go on for another 5 to 7 years. He has been steering clear of only the “high valued” stuff in energy. It boggles his mind that some of the names that are basically down 50% are trading at 5-7 times Book. For a commodity or a cyclical stock, that is outrageous in terms of valuation, he is very happy with the correction. It is not over yet and thinks there is a bear market coming in a lot of the names. If you stick to high cap, good valuation companies, you will ride out the storm. He is a valuation expert and looks for value in the market, and there is value in energy in some of the big names. He really didn’t get hit.

Markets. This is the most wonderful time of the year for stocks. December tends to be the strongest month of the year for equity markets. That is both on a frequency basis and an average return basis. The S&P 500 tends to gain about 76% of the time, averaging a gain of about 1.7%. The TSX is actually even better at 2.2% with a positive at about 86% of the time. Basically performance managers are chasing risks at this time. They’ve lagged the market for most of the year and they want to be aggressive at the end of the year. When their quarterly reports come out in January, they want to show that they are invested in the equity market, especially if it is going to run away. You typically get a big run up ahead of the US midterm elections in November. From about October to the end of the year, you get one of the best quarters out of the 16 quarter presidential cycle, and that actually continues on into the 2 quarters of the next year, so all the way through to June, you get some gains, returns that are actually 4 times above average. This is not a straight line. You get a lull from Dec 5th to Dec 15th, which is generally attributed to tax loss selling pressures. The average decline for the S&P 500 is about 9/10ths of a percent and is negative about 60% of the time. You are basically looking for sectors that have returned 5% or less in the year, which would include energy and small caps. Those are the areas you should probably stay away from, but it is also a buying opportunity. (See Top Picks.)

Copper? There has been a significant breakdown over the last few days, below $3. That is a concern. The chart shows a descending triangle pattern with a series of lower lows and lower highs and was constantly bouncing up against the support level of $3, and finally broke through that. This gives concern that this negative (bearish) set up could lead to significant downside. The pattern implies a move down to about $2. Their period of seasonal strength runs from about mid December through until May, which is attributed to the pickup in industrial demand, manufacturing, housing, etc.

Oil. Selling pressures on a seasonal basis comes to an end at this time of year. Over the past few weeks, there were significant lows at the $77 level. Now it is $67 which implies that we have a downward trend here. It has been significantly oversold. The weak seasonal tendencies are coming to an end at this time of year, and we could see this rise up into the quarterly futures expiration date in mid-December, so you could see a trade. Period of seasonal strength for oil and some of these energy stocks comes more towards February.

Markets. Markets are schizophrenic. We’ve had liquidity driven markets since the Fed has engaged in its various QE programs. There is no alternative to US stocks and the US$. The market is concentrating ever increasingly in the so-called safer names, consumer durables, consumer staples, utilities and technology. This increasing flow of money just keeps getting concentrated on one particular so-called safer area where earnings are a little more stable, etc. Contrast that with the bond market and Canadian commodity stocks. The bond market is discounting Armageddon kind of. Money is not quite discounting the future properly. You have the death fear in the bond market that we are in massive deflation and that is now carried over into growth and growth estimates for commodity stocks, which has basically been decimated since the beginning of the year. He is always looking for good income opportunities at a very reasonable price i.e. companies that can grow their dividends.

Markets. Beyond the energy, everybody is looking for things that may benefit from lower oil prices. We are in an area where consumer discretionary stocks are doing well. Banks are just reporting and are in the OK category, maybe +$5 and dividend for a year. It is a little difficult to find something that is not already expensive and already baked in. You have to search long and hard. There are also some names in the US where you can find some value. In total, the market is not hugely over expensive. In fact, given your choices, the North American markets, by default, are still probably the best place to be. He is looking for companies that have a good balance sheet, pay a dividend and generates free cash flow, after CapX, so that the free cash flow can grow the business, pay dividends, make acquisitions; all the things you would like to see growing companies do.

Markets. We will get some tax loss selling here short term. People are focused too short term right now. People are very negative on oil. Now that oil is down, everyone is negative and yet he is optimistic. Don’t you want to buy when things are cheap? We are in the falling knife phase right now. The fall in gasoline prices helps the consumer at the end of the day. But will it translate into people spending more on Christmas presents? Canadians are overweight energy in their portfolios compared to others in the world. For the past 7-8 years they have been terrible investments. In a strong economic environment, capital gains are by far the more important compared to dividends. In other years, dividends are important. He is very underweight the banks right now. You get a much better risk adjusted dividend in the energy sector.

Energy. The vast majority of what he does for clients is ETFs, however he bought ECA-T Friday. He has other large caps as well. Energy is his largest weight right now in the fund he runs for BMO. There could be some tax loss selling and people are worried about dividend cuts, but in 07/08 you didn’t see them in energy when oil hit $30. This is a no brainer that you want to take advantage of this weakness.

Educational Segment. Markets and Emotion. They go through cycles. We are in the depression area. People are thinking they have to get out because they cannot take it anymore. But in the Euphoric phase you should take money off the table. XEG-T went another 12% below the decline he predicted in the summer. Risks now are very, very low. Since 2001, XEG-T when it is down 10%, it is a good buy. The last two times we were at these levels they were great buying opportunities. The long term price in oil should be up from here. We should be bullish. We normally go up 20% with an 85% probability over history after these lows.

Markets. He was up 47% and now is down 3-4%. It’s been catastrophic. He believes the initial weakness when it was at $110 was related to the US dollar trade. The velocity of the sell off was the highest since 1983. The financial market for energy is 18 times the physical market so there is a lot of leverage. We then had to deal with barrels of production going back on line. Last Thursday was huge in terms of sentiment. Believes the Saudis are not targeting North American oil production. In the short term, the sentiment is the worst since the financial crisis. Oil will have to go down low enough to curtail some production. The oil industry does not work at $65 oil. There is one very small play in Canada that generates a rate of return below that figure. The oil companies are in a new reality of only being able to spend their cash flows as equity and debt markets are essentially closed to them. We WILL see $80 and $90 oil pricing again.

Markets. The 2 surprises for him for the year are 1) the drop in oil prices and 2) the drop in interest rates. It is always best to not speculate and to never use leverage. The good news is that those who sidestepped commodities in their portfolios and those who purchased US stocks have done well. He sees low interest rates are going to make businesses spend more money; do M&A and all the great things that started this year. With low energy prices, consumers have more money to go out and spend. The table is set for another record year of corporate profits in 2015. As a value investor, he is seeing some reasonable valuations out there. He has no trouble buying stocks and filling portfolios, but is cognizant of the fact that things are not as attractive as they were a year or 2 ago. However, the economy has improved and you can’t have a good outlook and good prices. Those 2 things don’t go together.

Energy. Technicals broke down through the $70’s and have reached a new low in the $67 area. He got out of all his energy stocks by the end of June-beginning of July. Still had some service companies connected to the business and hung onto those because he felt it was more of a price issue on the producers. However, once he got into September, they started acting a little odd. The TSX Energy Index has now moved back into oversold territory, so the herd mentality is decidedly negative. As we retest what looks like October lows, he thinks we are close to finding a bottom and we are getting back to the 2010-2011 levels. At this point, the risk/reward to sort of dabble in energy looks pretty good.