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

Markets. When a commodity gets smashed down, that is when he mainly wants to own it. Most of the major commodities were going sideways, and in his mind didn’t represent a compelling value. In 2012, he basically got all the resource stocks off his books. The only one he has come back into is natural gas with only a 5% exposure. What is happening with oil is really interesting. This is one of those times when you start to use the negativity, or overreaction, to your advantage. Oil is not going to be a V correction. It is not going to go down to $65 and back to $90 by February, so you have time to do your homework. Feels interest rates are definitely not going higher. What has happened to oil is a confirmation that the global economy has a deflation problem. It is systematic of the problem that the world is not growing anymore. The beauty of it though is that it is a massive tax cut for practically everybody in the world. Very stimulating for the economy, and probably way more effective for the economy than any kind of machinations that can come out of a central bank. He has been positioned, in the last 2-3 years and continues to be, in knowledge based industries. In a slow global economy, the only place you are going to get growth is from knowledge-based industries, such as IT, software, pharmaceuticals, etc.

Portfolios. He thinks a good number for a retail investor would be 8 quality stocks. The extent to which you diversify or concentrate is directly proportional to your ability to pick winners.

Auto Parts. Doesn’t own them at this phase in the cycle. There is a cyclicality to them. The auto business has done quite well for some time now, and he thinks it is going to have to be eased back on now and will probably be reflected at some point in lower sales. Coming out of 2007-2008, there was a real big delayed effect as far as buying autos. Now a lot of people have gone out and we have kind of caught up right now. He wouldn’t be interested in looking at any of the auto parts. They’re relatively expensive in a historical context.

Markets. Panic selling through the energy markets. Tax loss selling is going on at the same time. Today Americans are distracted by the NFL and tomorrow there could be more selling in the oil sector. He likes buying when there is a lot of fear in the streets. If you have companies you like and are watching, this is a buying opportunity. We have some amazing reserves in Canadian projects. We are showing reductions in costs and it is very encouraging in the kinds of rates of return our companies are returning. It is more to do with the balance sheet than the market cap that determines if they participate in this.

Markets. We are not in the midst of a price war in oil. You tend to get an overreaction in the market place when these things happen (OPEC NOT cutting back on production). Canadian oil stocks are great companies. You just have to buy quality. You can then buy them at these levels. Tomorrow could be a quieter day in the US so these companies may open lower. If oil bottoms at $60 it may not bounce right back. At some point in time, since we do use it, prices should eventually go up. There may be a lack of drilling until it does. Some capacity gets shut in. He always looks at the US first before Europe for a sector that he likes.

Markets. Small caps were outperforming earlier in the year, but for the last 3 years have underperformed quite a bit versus the larger caps. There is a lot of selling still going on in terms of tax losses. This is an opportunity to buy them, but he wouldn’t expect them to move up until next year because of people trying to sell their losers by year end. He is very much “growth at a reasonable price”, so is looking for companies that are growing earnings, good balance sheet, good visibility and a management team that historically have done well. His turnover period for his portfolios is about 30%, so he has about a 3 year Hold period for most of his stocks.

Energy. Right now you really have to focus in on the companies that have clean balance sheets and don’t have a lot of debt. With a lower commodity price, cash flow generation is going to be lower. Thinks the energy sector has been overdone and people are throwing out the baby with the bathwater. There is some very good value within the sector. You have to be selective and make sure the companies have good balance sheets.

Markets. China is stimulating. They don’t want to see their economy fall. US is approaching what he would call Escape Velocity, where their economy is becoming self-perpetuating on its own. The only potential fly in the ointment is Europe. The German DAX is up 16% since Mario Draghi started making comments about buying sovereign bonds, etc., which is telling you that investors are pragmatic, maybe more so than certain elements of German policymakers. They realize that quantitative easing is unfortunately necessary for Europe. It is also a response to the fact that Europe by and large, is lower than it has been, so this is a stimulus for European exports. Unfortunately there has been a lot of wind come out of the energy sector, and has come out of the miners for years now. Money continues to go into certain select areas, so this is very much a stock pickers market.

Markets. Thinks the markets will go higher. Valuations are looking a little stretched, but there is no other game in town. Commodities don’t look attractive, bonds don’t look attractive, real estate has been good but he doesn’t see that going much higher. We are in a multi-decade bull market movement in equities. It has gone on for 5 or 6 years now, but what kills a bull market are recessions, and he doesn’t see this, at least not south of the border. The likelihood is that we are marching towards an eventual Fed tightening. Whether it is in the 1^st half or the 2^nd half of next year is hard to predict, but he tends to be in the 1^st half. Once we see that happening, it will be clear that the rally in bonds is over, once and for all. Money that is sitting in bonds is eventually going to have to find a home, and he thinks that is going to be in equities. Equities in this low rate low inflation environment still offer good value, even at this level. You have to pick your best horse, and he thinks that is in US equities, simply because the US has the best fundamentals anywhere in the globe. Because growth is strong and it is rebounding, you want to be in cyclicals i.e. 1) industrials, 2) technology and 3) energy-later cycle, but keep in mind that energy will be quite weak in its financials. And then energy and materials much later.

Energy. OPEC is debating whether to reduce the quota, which is roughly 30 million barrels a day. It really comes down to Saudi Arabia and what they want to do. Saudi Arabia and Iran do not exactly see eye to eye. Nor does Iran and Venezuela, etc., etc. There are huge agendas which has a lot to do with 1) religion, and 2) who is facing sanctions. All of this is weighing on energy, so there is no consensus. However, the history of OPEC has been one of making a statement and then cheating amongst themselves. Thinks oil will remain under pressure, so for oil investors, that is bad news.

Markets. For 18 months, his view has been that we are in a new secular bull market for stocks. Fullbacks are likely to be shallower and shorter lived than we have seen over the last many years. When you have a market that is both growing earnings and a slowly expanding multiple of earnings that investors are prepared to pay, it is a very durable market. For consumer led developed economies, very low inflation is a really great thing. This is because the consumer has a little more money to spend and balance sheets are getting better and there are some big sectors that are big winners from low energy prices and low inflation. This would include transportation and retail. In the US economy, 72% of the activity comes from the consumer. He came out of the move in October, well over 97% invested, so very few of his Stops got hit. The biggest reduction he had from a sector exposure, starting in July and into August, was largely leaving the energy sector. The money was moved more towards things that were more consumer concentric, healthcare centric, transportation centric or technology centric.

Markets. For 18 months, his view has been that we are in a new secular bull market for stocks. Fullbacks are likely to be shallower and shorter lived than we have seen over the last many years. When you have a market that is both growing earnings and a slowly expanding multiple of earnings that investors are prepared to pay, it is a very durable market. For consumer led developed economies, very low inflation is a really great thing. This is because the consumer has a little more money to spend and balance sheets are getting better and there are some big sectors that are big winners from low energy prices and low inflation. This would include transportation and retail. In the US economy, 72% of the activity comes from the consumer. He came out of the move in October, well over 97% invested, so very few of his Stops got hit. The biggest reduction he had from a sector exposure, starting in July and into August, was largely leaving the energy sector. The money was moved more towards things that were more consumer concentric, healthcare centric, transportation centric or technology centric.

Energy. There is no indication that the weak pricing is about to abate. Has felt for the last 12-18 months, this is a sector where the tide is going out. Commodity prices are dependent on the last dollar of demand, and if production is growing more quickly than supply, then you have a problem. We are going through the greatest oil boom in the history of the US.

Markets. Oil may be going into the $60s and Brent may be going into the $70s. What we see in the extremes is that more and more people pile onto the trend. In this sector you get more volatility. The energy sector is currently his biggest waiting in his sleep at night portfolio. He has primarily the Canadian sector because it has been hit harder than the US. ZEO-T is the ETF he uses. The biggest in Canada don’t dominate this ETF. It is one of his bigger positions that he accumulated over the last couple of months. Small cap markets are getting stretched here. Small caps are lagging again. In a robust market, small caps should be leading. This is telling us the underlying markets are actually weak.

Caller asked for a recommendation for an ETF for 5 years for a RESP account. There is no growth in fixed income and probably only 2 or 3 percent. With a bond fund not having a maturity date, there would be interest rate risk. He recommended a fund he manages for BMO, the Global Tactical Dividend Fund, the ‘D’ class.