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

Markets. People wondered how low oil would go. Now it is a case of how long oil will stay low (6 months? A year?). He thinks fundamentally it should be at $75. It is a case of who is going to cut production and how soon. He sees $80 by the end of 2015. When he looks at the volatility of the cash flows in energy infrastructure he is surprised how low stocks have gone. Thinks there are some good values here. You are going to see decent growth coming out of the US. But will they pull the rest of the world up or will the rest of the world pull them back into recession. Follow cash flow streams to see where they come from and how well protected they are. He can manage equity volatility, but tries not to speculate on currency risk.

Markets. Oil was at $70 the last time he was on, and it is a lot lower now. Since then there has been overall concern in the Canadian market, outside of just the energy space, because of potential collateral damage to other sectors. At that time he much preferred US banks because they were several multiples cheaper, and thought the growth rates for the next 2-3 years were going to be better. Canadian bank valuations have come down considerably at 12.25-12.5 times 2015 earnings, and are now 11-11.5. Outside of energy, he doesn’t think alarm bells are sounding, but just that there was too much enthusiasm in places like the banks, the rails, etc. As we get into 2015, he thinks there will be a lot of interesting opportunities. When you see a market coming down, rather than jumping in front of the freight train, you just stay out of the way and let things settle in. With all of the weakness, he is just keeping his powder dry until the new year.

Natural gas. Has very different dynamics than oil. Used in power generation, heating, etc. Natural gas has also come down in the last couple of months, not nearly as much as oil and has had a much better relative year. The cost curve for a lot of the gas companies is far below where gas is trading right now. This a bit of a gamble on winter weather.

Energy. The one thing people don’t talk about is what oil is going to be priced in. The key loser in this whole strategy will be US shale. What does this mean on the geopolitical picture between Saudi Arabia and the US and what is going on with Iran, as well as the deal that Rush adjusted with India? On a long-term basis, he thinks this is good for Canadian producers. It’ll be very interesting over the next quarter as to how quickly production declines. He lowered his positions in oil about a month ago, and is now just waiting to go back in. Thinks we are going to hit that bottom where it is going to be way overcorrected, and then it is going to correct back up to a level where it is going to settle. His company has a $75 oil target where they think oil is going to settle.

Affect of falling oil prices on Edmonton real estate? Wait and see what actually happens to oil prices. He thinks the light is going to shine a little bit better on the nature of fracing wells, as to how rapid the supplies come down. Unlike Canadian oil, which is very low declining ratios, a fracing well is extremely rapid. Expects that within the 1^st quarter we are going to start to see inventory numbers come down rather quickly. Too early to tell. Wait to see how much cut back there is in Alberta.

Gold. Price has been moving higher along with the US$ in the last 1.5 months. Also, the decline in energy prices is really good for gold producers, because that is 30% - 60% of their input costs. Profitability should be picking up in Q1 and Q2. What factors affect the price of gold? We have to look at the disconnect between paper gold and physical gold. Countries have been repatriating their gold.

Markets. There is a lot of discussion and events that have driven the oil price down that are very short term oriented. Over the last 5 years the consumption has increased and so has the demand. The middle East increased production, but everyone else consumes it. OPEC is now maxed out. North America is the only source of new supply. Production globally is up 5 million barrels and supply is up 5.5 million. In the near term there will be a cut back. Decline rates in the US shale are about 40%. The opportunity is for Natural Gas stocks. He is looking at growth players amongst oil and gas stocks. Some stocks are being pummeled unnecessarily. Diversification is important.

Be careful about investing in index funds in China. They have been going down for 4 years. A lot of the companies are state controlled or owned and their agenda to increase profits is not the same as in North America. Pick and choose the Chinese companies you own.

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.