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

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.

Markets. He is not buying energy stocks today, but watching them with great interest. The pressure has to let up eventually. The drop in oil price is supply driven, not demand driven. The supply increase can’t continue for long. A call from the US to sell Canada came out and he feels the US are probably shorting oil stocks. The lower Canadian dollar benefits some oil companies in terms of costs. Two tech stocks with US exposure hit 52 week highs today. As we come to the end of the year you should see some covering on the shorts.

Technology has done well. ‘Old tech’ has sustainability of the dividend. He does not play in the ‘New tech’ stocks because they don’t normally have dividends.

REITs becoming their own sector on TSX. If the weighting went up, then index funds would have to buy more of them. If rates went up REITs would fall. REITs are fairly fully valued here.

Markets. She has had a theme of Sell Canada and Buy the US for the last few years for her clients. Even up to the last few months, she has been pretty consistent in her messaging, especially talking about the Canadian market and energy. She has talked about home country bias, where people in their own country tend to invest in their own country. For Canadians, that has been pretty hurtful. The energy Index alone was about 25% at its peak of the index. But there is also all the related industries that feed on that. Up until today, US energy has fallen off just as much as the Canadian energy. However, as of today there is a very big difference. Also, Book Value is also trading at a pretty sizable discount on US companies.

Markets. The numbers are actually looking pretty good. If you go back in history when the market got really rapped, there were some basic problems in the system. There aren’t any at the moment. We are doing very well in North America. Even though he loves his oil stocks, he knows that low oil prices are good for both the Canadian and US economies. Thinks there is a good deal of Canadian money going into the US. Their market looks a lot healthier than ours. In the consumer areas of discretionary and staples and looking at some of the multiples, it is a terrible place to do business. Margins are razor thin and there is a lot of competition. Also the yields aren’t anything to write home about.

India. The big winners in energy are the large importing countries. The US is still the largest importer, even though it is producing a lot of oil, followed by China, Japan and now India. India has been an emerging market thesis of his for some time. Emerging-Market Currencies are always a bit of a risk factor, because things can go wrong. However, as far as economies go, they are huge beneficiaries of a lower energy price. Ever since the Indian election in the spring, things have really changed. There is a lot of anticipation that things are going to get better. Everyone is giving Modi the benefit of the doubt. We haven’t seen a lot yet, but these things take time to put into place. India has the best demographics in the world, with the youngest population and is where China was 2 decades ago. It is ready to go, but hasn’t really gotten started yet. The problem was the huge bureaucracy. You couldn’t get things to market because of a lot of transportation problems. The new president is saying he is going to fix all that and the markets are giving him the benefit of the doubt.

REITs. Has exited the REITs, maybe a bit too early, but it is better to be too soon rather than too late. If the bond market starts to move against him, these dividend plays will have some pressure on them if they don’t have enough growth in them. There was some pressure a couple of weeks ago, when the market sort of had that little hiccup.