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

Natural Gas. Bullish. In Oct/Nov at $3.20 of the NYMX contract he felt it was way under the value that was needed economically. Since then he has seen the US production is beginning to slow down. Seeing conventional going down and shale production, that was ramped up massively in 2010, is beginning to peak. When we get into the air conditioning season, he thinks the price moves up.

Market is not as bad as last year when a shoe would fall and it would drop a thousand points in one day. Seems to be confined to 400 or 500 points, but it is still a very skittish market. Cdn Market trades a little bit more than it should on the price of oil.

Oil. Volatility has been insane. He tries to look at the medium and long term fundamentals. Feels oil fundamentals support a $95 to $100 band. Going to experience record high demand of 89 million barrels a day, the highest in human history. This resulted in an erosion of OPEC’s capacity, which was 5.7 million last year. Libya’s oil production has come off line, which has resulted in a further erosion of 1.3 million leaving them at 3.5 million barrels. Not only is there now a political risk placed on the price of oil, but strong demand is also there.

Natural gas. Fundamentals are very simple to analyze. More rigs drilling than there needs to be to balance supply and demand. Current number is 890 and only 800 are needed to balance the level off. Supply is up 5% in an already over supplied market. Ability to switch between coal and natural gas has been propping up the price currently.

2 recent significant developments, especially in small/mid-cap space in energy. 1) Had our 1st takeover in the space in quite some time when Spartan Exploration was acquired by Pembina (PPL-T). There was a cash component and they also spun off some assets, which existing Spartan team will still manage. Expect this will be a model in future. 2) Advantage (AAV-T) spun off some assets and many companies are watching to see how successful it is.

Top Short Short 10-year Gov’t of Canada Bonds. (Canada and US Bonds move in lockstep with each other.) Likes this short because of 1) inflation, 2) currency devaluation, 3) fiscal stimulus and 4) potential for a sovereign debt crisis. US government has embarked on a policy of inflating their economy and devaluing their currency as a way of getting out of their debt problems.

Buy Cdn$ versus US $. US government plan is to inflate the economy and devalue the US$. Put this trade on when the Cdn$ drops to $1.01.5 or $1.02 area. Believes the Cdn$ will stay between $1 and $1.12 over the next 18 months.

A Pairs Trade by going Long Shaw Communication 6.75% bond due Sept/11/39 and Shorting the Equal Term Cdn Gov’t bond. Likes the cable and telecom sector.

(A Top Pick Dec 13/10. Up 5.34%.) Buy Cdn$ versus US$.

Sell off a bond mutual fund? Bond mutual funds are Long only bond funds, which prevent the bond mutual fund manager from having the ability to protect the fund against rising interest rates. He expects interest rates are going to rise. You would be better in a long/short fixed income fund.

Inflation and Preferreds. Risk characteristics between bonds and preferreds are quite similar. In the event of a default event, you could get less back in a preferred. Also, some preferreds don’t have a maturity date but are perpetual, so they are as long as any bond you could possibly have. Wouldn’t own either, would just own long/short strategies right now.

Iraqi Dinars? Would never consider putting money in here. Very high risk and there is the problem with corruption.

Real Return Bonds for retired investors? Theoretically if he were going to invest in these as a retiree, he would want about 40% of his investments in inflation protected securities. The problem is that Real Return Bonds are a crappy investment as they are extremely illiquid and is a very expensive market to access.

Negative Bond ETFs or Shorting Bonds? There are negative ETFs on bonds, or if you have a margin account, you can short bonds. If you short bonds, you are on the hook for the interest payments.