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

General Market Comment. The announcement by the Federal government to begin First Nations consultations over the Trans Mountain pipeline is hopeful that there can be a solution, but it will take more than two years, he feels. Unfortunately, Canada is suffering from handing three million barrels per day to the US at half the price of world market. Meanwhile, Eastern Canada imports 1 million barrels per day at world market prices. Hopefully, Trans Mountain can eventually be built and exports can eventually go to Asia. This is peak pessimism in the market. China and European market are facing headwinds currently, which is causing a more defensive holding position by money managers. This leads him to feel we are in the seven inning of the bull cycle – expecting another 10-12% growth in markets per year over the next couple of years.

Is natural gas a better buy than oil? He thinks growing LNG demand, reduced coal demand will aid the market for the next 20 years. With LNG on the west coast, our market will open to Asian markets. He thinks Shell will expand an LNG plant into phase II and Chevron will likely enter as well. His favourite names are ARC, Tourmaline, and Kelt on the E&P side and Trican on the service side.

Market Outlook. The economy is good. But cycles are cycles and you have to be prepared for the unknowns and change. The market is comfortable. Trump is the master of claiming wins. The new deal with Canada was the equivalent of a family making $200,000 / year saving 70 cents. Reality and words are often not in sync. He expects a similar path with China. Having said that there are more difficulties with China.

After NAFTA's resolution yesterday there are more opportunities. He likes the auto sector (cash flow, valuations) for a rebound trade. Also likes Saputo, which could see some strength. Outsiders may invest in Canada again. The LNG announcement may signal to the world that we can get things done in Canada; it's positive. Investors want to see resolution to TransMountain though. The housing market could be a Canadian headwind in the next few years. He's always been overweight U.S. stocks where the economy is strong, and he still sees more rebound in that economy.

Comment. LNG Canada is a serious project that will open up the world for Canadian gas producers. It will create a huge number of new projects and new higher-paying jobs in western Canada. He owns Royal Dutch Shell but is not generally a fan of commodities producers, especially not of the companies that are highly indebted or don’t generate enough free cash flow to pay significant dividends. In general, he is not a fan of the Canadian oil and gas producers because they aren’t financially healthy enough.

Market. The new NAFTA Deal. Is this a better deal than before? It is virtually the same deal. He thinks there is some edge to the US. The liberal government did a pretty good job here. He was surprised. He did not expect a deal this weekend. There is an impact on the Canadian dollar, expectations for GDP and so on. Everyone is ratcheting up their growth forecast. There are a lot of expectations for the Canadian dollar to go to 80 cents into the beginning of next year. You want to own US$. Seasonally, it is that time where you get some market anxiety. We saw no early phase of it, surprisingly. He is not sure we will get a massive fourth quarter. There should be anxiety going into the US election in November.

Natural Gas. It has been a very localized market because of the expense of transporting it across continents. The US is kicking our buts in terms of LNG which is a game changer. He would not trade it today. We should only get seasonal spikes in Natural Gas prices.

USMCA (NAFTA deal) is finally done and is as good a deal as possible. Dairy concessions were inevitable, but we kept the dispute resolution mechanism. Overall, not a bad deal for Canada. Trudeau got a fairly good deal. Despite Trump's public negotiation, Canada kept its cool. Auto parts dealers today leapt 5-10% as a sigh of relief (after weeks of getting hit during the uncertainty). But the auto stocks are in the bottom of the 8th inning--late in the cycle. North American auto stocks are down vs. the past few years. Limit your exposure in this sector.

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Market. The S&P500 has been having the longest bull-run in its history. It is hard for investors to focus on beaten down areas, like resource stocks, when everything else is doing well. The US tax cuts and deregulation have contributed to a breath of fresh air to the market. A strong US market should be good for base metals globally, as long as we can wade through the tariff issues. With countries agreeing to reduce or eliminate Iranian imports, it should allow WTI to stay between $70-$80 per barrel.

End of the third quarter. In September, investors were fearful of a pullback, yet markets are clinging to their highs. Why? Because money is intelligent. Fairer trade is good for global growth. TSX fell off today on NAFTA concerns. Hopeful that after Quebec election, we might get more of a deal flow on NAFTA. There’s a lot of nervousness. The right deal is important. At the end of the day, the work will get done. The issues that divide US and Canada aren’t really that big. Dairy concessions might actually be more efficient for us.

Strongest quarter in years, but concentrated in a few names? Not as many global markets have done as well as the US, especially in tech. US is trading around 16x forward earnings, which is not actually that expensive. Canada is trading around 14.5x, and is a deal with the right catalyst. Europe is a good deal too. There’s some catch up for the rest of the world to the US.

Canadian energy. This too shall pass. He’s back in energy, not in a huge way, because he’s not sure how long it will last. A lot of really good Canadian companies in the oil patch paying good dividends, that are very cheap, and with just a few catalysts they are going to be winners.

Canadian banks, get out or stay in? These banks are still the place to be. Trading at reasonable multiples, very well capitalized. Really grown well in Canada. Don’t want to sell if you’ll be paying capital gains. On a PE basis, Canadian banks are cheaper. On price to book, US banks are cheaper. You want to own both.