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

Market Outlook. Last year there was a massive dislocation between what oil did and what oil stocks did. This year oil was up close to 8% and the average Canadian company is down about 20% from the high on January 26th. He is seeing unbelievable opportunities in the oil stocks. Some names are down 30%. It is craziness. He is seeing the greatest breakdown in history between perception and reality. There is a misunderstanding of US growth oil output and how that fits into the global context. You need growth. The market is already undersupplied. Demand is up – Goldman Sachs is saying 2 million barrels this year. We are in a multiyear bull market for oil because we experienced the largest drop in upstream projects spending globally. Oil price should remain very strong for the next 5 years.

Can you recommend a non-Canadian producer to invest in? He typically doesn’t buy the mega-cap companies. Their growth rate is fairly modest as they are basically a proxy for the price of oil. It has been topical to go out of Canada. He is 40% in the US. Repatriated some to Canada over the past month given the implosion in share prices. He likes WPX Energy Inc (WPX-N) in the US. They are deleveraging. Trading at a 2-point discount compared to its peers. Good mid-cap company with good balance sheet. Main thesis: high quality multi-decade running room and management the he likes.

What is the US reserve for fracking oil? Big debate on shale oil. Arthur Berman a couple of years said that there is a decline rate of 80% or more after the first year. In his opinion there was a fallacy as he didn’t recognized wells that were brought on. In his mind is not a debate on oil shale. It is more about quality of acreage. When you look at the best rocks. Because the marginal economics when you move to your tier 2 erode very rapidly. Companies are drilling longer, and efficiencies are flat lining. He sees that some evidence that high grading is eroding.

How is Alberta going to sell their oil down the road? Not going to solve the problem until you have pipelines either going East, West or South. Right now, the Government have given full support to Trans Mountain. But there are delays. We remain short pipe. It is impacting all of us.

Market Outlook. Looks at this kind of sell-off as a correction well needed. It had to come. The question is whether or not this is the beginning of a bear market. He thinks it is not. Because the US economy is growing, profits growing at 18-19% with the tax cuts. The problem is that when investors see this type of volatility they tend to catastrophize. Interest rates are still historically low. What is really wrong? We can expect further weakness from here, we can also expect some bumps like today. Be calm, take the dog for a walk.

What is a cost-effective way to protect my portfolio from a downturn? Very simple way. Go to www.m-x.ca which is the Montreal exchange. You will see pages of stats. Pick a month and a strike price and go from there. Now with more volatility they are a little more expensive. Buy put options. You might go to slightly out of the money and they are less expensive. The problem with options in Canada is that there is not that much volume.

Covered calls doesn’t offer too much downside protection, is there a point in a downturn where you get out and take losses? Interesting question. He would trim positions. The risk is that there is more risk on the downside than you have growth on the upside. In terms of exiting entirely, he wouldn’t do it.

Is there a favorite bank you do covered calls on? He hasn’t done a lot of covered calls on individual names. He would look at TD Bank (TD-T) and Royal Bank of Canada (RY-T) if he was going to do some. He would rather do it with an ETF with a basket of banks. It is simpler for clients to understand.

Cannabis stocks, should sell them? Why did you buy them? Marijuana stocks don’t have any earnings, you don’t know what the regulatory environment is going to be. He wouldn’t buy them for now.

Are Canadian income ETFs going to be vulnerable to interest rates going up? He doesn’t think that the Canadian Market is going to be terribly affected. Because many companies are increasing dividends regularly. You have to be careful which ETF you are choosing.

Would you use an ETF to invest in Emerging Markets? Particularly looking at India, what ETF should I use? In terms of buying an India ETF, he wouldn’t have any problem buying one (BMO has one and iShares, etc.). India is much more transparent that China. In terms of Emerging Markets’ ETF, he will talk about one of them on the Top Picks section.

Market. This pull back started Monday. Hopefully the real low was Monday. Things don’t go up in a straight line. Marijuana and Bitcoin stocks have had increased volatility. The central driving force of this is in the volatility index. There are ETFs that allow you to benefit when volatility goes up. Some strategies required small profits in low volatility. When one part of the bet goes the wrong way they have to sell equities to offset the losses. A lot of this correction was done on machines. 3:10 Monday is when it really kicked in. Currencies and credit and global equities did not sell off much. This is just a ‘corrective process’.

Market Outlook. Lots of adjectives for the market right now. One is exhausting. When you go through fluctuations like this week you want to make a step back and look at the fundamentals. Pick stocks based on that. The market is still pretty sound. Canada is the market that the rally forgot. There are some structural reasons for that particularly in the regulatory environment and taxes. From the valuation perspective though the Canadian market looks good. What is going to change that? Maybe something on the tax front or the regulatory front. The values are here. Maybe it is too early to run full hog into the markets. Less risk from the valuation perspective compared to other markets.

Bonds will face a challenging year. We see higher interest rates of 25-35 bps. The good thing is for the first time in many years where we have the global economy growing at 3% or more, which is great for earnings and the stock market as a whole. The Central Banks, however, are pulling back on their bond purchases. This is healthy from our perspective as we see great fundamentals.

Our thesis is we are seeing “re-flation”, but not inflation. Wage gains are not that pronounced and unemployment rates are very low. At the end of the year we will see positive returns on the bond and equity markets. It won’t be huge.