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

Energy. Eventually oil has to be significantly higher than what it is currently trading at. Oil/gas companies in the US have been saying they can produce oil at $30-$40 a barrel. They looked back at one of the top ranked US companies, Pioneer, which lies in the middle of the Permian Basin. They found their cash flow from operations from 2006 to 2016 were an accumulative $15 billion. Capital expenditures were $16.5 billion. That was with oil at around $78 a barrel. There was only one year where they produced positive cash flow from operations. They funded this through stock issues, debt and selling assets. That is a history of what some US and Canadian companies do. They traditionally sell assets, dilute shareholders, borrow more money, and hope for better times. They say costs are lower and productivity has improved. We are seeing a leveling out of productivity out of 3-4 years because of technology improvement. A lot of these companies sold some great Crown jewels, and have been drilling hoping for better days. Saudi Arabia and most OPEC countries need oil that is in the $80 price range, and probably higher. North American companies need at least $60 oil, just to be treading water.

Markets. Last week we saw the market starting to roll over. The transports really got hit. The DOW Transportation Index moved significantly lower into October and last week it moved down 2.79% so we are clearly into the corrective phase already. He recommends gold and gold stocks. As you get into the summer time there is a slowdown in the use of transportation services. 39% of the S&P stocks report results this week. When the DOW companies report he feel there will be a selloff in that market.

Natural Gas. It has two periods of seasonal strength. One is in the summer time when it is used for generation of power for air conditioning. It is still in a downward trend and is building a base. If it breaks out above $3.05 there will be an interesting trade on Nat. Gas. A good way to play it is to invest in Nat. Gas stocks. Gassy stocks are starting to show some interesting bottoming patterns. Watch for results from gassy stocks.

Educational segment. How to Play Earnings Season. Next week is the big week. Looking at Canada’s top 60 TSX companies, earnings should be up 11.3%, 47 should report higher earnings. Base metals and energy are expecting the biggest percentage gains. Look for those that had a loss last year at this time and report a profit this year. The banks are expected to have robust earnings coming into this quarter. The key in gold is how they calculate their future asset base.

Markets. The market is looking expensive by quite a few metrics. Sentiment is pretty strong. In 2012 the total value of the future performance of a company was 54% and now it is 71%. The rest of the value is fixed and working capital. The FANG stocks are surprising okay. He is little leery of AAPL-Q, however.

Economy. The Cdn$ has gone over $.80 for the first time in about 2 years. Since 2011, the trend for the loonie has been “net down”, and he believes we are in a countertrend rally. The $.80 has not really broken the trend. The US$ has been hammered, which has helped. It is now coming into a key level of support. A lot of commercial hedgers who were shorting the Cdn$ have covered their shorts and are almost back to a net neutral position. Meanwhile, on the US side, the net hedgers on the US$ are Net Short in a big way, almost at an extreme level. This is a set up for a US$ rally, probably happening fairly soon and a Cdn$ overbought level probably happening fairly soon. If you own US stocks, don’t be too fearful of a lot more downside on your US$ versus Canadian.

Energy. There is a monstrous technical lid on oil in the low $50s. If oil were to pop through $54-$55, it could be off to the races, but so far it has tried multiple times in the past 3 years, and it just can’t seem to do it.

Market. There is a lot of liquidity sloshing around the market, which really doesn’t know what to do. However, when you try to reach into the market to grab some value, it’s difficult. Because of this, what has happened increasingly lately is that as a kind of default investment, investors are going into ETF’s, somewhat blindly. The issue he has is that people buy and never mind what the quality, the underlying fundamentals are. When he sees the market doing the same thing again, he has to look back and remember what happened when this happened before. In the end, it wasn’t terribly pretty. It is very hard to fight it. There is still value to be found in certain segments. The financial sector is an obvious standout on both sides of the border as being cheap. When this market stops, you better get off.

Market.Non-resource markets did very well. The European economies are putting up better numbers. Even in the Asian emerging markets, there was a lot of trade in technology happening. The resource markets were somewhat left out of it, and financials were kind of dull in the 1^st half. When you set the stage for the 2^nd half, all of a sudden you have Central Banks around the world talking more hawkishly and interest rates rising. We are just coming out of what has been a very long, slow and tepid recovery. You don’t really know how economies are going to adjust to higher rates, and how fast that is going to happen, and whether or not there might be some adjustments along the way. Inflation is almost negligible, so why push interest rates up against that? This is a time to be really cautious and look at the quality of the companies you are investing in. Even though the recovery has been slow, markets have been fairly good. The wildcard in all of this are trade talks which have just started.

Markets. He sees a little bit of opportunity in the TSX. It did spectacularly well last year and it will be hard to replicate it. The sectors that have outperformed the most are counter intuitive – utilities and telecommunication stocks. They tend to be bond proxies and you won’t get the relative benefit in a rising rate environment. He has seen opportunity in alternative energy, however. We are trading at high PE multiples but we are having earnings grow into these multiples. These may last for quite some time until there is a rollover of the cycle. He would prefer financial services, and businesses that are tied to services in the industrial area.

Market. Everyone is worried that valuations are a little rich. We are in the middle of the earning season right now and investors still seem to be a little undecided. The bullish sentiment has spiked up a little lately. He expects a little pause until next week’s Fed. The growth Index showed it was a little extended in 2000 because of the Dot.Com bubble. This was followed by a housing bubble in 2008. A chart like this doesn’t tell you when to get out or what to invest in. There will be a little pause next week, and then we are going to have a really, really strong bull market in industrials, base metals and energy. Defensive areas such as utilities, bonds and staples should be underweight in a portfolio. As we get later into the period, you want to start to look for repositioning a portfolio, but for now the cyclicals are firing on all cylinders. To protect yourself, make sure you have a ballast between the procyclical defences, and you use stop losses.

Crude Oil? Chart shows this has made a little bottom. There is a seasonality that starts in the summer. The good news is, we don’t have to wait too long to figure it out. If we break $45 and move down in July, probably all bets are off, and it will probably go down to $39. In the short term, the upside will probably be $55, but there is a seasonality, so he is expecting it to push.

Cdn$? Once we broke 130, which wasn’t that long ago, we could get to 125. Once we get there, you are sort of looking at $.80-$.81. If we have this pro-growth move he is expecting, you are probably going to see the Cdn$ waiting to participate. The caveat is that technicals say we should stop here for a little bit. However, if we get that pro-growth move, he could see it going to $.90 kind of fast, but the Gov. of the Bank of Canada is going to have a conniption.

Energy. It has been a tough, tough space to be in for the first 7 months of the year. It is record-setting because for the last 27 years, the energy index has never fallen for 7 sequential months in a row. He is optimistic that given the trends we are seeing in the US inventory drawdowns, the market is going to wake up to the fact that things have been improving since July of last year. Things are not as bad as you would think, and oil is heading higher in the next couple of months. Had thought that the timeframe for a change in thinking would be roughly September, but that has now been pushed back to about March 2018. There are 3 reasons for this. 1.) The biggest one is Libya and Nigeria both coming on bringing on almost a half a million barrels per day since the beginning of the year due to geopolitical situations. 2.) The dislocation between OPEC production cuts of 1.1 million barrels per day and OPEC export cuts which only fell to 400,000. That has subsequently improved. 3.) The ramp up in the US. The rig count since the beginning of the year is up almost 50%. Despite those 3 headwinds, inventories are still falling, and we are getting closer and closer to the end point. Expects oil to be over $50 in the next couple of months, $50-$60 in 2018-2019 when the bullish picture really starts to improve. He struggles to see natural gas being much above $3.

How do you value a frac sand company? One way would be by calculating the cash flow stream over the 50ish years of reserve life. A quicker and easier way is to just look at, on a forward basis, the total value of the company (debt+ market cap divided by cash flow) and relate that back to historical multiples. The US names have typically traded from 7 to 8 times, and today they are trading 3 to 4 times.