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

Markets. We have had a nice recovery led by energy and materials, which are alive for the 1^st time in a few years. Canada is outperforming the US and the Cdn$ is up. Thinks there is a bit of a pullback coming on oil, and if it pulled back $5 that wouldn’t be unusual. Investors should be patient and pick their spots. When oil goes to $50, sometime in the next year, and the Cdn$ dips to $.81-$.82, he could see the bank of Canada acting to try to soften the dollar a bit, which obviously would help the economy. Expects the market to be pretty choppy from here because we have had that nice V shape recovery. We are overdue for a pullback.

A US Bank ETF? Doesn’t know ETF’s, because he buys stocks individually. The only banks he owns is Toronto Dominion (TD-T) and Bank of Nova Scotia (BNS-T), the ones that are half non-Canadian. You get paid to wait in the Canadian banks because of the roughly 4% yield. A big regional US bank might be of interest, and if rates go up you will do fine.

Market. The market seems to be a little bit better, but he doesn’t know why. The economy doesn’t seem better. Thinks people are accepting that interest rates are not going to move. Lower interest rates mean higher stock prices. Oil prices are coming back a little, and there are a few green shoots in mining. The stock market leads the economy, and we are seeing fundraising happening in Junior mining. A bullish sign if the market is right.

Economy. The Fed came out with no changes to the overnight rate. The market sold off and the dollar skyrocketed, and then that was all reversed. US is really paying quite a bit more attention to global growth now. The labour market has improved, which is the signal the market has been looking for in the last 6-9 months, so let’s get on with the rate hikes. Thinks they are feeling that global growth is not quite where it needs to be, so that a stronger US$ would not do anybody any good and are trying to keep the US$ in check. This is working very well for Canadian investors as our dollar has rallied, energy has rallied, commodities have rallied. As a result, we have to be a little bit careful. The US$ might be being held down by the Fed, and the Fed alone. There could be a snap back on the other side. To him there is no doubt that the Cdn$ hits $.80 and finds resistance there. The US$ is actually breaking out of a 20-year trend, so we have to step back a little. A lot of people were really upset when they didn’t have enough US exposure last year. That has now turned upside down. Some people that made a move too quickly into the US last year, are getting their head handed to them. Anybody who stayed in Canada and ignored the noise is probably having a pretty good year. Would recommend people to stay diversified between the 2 currencies. There are lots of great opportunities in both currencies.

Market. The market has been rallying about 17% from January 20, a pretty sharp upward rally in 2 short months. He does a lot of pair trading which takes out a lot of market risk, but when everything went up, it made it tough for him during March and April. A lot of euphoria has been built in to the market, but typically summer months are slower, and investors should perhaps be thinking about getting some protection in their portfolios.

Markets. This is a choppy world. In general, we are through the worst of things. We had a horrific start to the year. Thinks the Fed is a nonissue right now. It is going to be about earnings. Apple just reported and earnings were terrible and the stock was down about 8%. Twitter is down over 10%. Very stock specific and he thinks we are going to see more of that. Increasingly in the tech world, it is a Facebook, Google world, with Apple looking a little bit slow to the party. The overall economy is still slow, which is why he thinks the Fed will still be on the sidelines. You still have to be a stock picker. What the market is highlighting is that you have to be more focused on the names that you do own. Owning a basket is not going to be as successful as it has been, because you have these very stock specific stories.

Markets. Companies play a game by talking down their numbers, and then beat them. He showed a chart of profits. They are falling this year, even after backing out financials and energy. Non-GAAP compared to GAAP earnings are widening. Real earnings, not adjusted for accounting, are really falling. He is very cynical with how Wall Street plays games with earnings. We are very late in the cycle. There are not years of earnings growth ahead of us.

Currency hedging. You want to hedge for 5 years if the dollar gets below 73 cents.

Educational segment. The zero interest rate policy. The central banks are ripping about a trillion dollars away from the savers. This is actually effectively the biggest increase in taxes for savers in history. Japan cannot do anything to stimulate growth except to lower the value of the currency. There is $75 Billion in in ETFs that Japan has purchased in the last few years to try to stimulate the economy. The largest economy in the world (USA) is not growing if it was not for borrowing. Borrowing in the system is going up and GDP growth is going down. They just can’t keep going on like this.

Markets. He covers any company over 3 million in market cap. You generate wealth through alpha. He helps on breadth by allowing you to find out about almost anything. He started his market outlook by saying it was an amazing year in Canadian stocks, but then scratched that and realized it was an average year in Canadian stocks. We should all be used to it by now. All the volatility over the last 10 years has been driven by central bank stimulus volatility – would it continue. He is bullish on individual stock picking. Money is going way from active management. ETFs are getting the funds as well as global funds. 75% of millennials don’t own individual stocks.

Markets. He is currently cautious. Stocks are near their all-time highs, and yet we have got sub- 2% US GDP growth, Central Banks are talking more devilishly, and negative interest rates are quite a way out the curve. A potential risk is the prospect of inflation. Since the crisis of 2008-2009, but intensifying over the last 2-3 years, there is global competitive currency devaluation. Most Central Banks and governments saw the US economy as the best of all evils and the strongest of the bunch, and they wanted to export their deflation to the US. Feels this has really been intensifying in the last few years. Most Central Banks and nations have devalued their currencies, trying to export more to the US. The question becomes, is the US economy strong enough to import deflation from China, Japan, Europe, and even Canada. He is not so sure. If he is right, and inflation is not the issue, the back end of the interest rate curve should hold quite well. The interest rate curve has flattened from about a 2 year to a 30 year. He is seeing people with zero in fixed income and government bonds, which is a massively unhedged portfolio. He is currently looking to add 30 year bonds, which provides a huge cushion to a portfolio for a) deflation, if it comes, and b) if risk assets start selling off because of a flight to safety into government bonds.

Canadian chartered bank’s new 5.5%-5-year rate reset preferred shares? Most retail investors get some fixed income through preferreds, but the preferred market is not a fixed income vehicle, it is a senior equity security. This can be very dangerous. They are complex instruments. They have been sold as fixed income because most investment advisors either don’t comprehend a more traditional fixed income, or just can’t get their hands on it. They also get paid a sizable commission. In this past year, rate resets got hammered because people thought rates were going to go up. For preferred shares, if the regulator decides there is a triggering event on that particular bank or issuer, those preferreds turn into common equity of the bank. All that risk then runs down to the common shareholder making it all more volatile.

Government of Canada Bond 3.5% maturing 12/1/2045.

Energy. There is a real risk that oil will go down to the February low. The positives right now are the talk of a freeze, and June is coming which is a positive. Also, this week EIA data showed production in the lower 48 fell by 19,000, so we have been getting 20,000, 30,000 weekly production declines in the shale oils. This week, we got the 1^st indication that natural gas liquids are now rolling over, and that the production of natural gas is rolling over, and we have had a decline of 61,000. Between the 2 we have had 80,000 barrels a day decrease in US liquids production in one week. The biggest number we have seen in 6 months. Also, there was the Kuwait strike which had been producing 2.8 million barrels. A chart showing OPEC market share versus the oil price, at the high was about 38%, and is now 32.5%. OPEC is desperate to get back into the 35%-36%, so they want to drive out non-OPEC production. The other problem is that inventories are at record highs in the US, 200 million barrels more than needed, and this week another 2.1 million barrel increase on EIA data. This needs to come down to the middle of the range, which means 200 million less. To be a bull, you need to see OPEC production fall by about another million barrels, and you need to see demand hold up. The wildcards now are the Kuwait problem and the potential of another freeze. On the other hand, Europe demand is falling off, Japan demand is falling off, and the US economy is not so strong. If this is the case, he thinks we go down to the low $30s in May-June.

Russian oil and gas stocks? Stocks globally are cheap, so the question is, do want to buy in Canada where you know the stories, the companies, the political risks; or do you want to go to stocks that may be a little bit cheaper, but in Russia where accounting rules are not the same and government control is a lot stiffer?