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

Markets. It is very difficult to figure out exactly when all this stuff stops. There are a lot of things happening that are driving the stock market including a disbelief that the US is probably going to put off rate increases for quite a while. China is slowing down with a lot of talk about further devaluation of their currency. Inflationary expectations have been going down in the last little while, not only in the US, but in Europe as well. There is a real worry in the world that monetary policy cannot do the things it was supposed to do. Thinks the argument is valid that monetary policy has to be mixed with fiscal policy. We are looking for this to be happening in Canada in the next little while, and we need to see it in other parts of the world as well, such as US, Europe, UK, etc.

Energy. We have seen hundreds of billions of dollars in cuts in CapX spending in the industry. Feels the time for buying energy is probably coming quite soon. It is time for people to get interested in energy, because all the CapX cuts are going to impact production growth in the future, which is where the real opportunity lies. OPEC produces 2 million a day more than they were when all this started. Part of the problem has been OPEC itself, but also we have not had the kind of production we expected from the US, but that is coming. It has a lag time. When we saw the production cap happening in the US, a lot of it came with efficiency gains because of production cuts, and she doesn’t see that for this year, and this year the cuts are really going to impact. There could be a surprise to the upside because of how crude trades on this kind of behaviour. One caveat is that demand is going to be pretty decent this year, but there have been reports out that demand might slow down growth. However, thinks the oil sands is going to be challenged.

Markets. Things people are worrying about are not new problems for the most part. Markets for the last 5-6 years are advancing in spite of major issues percolating underneath the surface. The problems really never went away and as valuations continue to appreciate, and as some of the problems became more acute, it has given people pause to think about their positions. A common lore is that demand for oil is falling, and falling oil prices have been a symptom of weak global demand. However, demand for oil last year was the strongest it has been in 5 years. The problem is we have too much oil. This is an example of people focusing on what is an easy answer. Another one is the focus on China. China is decelerating its economic activity and is going through a transition, and people are worried about the devaluation of the Renminbi and what it is going to do to global markets and that we are going to have a currency war. We are already having a currency war and we are all pushing China to make their economy more open. The Chinese currency has appreciated, as has the US currency, for many, many years now. Now the currency is going down a little and people are criticizing them. Nobody pays attention to the fact that every country is in a competitive devaluation situation, which is very deflationary and is causing major problems to the US economy. Investors are only now starting to pay attention that the strong US$ has become a major headwind to US multinational corporate profits. He carries a very heavy cash position, just under 30%. The big new problem: are European banks spiraling out of control? He has been watching credit spreads widening globally for quite some time. Partially that is a function of the structure of the credit markets where a lot of high-yield bonds are held in ETF’s. The illusion exists that you can get instant liquidity. But the ETF has to sell the underlying security. With the new regulatory environment in the States and Europe, banks are less inclined to become liquidity providers in bond markets, so they have to find fewer and fewer buyers, and the major buyers of ETF’s are now in liquidation mode taking things down to valuations that compel people to purchase them. He is finally starting to see pretty good value in securities, particularly in the US. With credit spreads widening in Europe, etc., that stuff starts to begin morphing and becomes problematic.

Canadian negative interest rate environment? Canada could certainly go into a negative interest rate environment. Last year there were a lot of analysts that were suggesting banks should be bought because the yield curve was going to steepen as the Fed raised interest rates. It has done exactly the opposite. Negative interest rates are a tax on banks at a time when banks are already struggling with other kinds of problems. He doesn’t think negative interest rates will cause banks to cut their rates. They are well capitalized, strong and quite capable of dealing with an increase in nonperforming loans. However, he does think Canadian banks have been feasting on selling Canadian investors a debt for a good long time.

Markets. This is going to be a challenging year for investors. It has been much more pronounced than people expected. Feels we are now getting to the point where lower oil prices are sparking concerns about credit. A lot of people are looking at the banks, their balance sheets and exposure to oil companies as well as debt maturities coming up for renewal this year and next, and how many companies are going to be going concerns. You are seeing this with Canadian, US and European banks, so you have credit concerns. Over and above that you have global growth concerns, so people are starting to fret about China in 2016-2017 as they go through the transitionary period with their economy. People are making bets against the Chinese Renminbi, and are going short the currency, because they suspect further devaluation is necessary to stabilize economic growth. Then there is some uncertainty about growth in the euro zone and Japan and what the ECB is going to do at their coming meeting in March. All those global growth concerns, low commodity prices, currency depreciation are really contributing to the economic market volatility. Thinks we are going to see the US Fed take a more dovish stance. While most people were expecting 4 rate hikes at the end of 2015 and 2016, now we will be lucky if we get one, if that. If the US Fed backs off, it could be a bit of a rallying cry for equities and maybe a reset of inflation expectations, which is why you are probably seeing the US$ fall back.

Markets. There seems to be a lot of uncertainty as to what is happening with the impact of energy and fears that we are heading into a global recession. Certain regions are overly dependent on energy which has hurt their economy, and Canada is one of them. US doesn’t have energy as that important of a role. Manufacturing has been quite weak, even in the US. Some CEOs have said we are in an industrial recession. However, for the US economy, the US consumer is much more important, as their economy comes for 85% of GDP. The US consumer is in a very good situation. There were very strong job numbers last week, even though they were below consensus numbers. Unemployment is at an all-time low below 5%. The non-manufacturing Index is still expanding, so she thinks that the US economy will grow at a modest pace this year.

Markets. You are better to put money in the market when the market is down 1.57% (a statistically calculated amount), such as on a day like today. He thinks the Fed will suggest they won’t increase interest rates in March. If we are going into a moderate recession, the US market is not down, even if the rest of the world is. At some point this year we might see the S&P at the 16-17 hundred level. The S&P could go up 10%, or it could lose. This earnings season is far better than expected. The top line growth, however, has been declining for a year, plus. Best case scenario the market goes sideways, but there will be trading opportunities.

What ETF for Canadian TSX exposure. ZCN-T is the entire Canadian TSX. XIC-T is the entire TSX and VCE-T is the MSCI Canada version of the index.

Oil. He thought it would bottom in the $40s, not the $20s. He got in early. He is not inclined to do more at present. There could be bankruptcies in the oil space in North America. If you have not stepped in, then wait.

Markets. The S&P should post its biggest earnings decline in 7 years. The forecast for 2016 is for an over 3% decline. This should lead to a decline in US employment. There is a potential for a decline in the US economy. The NASDAQ is at a 15 month low. Many stocks are trading at high PEs. He expects a broad decline in the US markets.

Educational Segment. How to make Smart Monthly Withdrawals. 0.8% is the monthly average return of the S&P over history. Look at the percentage difference between the current S&P price and the 21-day moving average. If the current monthly return is twice as much as the average monthly return, it is time to take money out of the market.

Markets. People tend to think of a Hedge Fund as a higher risk, but if it is done right it can help reduce volatility in a portfolio. On a day like today, you want to protect capital. The usual way people do this is by moving from securities into cash. Then when the market starts to rally they feel they are being left behind and they move back into securities. This means they have 2 market timing decisions. Market timing is something investors can’t do well on a consistent basis. Pair Trading helps to minimize some of that risk. There are 3 different types of major risks in investing. Market risk where the market goes up or down, industry specific risks that affects all companies within the sector equally, and finally company specific risk. On a Pairs trade he goes Long a position within the same sector, and Short a stock within the same sector. Think of this as a fraction with the long position as the enumerator and the short position as the denominator. The market risk, industry specific risk and company specific risk are in both the enumerator and the denominator. Like a fraction, you can cancel out the market specific risk on both sides and you can cancel out the industry specific risk on both sides, and you are left with company specific risk over company specific risk. He likes to isolate those factors as it is a much more precise way to invest. Decided about 3 years ago not to make any direct investment in resource, long or short. In a non-resource name there is a much better ability to understand a company. Both his funds were up last year.

Bitcoins? He is very cynical about the bitcoin space, and thinks it is very ripe for Short opportunities. Some of the names out there are not big enough to Short. If you are thinking about going Long, there are a lot better places to put your money.

Markets. We are in a lower growth environment and people are going to have to ratchet their expectations down. The Canadian market has been dramatically affected by the oil price, not only affecting the auto sector, but bank stocks as well. Thinks we are in to a new era where we have a lower growth. We are in an aging demographic where people are saving more. He loves dividend paying stocks. Rather than the volatility, he prefers more of the good old steady Eddie, and dividends are a big focus for him. Likes technology for finding safe value companies, especially in the US.

High-yield ETF Bond Funds such as XHY-T or ZHY-T? These have come under a lot of pressure recently because 20% of these funds are in oil/gas related industries, and there is a lot of concern that these companies are going to fail and not be able to make their payments on their debts. He has not seen any evidence of that. Default rates are not anywhere near high levels. This is an area that could do significantly better if oil prices stabilize.