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

Oil and the Canadian Dollar. No one thought we were going to $28 oil a year ago. He thinks when we bounce it will go too far to the upside. Over a year or two we will settle on a price of mid-$40s to $50s.

Markets. The North American market is extremely volatile, and is very difficult for clients and investors to look at this with any kind of sanguinity. They are understandably nervous. What people need to understand is that if your portfolio is being managed properly, you should be prepared for volatility. He looks at volatility as his friend, because he is prepared for it with 30%, 40%, 50% in cash and bonds, with no long-term positions. This means that if there is volatility, he can take advantage of it.

A US ETF that excludes oil and hedged in Cdn$? You might want to take a look at some of the sector ETF’s that are hedged. BMO has some such as healthcare, banks, covered calls in the US, etc. You could look at ZUB-T and ZUH-T.

Are options trading allowed in a TFSA? Yes, in the same sense that it is in an RRSP. There are certain things you can do including covered calls and buying and selling options. What you can’t do is any naked strategies.

Using Options to take advantage on stock selections that look good? You need to really take a look at some of the material from the CBOE education section to learn something about this. You do have to know what you are doing, because time is your enemy and an option can expire worthless.

Markets. There is illogical selling going on. Investors are selling because the market is down. Have your companies really changed dramatically because of what is happening in China or the price of oil. In spite of this stocks are down and it has nothing to do with anything that is going on in the world. If you are not in commodities, it is not a panic “end of the world” scenario. The Canadian economy is not great, but valuations are starting to reflect that. Also, the US economy is quite strong with everything more or less under control. Canada may go into a recession, but it is not the first and won’t be the last time. Volumes have started to pick up in the US, so you are getting that capitulation trade. He would recommend you own a piece of the business rather than anything else.

Canadian Banks? If he told you that he had a stock that had been around for 100 years, always paid their dividends, raised the dividend on a consistent basis, survived the financial crisis, in an oligopolistic position, pays a 5% dividend and the valuation is 8X earnings, you would be all over it. The current situation will end and people will realize that banks are not going to change their dividend again the cycle. Will raise their dividends as they did in the last quarter with valuations quite, quite low for the sector.

Markets. He focuses on companies that create free cash flow consistently over time. When you get into markets like this, you don’t want to have companies that are heavily indebted, because their costs of borrowing are going through the roof. He started to accumulate cash, probably in 2014, and was happy to have 10%-15% cash last year, because if the market continued higher then clients would make money, but if it started to pull off then there is cash on the sidelines to take advantage of opportunities. What we saw today is nothing compared to what we saw in 2008. There hasn’t been capitulation, you are not getting everybody screaming to Sell watching the bids disappear. Normally, when PEs get up around 23 or 24 times, that is usually signalling a peak. We’ve had ultra low interest rates for a very long time, and if you back out the extraordinary items from earnings, you are going to start to see the S&P, 600 Europe, etc. all trading at 22-23 times earnings. There is nothing wrong with having cash on the sidelines. He has always advocated no more than 20%, because that is deemed to be a synthetic Short cash.

Markets. The oil market may not be balanced until 2017. He would have thought it would have expressed itself by now, so he expects the fundamentals reach a balance by the end of 2016. There is a big drop off in the investment in future production. OPEC is 2/3rds of the world’s production. Non-OPEC supply will adjust. We have to be careful about the growth rate in oil demand. It will be 3-4% over the next 10 years. He looks at gold as a pretty safe place to be. However, in Canadian dollar terms you have seen no change in the last year. We have accepted that the floor is between $1000 to $1100. The key for him is to focus on companies that can excel in that price range.

Markets. This has been an emotional selloff. There is a storm of investor anxiety, some new, and some old carried over from 2015. This has caused the equity markets to have one of the worst starts in history. We are looking at things like the economic deceleration in China, falling commodity prices, a decline in corporate earnings expectations, strong US$ headwinds are still out there, and we have some new geopolitical tensions that serve as a backdrop to start the year. Investors have pressed the Sell button first without really looking at underlying fundamentals, which aren’t that bad. S&P is trading at about 15-16 times forward earnings. If you take a 10-15 year history, we are pretty much average at this point. Selling in the equity markets has certainly been overdone. From a technical perspective, we are oversold. For patient investors who are picking away at equities, we’ll see some sort of relief rally. Continues to like US equities over Canadian equities. The US economy is still going to grow at the 2%-3% growth rate this year, and earnings per share on the S&P 500 should grow at around 7% this year. He was about 12%-15% in cash at the beginning of the year, but is now down to about 8% cash.

Economy. Global economy is growing slowly which makes it more vulnerable to shock. As global growth comes down, the economy is more susceptible to shocks, positive or negative. With a higher number it would be more sustainable, but we are not seeing that right now. He is forecasting only 1.5% growth in Canada. Generally, growth consensus starts out the year higher, and always seems to come down through the year. His forecast is low to start, and he would rather ramp that up. The TSX is in bear market territory, and about 40% of stocks in the US are down more than 20%. China is a huge economy and they are trying to grow it as best they can. Some transition comes from manufacturing to service, and that is going to be lumpy.

Healthcare? Expects there will be a fair bit of political pressure in the upcoming year with the US election and the turmoil in the US with pricing. Healthcare is split into a bunch of different sectors. Pharma biotech will be the one that comes under the most pressure because of pricing and the news. Equipment manufacturers offer good value, and a good demographic going into the next few years.

Are dividends safe and will stocks go back up on Canadian Banks? The dividends are absolutely safe, and he would have no concerns. He would have more concerns with growth potential. You are going to see some increased losses because of the price of oil and the loans outstanding to oil companies. That will take some time. Also, there is potential for slowdown in the Canadian housing market.

Markets. Some of the technical indicators from a market perspective started breaking down last summer, so he started getting a little more defensive. Now he is starting to see some economic signs as well. The US ISM Manufacturing number has been ticking down pretty aggressively. From a profitability standpoint, any time it is below 50 means the economy is contracting. Below 48 the probability of a recession really starts to go up, and below 46 pretty much gives you a 100% probability of a recession. Right now it is in the 48 range, so we are definitely getting into the danger territory for the US economy. If there is a US recession, that is not very positive for markets globally. You want to be cautious and careful where you are positioning and what you are looking at. He has a fairly high cash percentage in his portfolios at about 50%. There might be some kind of bounce in the market which could be a chance for people to lighten up or get out of positions they are not comfortable with.

Currency. There is increasing speculation that Canadian rates may be cut again, seeing the dramatic decline we have seen in the last couple of weeks. She had moved heavily into the US in her clients’ accounts a couple of years ago, which has worked out nicely. It is now at an inflection point as to when the trade starts going the other way. In the foreseeable future, it is hard to see the US$ depreciating the Cdn$ given that the Fed had increased rates in December. They have indicated that they will continue to do so, probably predicated upon how growth materializes and what goes on in global markets, but nonetheless their economy is growing much stronger than Canada’s, so her clients continue to want exposure to the US. Canadian tourism trade should benefit, but on the flipside, retailers tend to source a lot of their goods in the US and have to pay in US currency, a potential squeeze on margins.