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

With such a surplus in crude oil, who is purchasing our oil? Non-OPEC production was 57.2 million barrels a day and OPEC production was 38.8 million. Demand came in at 95.1, so there is less than 1 million barrels a day surplus. That can disappear if economies continue to grow. Among OEC countries, the annual year-over-year change as of last Friday was 1%, and for non-OEC countries it was 3.3%. That was real growth.

In millions of barrels per day consumption, the US 19.4%, China 10.8%, Latin America combined 8.6%, former Soviet Union 4.8%, Japan 4.3%, India 4.1%, other Euros 3.1%, Canada 2.4%, South Korea 2.4%, Germany 2.4%, etc. Growth is going to come from emerging markets. The US is still below where it was in 2007.

Gold. There is ongoing demand from India and China. In the next 2-3 years, he expects gold is going to go up, but doubts we will see $1900 anytime soon. He would guess it is going to be between $1,000 and $1,300. There have been suggestions that the US$ is peaking. If that happens, it will help gold and other commodities.

Buying US stocks with Cdn$? If you like the underlying stock and believe in it he would buy it now.

Markets. We have had 2 rate cuts in Canada this year. We have had anaemic growth and there has been a lot of challenges with the Cdn$ and commodities. REITs are a pretty simple business and should have done a lot better. A nice hunting ground for income investors. You probably want to stay away from the retail side, but industrial looks pretty good. Also, apartments, multi-residential REITs, look pretty good as well.

Oil. In the short term, the price of oil is scaring a lot of people away. One needs to question if you need to own oil at all. Start thinking 6 or 12 months out. His feeling is that oil is going to be higher in 12 months than it is today. In that case, you want to own some of the large cap, high quality, dividend names. There will be a number of bankruptcies, so be very careful and pay attention to the balance sheets.

Banks for RRSPs? Banks are very good long-term holds for investors. We might be entering a period of slow earnings growth for Canadian banks, but for income investors nothing is more sacrosanct than the dividends, and Bank dividends are very strong.

Markets. What has been driving the market is mostly the liquidity, not any rational fundamental. The markets are overvalued in relation to the real global economy. There is a big divergence of numbers. Right now being a contrarian is where the money is going to be made. He is positioning himself to be higher in cash. Loves precious metals. They are a hedge for what is going on in Central Banks. A lot of “what if” happening is being driven by the liquidity that they have allowed into the market. Everything that has gone up should come down, and everything that has been kept down should move up. Commodities are a different story because the global economy continues to slow down. He makes a distinction between commodities and precious metals, the ultimate form of money.

Gold. Central Banks are not selling gold and silver, they are buying, and at a very quick pace. With the Fed going to raise rates, the need for buying gold is now more important than ever. It is the ultimate form of money. We have an overburdened amount of money printing, so you are just witnessing a devaluation of monies around the world. They are all going down. Because of that, you have to hedge yourself. It is going to play out on a very positive side.

Energy. Has been short the energy sector. Since last October he has reduced his positions and has been sitting on the sidelines. Inventory levels globally keep building, especially in North America, because of fracing. Has been expecting that we are going to see a crack in the junk bond market of the fracers, and at that point that whole industry is going to start to dissipate and hopefully we will start to see inventory levels start to decline.

Markets. He thinks the Fed’s interest rate raise has already sparked reaction around the world. Global growth concerns and anxiety about this first raise is what has cased all this volatility. The US$ always peaks ahead of the first raise and then rolls over afterwards. Analysts think there will be continued US$ strength afterwards, however. Some of the pressure might come off commodities when the US$ levels out or fades a little. Energy may not bottom until the first half of 2016. The longer it stays down, the more restructuring takes place and the more it impacts the banks.

Markets. Most people don’t have a way of quantifying risk. They understand return metrics, but don’t understand risk metrics. The volatility in the market is evidence of what risk is all about. We only look at risk from the perspective of downside risk, and we are looking at it when the market goes down. Nobody really has a problem when the market rises substantially and quickly. There was a significant drop in oil beginning in the 4^th quarter of last year. That decline was so rampant it paid a dividend at the gas pump because you had more money to spend. In theory consumer should spend that dividend. If they spent that dividend then the decline in oil prices, offset by the rise in consumer spending, should be a wash for Canada and net positive for countries like the US. This time we didn’t see that, and Canada went into a technical recession risk. Thinks the market declined so rapidly that investors/consumers didn’t believe it. As it dragged on consumers began to believe that it was almost a permanent thing and is going to be here for a while. In that light you are starting to see consumers spending a little bit again. We are starting to see that in credit card numbers. If he is right, you should see those spending patterns pick up in discretionary items like restaurants. Restaurant sales at the tail end of August and beginning of September were up 18%. This leads him to think that we may actually see some positive stuff next year, and that will be a surprise to the upside.

Oil? We are awash in supply, and that is not going to end any time soon. Suppliers out of the Middle East are going to continue pumping because they want to maintain market share, and hopefully affect a lot of the fracing companies in the US, but more importantly they have significant domestic issues that they can only tap down on by continuing to produce oil and continue to flow money into their systems.

A natural gas ETF to hold for the next 3 years? Not sure he would be going Long natural gas. There are a number of ETF’s. If you just Google “natural gas ETF’s”, you will get probably 10 or 20 of them.

Markets. Things are getting pretty oversold in energy, so he wouldn’t be surprised if we saw some sort of short-term bounce, just from a sentiment standpoint. The supply/demand equation has to work itself out before we see higher energy prices. Going into 2015, there were a lot of analysts talking about how the market looked great and the direction was going to be up. That hasn’t been the case. US and Canadian markets are substantially down, and most investors were not positioned that way. Volatility really started in the 2^nd half of the year. A number of analysts give their earnings numbers, and base the market multiple off that to see where we end up with final year-end numbers. In reality that is probably not going to happen as historically markets don’t tend to have 2 flat years in a row. He is growing concerned about, or has his eye on, the manufacturing number with the ISM, which has been trending down over the past few months. Non-manufacturing, the service side ISM, has actually been fairly strong and continues to be so, and that is a bigger part of the US economy. In conjunction with those, he is also watching the leading economic indicators, and has found that a really good indicator of any type of recession is when the LEI number crosses below the 18 month moving average. Typically that precedes a recession, and he has not seen that yet. There is still a lot of room for that to happen and is one thing he is watching.

Markets. The volatility and choppiness is quite stunning. This morning, everything was Red, and then around 10:30 everything was very strongly Green. This is a lot of year end positioning. There is a lot of conversation as to how long the US dollar strength can continue, how much lower can oil go, etc. This is just a very strange calendar phenomenon that we are going through. Everybody is trying to adjust for what they think is going to be happening next year, and they sort of lose confidence in the names that have been working for them, trying to be a little too clever and go for something that is bottoming out from tax loss selling. That is a bit premature and a little bit too cute for the short-term and people just need to bull through this. What has worked for you this year will continue to work. It is really important to allow price and trend to allow you to stay with a winning position. Feels it is going to be very good for interest rates to be on the uptick in the US next week. Thinks the US$ is actually breaking out and is in the early innings of really going on a multiyear run.