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

Markets. An investor has to hitch their wagon to the American Star. Even if you are investing in Canada, forget what we are famous for. Forget Greece, forget rocks, forget paper unless it is focused on harnessing the growth that is the US economy, which has already been through its long, dark tea time of the soul, and is on its way up. More than half the revenues of his funds come from the US, with another 20% coming from Europe and overseas. We are in for a rough time for a while, until we begin the upswing. In this environment, investors need active managers more than ever, particularly if you are talking about the Canadian market.

What percentage of a portfolio ought to be in Canadian Banks? How many banks would you own and how would you weight them? Canadian banks are not a bad place to be. Have performed very well over a protracted period of time. National Bank (NA-T) has the biggest exposure to energy, making it the most vulnerable. TD (TD-T) has been the most successful in the US, and he thinks there is going to be growth out of the US. Scotia Bank (BNS-T) is the most international and there can be some growth there. He likes Mexico very much. He is not equally weighted in the banks.

How would you evaluate a company’s ability to pay a dividend? You will have done well focusing on dividends for the last several years. As interest rates have been lower, lower and lower, there has been a demand to get better and better dividend paying stocks. Going forward, it is going to be critical to focus not on the magnitude of the dividend, but its trajectory. Growth and growth of top line is important, but a better number to look at is free cash flow. That’s the cash that a company has after it has met its obligations after it has reinvested in its business and paid its existing dividend.

Markets. There has been a lot of volatility on concerns on what is happening with global growth. The Chinese economy has slowed down, and the question is whether it has reached a plateau or not. The bright star globally has been the US economy, which has seen 6 years of expansion, but at a tepid rate. Every time they start talking about whether interest rates are going to rise or not, the market seems to get a little skittish. We keep seeing mixed signals. There have been strong employment numbers lately, but industrial production numbers may be a little soft lately. In Canada we are still dealing with the fall off from falling energy prices last year, and that is still rippling through the economy. We now have new governments provincially in Alberta and federally, and their policies with respect to business are not entirely clear. There are some legitimate concerns out there, but some of the valuations we were seeing until a year ago were getting a little bit stretched. A lot of things have pulled back, particularly in the financial services. There have been pullbacks and valuations to a level where a lot of the bad news has been built into those numbers, and where there is room for investors to look and position their portfolios for the next cycle.

Canadian Banks. Have corrected over the last year which is being caused by a number of factors. One is that they are in Canada with exposure to energy markets. There are a lot of international fears about the Canadian housing market, which are unjustified. Since the financial crisis, there have been movement by regulators globally, to force banks to increase the level of capital that they hold, against any future calamity. As they had to hold more capital, it reduces ROE. However, banks in Canada are selling at reasonable levels and are carrying compelling yields. He owns the Royal (RY-T), CIBC (CM-T) and Bank of Nova Scotia (BNS-T).

Markets. It is an interesting point in the market. It all comes down to the interest rate question, which is creating opportunities in the market. Any REIT with US exposure has been outperforming and Calgary focused REITs are the worst performing. If you see the rising rates coming in December, the Loonie will weaken further. Once rates move, the market will realize that this move is very slow and they can focus back on fundamentals again. With Calgary we need to know what the security of the rent is. It is not that bad, but the market has such a hate for them and soon they will be the place to buy.

Market. Despite massive efforts by banks globally, there is a shortage of demand for almost everything. As an example, the third-quarter report from Caterpillar (CAT-N), a big capital good makers, tells you that nobody is investing in basic production. This is weak even in the US which has a strong economy. Production increases in the US has really been offset by decreases in places like Mexico or Venezuela, state owned oil companies that haven’t invested substantially in sustaining capital for a long time. The increasing US production is great for the US and for US consumers. What is really driving commodity prices is lack of demand. Coal, iron ore, uranium, base metals businesses are getting decimated. For investors with a decent time horizon, this is very good news. In resources this happens periodically about once a decade. Money has been made historically in resources by being a classic contrarian, buying when the situation is bleak, not with a quarter to quarter view, but buying it with a 2-3 year view. The cycle always turns. As long as people are being born, and those people want to eat or drive, demand for commodities is one of the basic economic drivers globally. Regarding precious metals, we are at the beginning of the end. Regarding industrial materials, we probably have 1.5-2 years to go. Fiscal measures, which are still being undertaken and which really began in 1997, had the effect of forward shifting demand. We have forward shifted demand for 13 years, and the chickens are coming home to roost. We have to work our way through this. In 2015, we are wearing the effects of 15 years of quantitative easing. It is a natural, if unpleasant cycle.

Ecuador? He would happily invest in Ecuador. This is a country that is in transition, and he thinks it is for the better. The problem will be a social accommodation between the centre Quito and the regions. Traditionally, resource rents have always gone to the centre, while regions have always paid the cost. Also, the government currently wants approximately 50% of the economic value of the resource. They are going to have to become more competitive.

Energy. OPEC expects a balance in the oil market sometime in 2016. Incremental oil demand globally is up by 500,000 in 2013 by 1.8 million barrels a day by 2014, and this year it is going to go up by 2.5 million. There has never been a time in modern history where oil/gas has had 2 years in a row of negative capital expenditures over the previous year. It looks like next year’s forecast will be down by 10% versus 20% from the previous year. The Canadian oil product is probably the lowest price on the planet. Companies who cut their capital expenditures to below cash flows are the ones that are going to be sustainable in business.

Vermilion (VET-T) or Suncor(SU-T)? Doesn’t think a portfolio should be built on highly concentrated positions, so he would suggest looking at mutual funds or ETF’s (such as iShares S&P/TSX Energy (XEG-T) that give you some advantages of diversification.

Natural gas. Now going more and more towards base load electrical generation, but there are always going to be large swings that come with heating and cooling degree days. There are massive amount of production coming off the Marsalis that seems to be swamping the continent. We are going to be living with lower price natural gas for a while.

Markets. Relatively bullish in the intermediate term. We are still in a nice up trend. The market retested the August lows, which he had expected to happen. The market has surged a lot faster than expected, so we are in a period of consolidation. One of the big themes in the market is the Fed and when it is going to raise interest rates, which is supposed to have a large impact on the market. He is not so sure the increase is going to happen. The Fed has been relying on the market as an indicator of whether or not they should raise rates. In the US they are talking about negative earnings growth and negative revenue growth, and it looks like it is going to come in negative, including the Q4 numbers, for the whole year, which is not a great environment to be raising rates.

Economy. The global economy is struggling, led by the US and China. Still in growth mode. 6% seems horrible relative to the 12% of 5 years ago, but is still pretty robust growth. We are seeing an environment that is conducive to further positive equity returns. Slow growth is not the worst thing in the world. These things move along at a decent pace, and hopefully we see dividends increase in regularity. Eventually there will be a rotation back to more of those more core dividend paying sectors and more of the value bias going forward. The big thing will be the lift-off from the Fed. Once that happens, that is going to make it harder for all companies to grow. Rising interest rates, by and large are tough for all asset class returns. Expects the market will rotate back to a more conservative stance.

Pipeline dividends? Enbridge (ENB-T), TransCanada (TRP-T), Pembina (PPL-T) and Altagas (ALA-T) all raised their dividends this year. The commodity price downturn, even though these projects are long life and can survive another commodity price downturn, potentially has taken some of the growth off the table. Still views dividend growth as being pretty robust. These companies deal in volume (which is increasing) of oil and gas, not price.

Markets. We had a tough summer with a 10% correction. We are back to the starting point. We had 6 pretty good years so a lot of stocks are getting expensive. Selection of stocks will get very important. The Fed is likely to start raising rates, but there is plenty of liquidity around. There will be some volatility regardless. We are not going back to the 3-5% growth from the past. You need to choose stocks that will grow organically in revenue and earnings. The US has the strongest economy in the world. They were first into and out of the crisis. So this has been a big focus for him. He thinks the growth will spread out throughout the world slowly. Eventually he will see a rotation into energy (3-5 years). He trimmed his portfolio down to core positions and then opportunistically deployed his cash after the correction.