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

Energy. Right now we still have very high inventories with no real strong demand. We have increasing production in excess of world demand. Still thinks the price of oil is too high at present. On the equity side, the TSX is trading at a multiple of forward earnings at around 19X, but when you look at energy, it is trading at 42-43 times.

Manufacturing stocks? The Cdn$ has rallied quite substantially, which has probably hurt their prospects. Also, growth has been a little bit absent globally.

Canadian rails. Why are they dropping? Thinks this reflects a weakness in growth and the weakness in oil prices, even though oil only represents 3%-4% of their top line revenue. Feels it is sentiment that is driving it. Numbers so far have seemed pretty good for both of them. He would prefer Union Pacific (UNP-N) because of its Mexican tie-in and its ability to ship into the lower 48 states. Rails are kind of expensive relative to airlines.

Markets. He had anticipated the current market and is now about 20% in cash, which is pretty high for him. Also, has portfolio protection for another 30% of his portfolio, which only kicks in if there is a really big correction. He will use his pile of cash over the next 3-4 months to buy or add to the companies that he likes. He buys Put options on the market as insurance. He buys them 7%-8% out of the money so it doesn’t cost very much, but as a consequence they don’t kick in if the market goes down only 3%, but do kick in if the market goes down more than 8%. There is some time value as well. They are there to protect him from tail risks. He also Shorts stocks, which have done quite well, but he doesn’t have many right now. Usually if the market is going to come off quite strongly, 1 of 2 things is going to happen. Either interest rates are going to go up which creates a reaction; or earnings are coming in lower than expected which gives a valuation correction. Hasn’t seen Canadian data yet, but in the US earnings are coming in at about 6% above expectation. A very, very significant beat at this point. He knows earnings growth is strong and doesn’t see inflation on the horizon, which are the 2 big things you watch, for a more severe correction.

Canadian banks. All of the banks have had a pretty big correction here. Banks are really good investments for Canadians on risk/reward. In the meantime, you keep getting a nice dividend. The businesses themselves are growing, so every year they raise the dividend. If you think the US is going to be really strong, you go with Toronto Dominion (TD-T) and if you are thinking of a great domestic franchise, he would go with Royal Bank (RY-T).

Markets. Earnings, revenues, forecasts, etc. were pretty predictable as the bar was set quite low. Through the 1^st quarter, expectations fell and fell and fell to the point where they were negative coming out of the 1^st quarter. He also sees that the themes are exactly as he had expected, i.e., a lot of conference calls are citing revenues as being tough comparisons, because of foreign exchange translations. For the most part, the street is shrugging that off. His expectation is that the US$ will resume its strength against the euro. Pleased the market is taking a bit of a breather here. We are in a situation where the economy is tepid and not doing all that well. Corporate earnings are not barn burners by any stretch. A lot of growth is going to come from organic growth, company specific growth, so you have to find the stories that have catalysts and you have to do some work.

Markets. We have just finished the 6 months from Oct 28 to May 5 where the markets tend to do better, versus the next 6 months. Historically the next 6 months does not provide the same type of return potential that the previous 6 months did. The 6 months coming up now is the time period when big losses tend to take over with very few big gains. To stay with your existing material is an extra risk, because the next 6 months don’t tend to produce the same type of returns that the last 6 months have. In the Oct to May time period, 42% of the time there has been gains of 10% or greater versus only 12% gains in the May to Oct period. You do get gains once in a while in May to Oct, but usually there is a reason for it and we are not in any of those scenarios right now. You are really managing risks and you want to take a bigger risk when things are in your favour. The next 6 months is the time period when there is a greater risk for a drawdown, so why not take less risk at that time. This is a time when you concentrate on the defensive sectors and look for seasonal sectors that tend to do well.

Currencies. US$ has a strong seasonal period of outperforming the Cdn$ starting in the fall and into the new year. April is the strongest month for the Cdn$. Over the next little while, on average seasonally, it is really kind of neutral up until July. The current rise in oil is helping to boost the Cdn$. The next downturn would be in mid July.

Utilities vs. telcos? Utilities tend to perform better in the summer. They are a bond proxy. They start to do well in July, but can pick up a little bit earlier. The seasonality for telcos is really in September. It has to do a little bit with the whole buying pattern for plants, etc. They have a very strong seasonal period relative to the market.

Educational Segment. Stops. He loves ETFs for diversification. With a single stock you tend to fall in love with it and average down. You never want to have more than 5% in any one security, otherwise you are gambling. Take SU-T. A recent low was $29. A recent high was $40. At $39, you have 4 or 5% upside. Back in 2012, it was in the mid $20s. You have 8% downside and 4% upside. At $35, you have a much better risk reward ratio. Move in slowly and if it ever goes below your stop, get out. Don’t average down.

Markets. Greece will likely have the money for their debt payment later this month. But nothing has been fixed here. It doesn’t matter if Greece leaves the Euro. Their economy is not big enough to matter. He thinks the debt holders will take a big haircut. Over 5-10 years other countries will line up to leave the Euro. Greece is the test case. China released the weakest numbers in a year, but the money is coming out of real estate. You don’t want to play China at this point. We could get a pull back in China in the back half of this year as much as 30%.

Emerging Market Fund. They are about 12% of the world. 7.2% would be an equal wait for a balanced portfolio. ZEM-T or EEM-N are example funds. He thinks they are at the high end of the range so he is at half weight.

Markets. The US is starting to roll over, especially the multinationals. Europe is getting QE injections and so we could see higher values there. There is value in Asia. If the oil price had not dropped we would have seen rates rise in Canada. If oil prices come back up we will at least see interest rates rise in the US. He is sitting on high levels of cash and just starting to look for value to buy. He is underweight on oil. He started investing in Europe 3 years ago. It is now a multiple expansion story as much of the gains have happened. Pick your spots and try to buy value when you can.

Home Renovation Retailers. We are in the midst of a housing bubble (in Toronto, for example, in Phoenix, too). People are spending money on their homes. He does not think there is another leg up coming in the US housing market.

Markets. Looking at investment alternatives, there is still not a lot of competition from the fixed income market. We know that rates are inevitably going to rise, but he doesn’t feel that is necessarily a death knell for the bull market. Bank of Montréal did some studies that shows PE levels of the market are fairly valued right now, and can see at these levels a bit of an upturn in interest rates. We can withstand a little bit of an increase on the equity side, because coming with that are hopefully going to be higher earnings. Returns in the May to October period have historically been less than the October to April period, but you take the chance of being out of the market if there is a strong market, particularly in a pre-election year, which is where we are now.