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

Short selling in a registered account. You can’t because if you get a margin call you can’t contribute more to meet the call. You can use inverse ETFs to get the same effect as short selling.

Educational Segment. Assessing Risk and Return. How much should you put into any given trade? If you are trying to beat the TSX in the energy sector, for example, the XEG-T (energy sector) represents about 22% of the TSX so if you want to outperform and energy is leading, you need more than 22%. Looking out over the next year it is unlikely the sector reaches more than 16 when it is at 14 now. If we look at 5 years, he thinks oil will recover to the mid $80s. You now have 50% upside. He thinks you want a 25% position in the TSX energy sector right now. As it pulls back you want to add to it.

Markets. Oil and gas is where he is seeing the most opportunity because it has been out of favour and we are bottoming now. The US is entering its period of seasonal strength. The 1.5 Million imbalance is quickly getting restored by decline production rates in the US. Prices may keep pulling back after companies increase production in response to increases in price. Refinery utilization has gone up for the past two weeks. Demand is going up. The market could easily be under supplied by this time next year if the oil price holds and Cap-X remains low (now generally cut by 50%).

Energy. Bulls are looking that the rig count has come down significantly, one half in the US and more so in Canada. US production finally had a negative number last week, when it fell by 36,000 to 9.386. Then you add in the liquids, so it is 14.6 million, and the US consumes about 19 million, so the change has happened when you are finally seeing a negative number. Also new inventory last week was only 4.8 million, versus weeks before where we were seeing 8-10 million barrels a week injection. Summer driving season is coming in June-July and demand always picks up about .5 million barrels or more. The worry is that there is 1.5 million barrels of excess capacity. If you have a demand growth of .5 million into the summer and China starts building additional strategic reserves of maybe 50 million barrels, about .5 million barrels per day, starting in June/July 2015, all of a sudden that 1.5 million barrels of excess capacity shrinks. Bulls are looking at it and saying we have a low of $45 with a high of maybe mid $50 until we get to the summer, and then prices can move from there.

The bear side of the story is that there is no inventory places anymore. Cushing last week went up by 2.6 million barrels, so it is now at 58.9 million barrels and effective storage is only 65, so in 2 to 3 weeks, there is not going to be any space left for Cushing to take any more oil, and the US as a whole has 100 million barrels more than it normally has, so there is 100 million barrels owned by speculators. The concern is that there is 1.5 million barrels a day or 10.5 million barrels a week, looking for a home. The bear side is that at the end of April to May, when the US storage is up to the full, where does that oil go? It would mean it has to come down to a market clearing price, and the market clearing price may be much lower. He likes the bullish story for Q3 and Q4 looking for $60-$70 oil. His problem is, where does the excess capacity/production go once the US is up to full capacity by the end of April. During the month of May and June somebody has to cut back production. If OPEC says they are not going to cut back, then the price of oil has to come down. He is recommending that people be patient for another couple of months to see what happens.

Book Value. Does this have any relevance when all these junior companies are selling at a fraction of the Book Value? If the company bought the asset in the buoyant period like in 2013-2014, they paid top dollar for it. The $100 oil asset is now worth less, which is why a lot of companies have been writing down goodwill and taking impairments in their quarterly financial statements, to write down the excess premium. Because of this, Book Value is relevant, especially for the companies that bought their assets 5-10-15 years ago.

Natural gas? While oil volumes were rising until last week, natural gas volumes also started peaking. In Dec/14 there were 78.8 BCF a day of US production. In Jan/15 it was 78.1. We are finally starting to see the 1^st downtick in natural gas production in the US. He likes natural gas, and in the $2.50 range, he thinks it is probably the bottom. In the winter of 2015-2016 we can probably see back to the $4 handle that we saw March/April of last year. Thinks that in 2016-2020, there will be another great cycle.

LNG development in British Columbia? There are a lot of companies in this area such as Painted Pony (PPY-T) and Birchcliff (BIR-T) that are doing quite well. The problem is that everybody is hoping that we are going to get LNG out of the BC government. With gas today at $2.50-$2.60 MCF, the export pricing is not going to be high enough. For LNG to work, you need double digit gross prices so that you can pay for the LNG shipping, processing and plants.

Markets. Sectors reflective of the global economy are leading. They are above the 300 day moving average, above the 50 and the 50 is above the 200. There is no sign of breakdown in the US biotech index. In Semiconductors there is no sign of a breakdown. The sector is immune to the strong US dollar. The Russell 2000 also is doing well. The Dow today is more interest sensitive than 20 or 30 years ago and so is a more risky bet. It is because there are less industrials in the index and more consumer stocks now. US$ and WTI prices are inversely related to each other right now.

Energy. Thinks energy prices have bottomed for the most part. Felt that the 2^nd quarter was going to mark the high water mark for inventories. With every week that passes by the additional builds of key storage hubs in the US, we are getting close to the point of maximum pessimism, and oil prices are going to find a bottom in the 2^nd quarter. ExpectS we will retest the lows from back in late January. In the 2^nd half, he expects we will have increased visibility to tightening supply/demand balances. If all goes well, we are going to finish the year in the neighbourhood of $65-$70 oil. There has been a precipitous fall off of the rig counts in the US. That has been the key non-OPEC growth area that everybody was concerned about. The speed and severity of the fall off in rig counts is unprecedented. He generally looks for a 6-month time lag between the fall off in rigs and then that showing up on the production side.

Currencies. Currency volatility is really high right now. Believes this is a result of have and have-not oil countries. Before, if you had oil, you were a relatively rich country and probably building reserves. That has probably swung completely around. Currencies have to adjust to the valuation of asset mix of relative country mix dynamics. There is a certain degree of uncertainty out there as to whether we go into a deflationary environment or not. He doesn’t believe we are. As a result, currencies are difficult to project.

Markets. He has been holding a fair amount of cash for a while. Feels that for the rest of the year the market is going to dictate a ho-hum performance. Expecting global growth within the 3%-3.5% range, driven by the US. You could see some volatility with rate increases potentially coming, who knows when, in the US. This causes some uncertainty, so cash positions are warranted to take advantage and pick up some good names that might be available on the cheap. QE is just starting in Europe, and there are some good numbers coming out of there. The euro dropping in value has certainly helped the exports. In China, the same thing. Thinks Chinese growth is closer to 5%-5.5% and the central bank will do more to facilitate that, back up to their traditional 7% range. His primary focus for the past 2+ years has been moving from Canada to the US. There are a number of reasons including currency, diversification and multinationals that have exposure outside of the US. The US market is stretched and finding values is difficult.

Markets. We are dealing with increased volatility in the stock markets. US stock market is trading at about 15-16 times. When you have ultimate yields below 2%, technically from that perspective, the yield from the equity markets is cheap relative to bond rates. In the US there is a 3%-4% GDP growth. Europe is not hurting by quantitative easing, which leads to higher equity markets. The Fed will most probably raise rates, but are not going to raise them aggressively. Just like last year, he thinks the winter was brutally hard for Northeast US and the Midwest, and that definitely impacts GDP growth. Like last year, he won’t be surprised to see 4% GDP growth in the US. European companies are actually making more money because of the opposite effect of US foreign exchange. We still haven’t seen the fall through of consumer behaviour on lower gasoline prices. When you add everything and the fact that rates are going to go up aggressively, he thinks there will be continued earnings momentum and the stock market should gently go up for the next 6-12 months. The most washed out sector is Canada, which has underperformed for 3 years. Considering where the US$ is, he would be a lot more comfortable deploying money into Canada. Valuations are slightly cheaper than in the US.

REITs. There are 2 situations. 1.) Alberta is having a slow down and 2) office and retail seem to be having problems, especially retail, because of e-commerce. That is going to take years to deploy, but it is kind of gnawing at the fringe. When interest rates go up, REITs get hurt, but from a valuation they are neither cheap nor expensive. He would say they are in the 7^th inning of a 9 inning game. He wouldn’t expect much from them.

Markets. The 1^st quarter has been very volatile. There have been a fairly number of days where the market has been up 1%, down 1%, and he kind of expected that coming in. Any time you have the Fed move away from a policy that they have had for the last 5 years, you are going to have some dislocation of asset prices. Economic growth has not come in as strong as people had hoped. The rising US$ continues to hurt earnings for the multinationals. Energy prices continue to be low, hurting some of the S&P energy names. Market would like more certainty so that valuations can be recalibrated on a different rate path.

Industrials. A postsecondary recovery has a normal cycle recovery of 5-6 years and we are already beyond that, and we haven’t gone through a full cycle yet. Transportation still has potential room for value. Short cycle industrials, depending on the end market exposure, have potential value. However, we are past the early cycle and are somewhere between the mid-to late cycle. You want to look at businesses that give you exposure to mid-cycle exposure, preferably non-residential.