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

Markets. He is expecting more volatility and lower equity returns this year. After 4-5 years of steady gains, both in Canada and the US, equities are not undervalued the same way that they were. As a result, we are going to see more volatility. Stocks will not be as immune to bad news as they were when they were cheap. The market will pull back when there is bad news. Now, more than ever, you need to understand what is in your portfolio, because if you have risks in your portfolio that you are not aware of, you are going to feel it more than you have in the past. Now that things are fully valued, you should expect both the losses and the gains. Feels the Chinese slowdown is here to stay. From 1978 until 2008, their economy was growing at about 10.5% per year. That kind of growth is simply not sustainable. Today it is at 7.5% and going to go lower. Still growing, and considerably more than we are in the West, but not at the same rate as they were before so won’t be consuming as much in the way of energy and natural resources. The growth we should expect in energy, commodity and agricultural, for the next decade, won’t be as fruitful as it was in the past decade.

86 years of age with all money invested in Canadian banks because of dividend. Is this a reasonable investment? He owns the Canadian banks, and views them as being an important part of the overall portfolio. Easy money with the Canadian banks has been made. They make their profit on the spread between what they pay in interest and bank accounts, and what they earn in loan interest. The spread, being so low, is very tight but has been offset by the Canadian consumer continuing to borrow, borrow, borrow. He doesn’t expect loan growth for Canadian banks to be nearly at the levels that it was, and that will weigh on their bottom line. Dividends are safe and doesn’t feel this will change, but expect more volatility moving forward. You would benefit from talking to a financial advisor and getting some diversification.

Credit card companies? The common denominator for Visa (V-N), MasterCard (MA-N) and American Express (AXP-N) is that they have benefited from the shift with the consumer using less and less cash and using more of their cards. Transaction volume has certainly picked up over the years. Visa is the largest. More of MasterCard’s revenue is global. AMX is different because it is a charge card and you have to pay the full balance at the end of the month. MasterCard has really been investing in the mobile payment platform. They issued over $1 billion in debt last year, which is beefing up their infrastructure for mobile payments. They expect to issue over 500 million cards this year and are seeing growth in that space. However, the easy money has been made and valuations are quite rich. There is a little more opportunity in AMX because it is cheaper, trading at closer to 20 times, relative to the other 2 which are closer to 30X. He would not be stepping into these at this time.

Utilities? He likes the space. It is tough to get good dividends these days, and utilities certainly provide that. If you are building a portfolio overall, utilities make sense. What you want to be careful of is to not become too attracted to the cash flows and the dividends because these names will tend to be quite sensitive to rising interest rates. Any real talk of interest rates going up and you will start to see volatility in the share price. He owns Enbridge (ENB-T) and Emera (EMA-T) which are giving good dividends.

Markets. There is quite a bifurcation. Some of the safer sectors have really moved up as the market has rotated out of materials and energy and into utilities. Financials have been sort of treading water. Telecom stocks have really moved. Some areas of the market are extremely depressed and sitting on 5 year lows, while some areas are sitting on nearly all-time highs. However, volatility creates opportunity, and it is a good time to be looking around. Last summer he was pretty well fully invested in energy, especially on the infrastructure side, and had about a 20% weighting. He still feels very good about the energy infrastructure industry. Some of the growth projects might be a little bit pushed out or slowed down, but all that does is give them more distributable cash flow to pay dividends on existing projects. On the producers, he tries to own stronger balance sheets, good companies with good netbacks and cost of production, and those companies have held in decently on the downturn, and he is looking to average into them once he sees some stabilization in crude prices. There has been a lot of negative press on how bad energy prices are going to be for the economy and for the banks. While there is going to be some pain, there is also going to be some big positive offsets. The Cdn$ is down significantly year-over-year, and definitely down from the highs of above parity a few years ago, where a lot of the manufacturing in Ontario and Québec was significantly depleted over that time period.

Markets. There is this ‘Sell Canada’ thing going on here. But we are trading ahead of the long term average in oil price. Right now we have excess supply and no demand. 9 of 12 countries in OPEC have a break even cost of production of $75. OPEC is 26% of world production and are maintaining production and North America has 21% and is cutting back. Oil and related stocks are incredibly low. He is starting to pick away at stocks. Mid stream companies are not all that affected by oil prices. Companies that have already cut back dividends or spending are worth looking at.

REITs vs. Banks. Banks have better valuations, but he would buy both. Banks are only 3% oil so are not going to be affected as much. They are in the sweet spot of valuation. HR.UN-T and REI.UN-T are off because of the Target story. He holds all 5 banks.

US Dividends? You can never correctly forecast currencies or interest rates. You pick an investment that will go higher and unfortunately the currency will move one way or the other. You can get a Canadian listed, US dividend ETF.

Ontario Real Estate. Are we heading for recession? We may be seeing some signals, but he doesn`t think we are heading for recession. He likes situations that signal to the Americans that we are not like them, illustrated by Target leaving Canada. He does not see anything weakening because of Target leaving Canada and it should not significantly impact the REITs affected.

Markets. We have had a period of abnormally calm markets, probably driven in part because the direction of the market was pretty well orchestrated by the Central Bank. Their goal and role was to inflate assets, to inspire confidence, increase spending and the velocity of spending in the economy. They have been successful, and it led to a very long period of low volatility. Now we are entering a period where the banks are indicating they are going to raise rates. We are now going back to normal, which includes volatility. He tends to look a lot more at the companies than he does stock prices. Stock prices are a much more volatile beast than the companies themselves.

Energy. Hasn’t changed his strategy, because he had a good strategy coming in. The majority of his clients are in balanced accounts. His average balance account has about 8% exposure to energy. Within that 8%, he has gravitated to more senior producers. He likes good management. These are the companies that, during times like this, would take advantage of the weak and buy at low prices those distressed situations.

Is it wise for Canadian investors to be buying US stocks with the current exchange rate? The dollar is always a relative measure, but a good investment can grow to the moon. In the short term, it makes a difference, but the longer investor you are and the longer your timeframe, the less you will think about or talk about currency differences.

Energy. Saudis flooded the market in the mid-80s. They were trying to knock out the possibility of substitute production coming in at much higher costs. The dilemma this time is that their cost structure is way up. Although they export 8.8 million barrels, they consume 2.8 million barrels. The impact of cutting the oil price in half is going to be demand growth. This won’t come suddenly, but when people go to buy a new vehicle and it doesn’t cost them $100 to fill the tank, they are more likely to buy that SUV or something larger. Saudis are certainly trying to knock Americans off course in terms of energy self-sufficiency, and are trying to knock off some of the shale drilling as well as some of the future oil sands plans, but they don’t have much more production available. Estimates of leading world authorities for over the next 20-25 years is that we are going to need 25 million more barrels of oil a day. Thinks oil will be back toward $70 this year. The world needs more oil, not less. It looks like all the Saudis are achieving is slowing down the inevitable.

Are alternative energies having any affect on oil prices? He doesn’t think so. The main thing that is driving down oil prices is that there is a bit of a glut. Alternative energy is hitting coal more, where it is in stationary use for producing electricity.

Markets. The major economies of the world are largely consumers of oil, not producers. So a drop of $40-$50 in oil price is enormously stimulative to consumers in almost all of the major economies such as China, India, Germany and the US, and the burden is born by the major exporters, largely the Saudis. Because of this, he is a little bewildered that the world markets seem to think this is a bad news story. While we are sharing the pain as a producing and exporting nation, actually this was a stimulus that nobody was able to conjure up to get the world economy moving again. Thinks this is a net positive and that low oil prices will not last for very long. They haven’t the last few times. This is a time for courage and not throwing very good companies overboard because of a bit of investor panic. Copper and oil prices being lower, are all good things for job creation worldwide and for people to have better lives by being able to buy things.