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

Markets. On a Bull market, you look at the breadth of a market and things are always positive. Economic numbers have been fantastic, especially in the US. The LEI and Consumer Sentiment numbers are all hitting levels that we haven’t seen in 6-8 years. This is all very positive for the economy and very positive for the market. Then we have lower energy. People have focused on the damage it has been inflicting, but there is huge benefit here. From the consumer’s standpoint, just a savings on gasoline and home heating costs. Any of the producers that use energy as a by-product or an input are seeing a huge advantage as well.

On the Bear side there is usually someone saying there is a crash coming, too many signals, too much overvaluation, etc. That is probably a good thing because it means there won’t be a bear market. Bear markets typically show up when optimism is at its highest. When he sees all the strategists becoming excited about the year and things are optimistic, and the market is going to go nowhere but up, that tends to be a bit of a warning sign for him. Historically, that is when the market tends to peak out. He is seeing some signs that the market might be getting long in this uptrend and wouldn’t be surprised by an actual Bear market in 12-18 months. Now is the time to be cautious and a little more careful with your portfolio.

Canadian banks? The 5 major banks are very similar. Toronto Dominion (TD-T) and Royal (RY-T) tend to have more US operations than the others. Bank of Nova Scotia (BNS-T) tends to have more international operations. The one that he probably likes the best is Royal because they are the largest player in the business and are well diversified. All the banks are going to have some energy exposure, but they all have such diversified businesses, so would not be affected that much.

Economy. The streams for 2015 are divergence, inflation and oil. Divergence references that the US economy is the one that is maintaining or building a bit of momentum. The goose that lays the golden eggs for the US is jobs. About 235,000 jobs have been created on average per month. It is the consistency of the job growth and the dramatic move down on the unemployment rate. This is trickling down to better consumer spending on big ticket items. Auto sales are back up to 17.2 million units produced in North America, about twice the rate it was at the height of the great financial crisis. Housing starts in the US are north of 1 million. That really matters to the economy’s employment. Cascading from that is spending. Euro zone indicators are showing they are not growing. Japan has had back to back quarters of negative growth.

Should Canadian banks continue to be held for the long-term? You want to keep at least 2 or 3 of them. As we go forward, there is no reason that the Canadian banks shouldn’t deliver at least single digit growth going forward. The strategy is that you keep a couple of the banks in your income portfolio.

Economy. Weak energy prices are negative for the energy patch, but are very positive for the overall economy. Particularly in the US, there is an environment now where there is really strong job growth numbers, expanding manufacturing activity, business optimism is high and consumer confidence is high. Now there is another unexpected source of income in terms of lower energy costs. That is going to be beneficial for the US economy. She is starting to see revisions upwards for GDP growth because energies will be beneficial for overall economic growth. Also, lower energy costs and the strong US$ means all of their commodity prices are also weak and is really easing the inflationary concerns for the next year or 2. This gives central banks around the world more room to put in stimulus measures to get their economies going.

Markets. She has 40%-45% exposure to the US market, which continues to be warranted. Expects the US economy to be the strongest economy in terms of rate of change globally, and by that token feels US companies will also do well. She has not been adding to energy and had sold her service holding back in December when prices really started to decline. Still has a couple of energy names which have a yield behind them along with some infrastructure names, but for now she will wait to see the commodity stabilize before she adds any more exposure. Her exposure is around 14%, and the bulk of that is pipeline stocks.

Why would we buy US bank stocks with an almost 20% rate of exchange? This is a headwind if you think the US$ is going to weaken, but she thinks it will stay relatively strong. You are buying US stocks for exposure to the US economy. If the US economy is doing well, then US banks in general should do well. (See Top Picks.)

Markets. When you look at where Goldman takes their oil price forecasts from, they have been behind in it. The point is that when someone comes out with a big call like this, you don’t just run out and sell it. It’s an opportunity to add some value to your portfolio. Energy has not made lower lows, so he feels we will bang out a bottom here, although he does not know when. Testing a low would be a buying opportunity. He would be in complete shock if energy prices stayed where they are. You don’t want to be selling these things here.

Hedged US ETFs. He loves the ability to hedge or not hedge the US dollar. These are brilliant ETFs and will be the solution for the next 20-30 years. Currency becomes another source of returns. He is mostly hedged to the US dollar. He is only just starting to build in the Euro.

Can rising interest rates allow Fed to reduce bonds on the balance sheet? He thinks if they did, housing and car sales would drop. Does not think interest rates can go up.

When oil prices go down, refining margins go up, so integrated stocks don’t suffer as much, or even benefit. E & P companies don’t do as well in this case.

Educational Segment. Geopolitical Influences. In Jan. and Feb. we tend to get volatility in the markets. It seems geopolitical influences will be high this year. Greece will be next to impact the markets. Yields are rising there again. They may elect an anti EU party. He feels the only way to fix it is to get rid of half their debt.

Markets. It is pretty dangerous out there in the resource area. Commodity cycles don’t last in years, but in decades. They go up for a very long period of time and then down for a very long period of time. People lose money time and time again trying to pick a bottom in markets. There is lots of time to make money when it starts going up again. Canada is not that attractive. He would put his money into financials in the US and into the European markets. Most of the Canadian market is pretty fully valued here.

Big, well capitalized energy companies will be the winners in this environment. Having a rock solid balance sheet is important. Dividends, even in the big companies could be in jeopardy. In this environment the bigger will get bigger and the smaller will suffer.

How will Canada do in a 5-7 year $70 oil? Companies would be very happy for oil to stabilize as $70. Companies will adjust and there will be losers and there will be winners. Stick with companies that have better balance sheets that can take advantage of the opportunities that exist at $45 oil.