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

Pipelines? He likes TransCanada (TRP-T), Canadian Utilities (CU-T), Power Generation (??) and a couple of mid-streamers such as Keyera (KEY-T) and Pembina (PPL-T). These have been hurt, but they all survived 2008-2009. In the meanwhile, they gush cash. This is why he likes to stick with them.

Markets. US job reports are the strongest since 1999, which is consistent with what he thought was going to happen in the last few years. Just a slow and steady improvement. He is very optimistic about the prospect for wage growth to continue in 2015-2016, especially if they continue to add 250,000 jobs each month. As we approach the rate of national unemployment, he thinks we will see wage growth outstrip inflation and a really big increase in consumer spending power. This is how he has positioned some of his portfolios and why he has some US exposure, especially in the consumer sector. When looking at wages, you can’t just look at average hourly wages; you have to look at the number of hours worked as well. You also have to consider what happens to wages as you approach that national rate of unemployment. At every point in history, when we consistently approached the national rate of unemployment, you have seen wage growth outstrip inflation. The US Fed is contemplating tightening while major developed markets like Europe and Japan are going to likely continue to have accommodative monetary policies to support their economies to get inflation a little bit higher. When positioning your portfolios, you want to make sure you are invested in economies or stocks that have good risk adjusted returns. Europe is going through a deleveraging process and has likely got another year or 2. Very reminiscent of what the US went through 4-5 years ago, so you may be a little bit early if you are invested in equities there. In the US, you have the prospect for excellent risk-adjusted returns, and by proxy, he thinks we will see this in Canada as well, given that we are their largest trading partner. There are some really good buying opportunities in several sectors in the Canadian Market. The energy sector has pulled back because of the recent decline in commodity prices, so if you start to nibble away here with a long-term time horizon, you end up making a boatload of money. Real estate sector looks really interesting, especially if we have low rates for the next 6 to 12 months, with a gradual increase thereafter. Also, he can see several opportunities within the industrial sector to get exposure to really good dividend paying stocks. That is his bread-and-butter.

Canadian Banks? The biggest risk is if oil stays around $45-$50, you could see earnings estimates for Canadian banks get revised downwards by 5% or 10%. This is overhanging a lot of the banks, and when you look at the ripple effect, it is going to adversely impact capital markets activity and a negative impact on wealth management. However, the banks are all off and the valuations have compressed. If you are a very longer term oriented investor that just wants a good dividend, this is a good entry point. They are good value. The only time you would want to Sell at this point, is if you thought that Canada was going to go into a recession and you have a short-term time horizon. His Top 2 would be Royal Bank (RY-T) and Toronto Dominion (TD-T) because they have some US exposure. The ones he tends to avoid are the ones that made a lot of money issuing equity for energy related issuers in 2014, and would include something like a Bank of Nova Scotia (BNS-T) or National (NA-T).

Energy. Thinks oil prices will go back up to $65-$70 through 2015. This is also an average that he thinks is very reasonable for 2016. Gas prices should also move up to about $4, given where inventory levels are. If we have anything resembling a normal winter for the rest of the year, that should support inventory getting drawn down and gas prices pushing higher.

Markets. Macro Money Flows are important because when you see markets move, a lot of times it is not individuals or portfolio managers that is moving them, it is flows that are coming from offshore. There seems to be fewer and fewer players in the market, and they are bigger and bigger. Things are being pushed around that we didn’t see 20 or 30 years ago. The world has really shrunk in the last 20 years. You have to see where the money is going so that you can anticipate where you should be and what you should be doing. He had a chart that showed the euro versus the US$, which showed the euro has been beaten up for a long period of time. This means money is leaving Europe and is going to the US. You can see this in a number of the big currencies. The pound sterling held up pretty well until just recently, but then it broke as well. Portfolio managers are looking for trends as to where money is going. The long-term trend now is positive towards the US$. This means that if you are investing in US assets, you are going to have a tailwind with you.

Tax implications on holding ADR’s in either RRSP or taxable accounts? ADR’s are foreign securities that are traded in the US and are sponsored by a bank or a broker. There aren’t any implications in an RRSP because this is tax sheltered. There are no dividend tax credits because they are not Canadian securities and there is a withholding tax, depending on the origin of the country.

Markets. We saw all time highs at the end of the year in bullishness. We are now in a strong part, seasonally, of the year in the markets. We are only in the first or second inning of the bull run of the US dollar. He has a secular view on the US dollar, which means 5 to 7 years. Be prepared for a long run on the US$. Position yourself in the top 100 of the US equities. The world will be under pressure as the US dollar goes up. The Chinese market is going up because it is pegged to the US dollar.

Gold. For the last two years gold stocks have been uninvestable.

Oil. There is a lot more downside in oil. No one is making money except perhaps Suncor. Wait a couple of quarters before looking at anything to do with oil.

Gold. This has been rising along with the stronger US$, which is unusual. Gold began its precipitous drop during its strong seasonal period in the summer when the US$ was rising. His chart on gold for 2012-2014, showed a couple of strong touch points. Gold really is a currency, and what you are seeing now, in the last couple of weeks in particular, is a divergence between the two and there is not much left to kick the gold up, unless maybe we see the US$ come down. Just coming back a few percentage points will probably have a pretty big impact on gold, and it will probably thrust above the 220 level. (Not sure of this and wondered if he meant $1220. – Bill)

Telecoms? When compared to the rest of the sectors on a short-term and long-term basis, it is really strong. This is a reasonable space to be in.

Gold and silver? These both had 2 ½-3 disappointing years. He doesn’t know if they will break out, but there is a lot of pent up energy in these trades right now. Doesn’t mean it is going to happen, but your risk/reward is pretty good. Looking at gold, it is in the $1160-$1180 range and is really positive. Silver tends to react a bit quicker, so you would get a pretty good cue on both of them based on how silver acts. They have been pretty constructive in the last couple of months. It doesn’t mean something is going to happen though.

Energy. Reading all the popular press, you conclude that there is somewhere between 1.5-2 million barrels of oil oversupply currently in the market, which has been enough to create the situation now where oil prices are falling dramatically. It really comes down to a game between the Saudi’s and the US shale industry. The oversupply issue is a concern with the Saudi’s because they want to protect market share, and really becomes a question of who is going to blink first. You have to wonder how much pain the Saudis can stand with this big haircut in the price of oil. They have a huge budget deficit even at higher oil prices. He thinks things are going to come to a rapid halt. For example, big players in the Bakken trimmed their budget by 50%. We are starting to see that across all the basins. It is just a matter of time before production follows the budget cuts.

Natural Gas. The story is one of oversupply, principally coming from shale gas plays. The biggest is the Marsalis in the Northeast US. This is a little more sensitive to weather issues, but you have to look a little deeper than that and convince yourself that there is some serious potential declines around the corner. The Marsalis is on the verge of producing 20 BCF a day, which would be not quite a third of the total US gas production. However, they have a serious problem in that they don’t have enough take away pipe capacity to get the gas to market. On December 31, gas in the Tennessee region was selling for just over $1 MCF. That is not sustainable, so why would a company drill if the best price they are going to get is $1. Gas production there will decline rapidly if the drilling stops or slows down. He expects this will show up in gas volumes. We need to see a big correction like this to get the fundamentals on side. Expects the gas season will probably finish back to normal.

Energy. It has been a very precipitous decline and he saw nothing that was predicting anything like this. Whatever the reasons, we are in a new paradigm as far as energy stocks are concerned. As a value investor and looking out over a five-year period, what you should be doing is very selectively initially taking some position in the companies that are likely going to benefit most from a very bad environment. A number of companies are likely not to survive and will soon be victims of M&A activity. Investors should initiate positions in the very high quality companies. Doesn’t know where the bottom of this is likely to be, but suspects that we are below the threshold where the new normal might end up. Don’t think we will see $100 for some time. In a situation where you have supply greater than demand, there is going to be a period where things run off and it will take a while for that supply to diminish. A lot of these companies, particularly those that are highly levered, are going to keep their wells going because they have to make debt payments and they need the cash. That can only last so long because banks are going to start to stop giving credit. This will initiate a whole new reorganization in the industry.