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

Educational Segment. Will it be a year for the Bears or the Bulls? Lots of volatility in 2015. Since 1900, US large caps have always been up in a year that ends with a ‘5’. The fundamentals are nonsense. ‘So goes January, so goes the year’. That is nonsense also. About 40% of the time it is true.

Seasonality: The first couple of months of the year are flat on average and then you sell in May and go away.

Presidential years: The seasonals are almost twice as strong in the 3’rd year as any other and it is because of fundamentals. We should get a good seasonal rally starting in March.

Buy on dips starting in January. He would not be surprised to see the lows of the last few months to be tested once again on the TSX. You might want to raise some cash.

Markets. It does not appear there is a floor to oil prices. No one can predict earnings on oil stocks now. In his US portfolios he has no exposure to oil and has not for some time. He focuses on fundamental businesses with cash. Thinks heightened volatility will continue. Prefers domestic (US) companies rather than international. The US is in a very good environment right now. The equity markets have gone up for 6 straight years and the wind at the back is drawing to a close.

Markets. This may be the year of the Achilles heel of quantitative easing. The real issue is too much debt on the economies, and too much debt is literally crushing the life out of a lot of Europe and Japan and is not helping US or Canada. Because there are no more arrows left in the economy’s quiver, they just keep reaching for them, shooting them and hoping that something will work. The problem is, when you add all that debt from quantitative easing, all you are doing is pressing harder and harder down on the economy. Thinks that 2015 in Japan is the watershed year. Doesn’t know what is going to happen in Europe. He is concerned, because of the inflows of money into the US, that the US will look better, but underneath it all the US is weak,and, by the 2^nd or 3^rd quarter, we are going to be revisiting some form of quantitative easing again. It hasn’t worked so far, so why do we think it is going to work now? Against this background, the 2^nd strongest currency in 2014, gold, could have a good year.

Energy. Thinks it will be a couple of years from now before oil prices get back, to even $60. Why should low cost producer Saudi Arabia shut their production in, so that high cost in US shale and Canada’s oil sands continue to produce? Right now we have a surplus in oil and a weakness in demand, and it is just going to take time. Your best opportunities are probably on the Short side. He is Short with some of the large US integrated names, because he thinks they have issues with negative free cash flow. Most of them have budgeted for $70-$78 oil, and thinks oil will bottom in the $40 level, and they are going to be in a lot of pain. Thinks that most of this year and the following year will be in the mid-$50s, and at best low $60’s. (See Top Picks.)

ETF on US banks? The timing on US banks is excellent. The US money centred banks in particular are extremely unloved. They are blamed for the financial crisis, which to a large degree is right. Instead of an ETF, he would recommend buying a basket of individual names such as Citigroup (C-N), Bank of America (BAC-N) and JP Morgan (JPM-N). Just buy these and that would probably be your best bet.

Commodities. The uptrend that has been in place for about 16 years has now been broken. As a result, we are probably facing another 16-20 years of downside in a very long sideways trading band. Copper which is currently at $2.80-$3, could go down to $1.40. Gold could be at around $700. Oil could be at $35. Overall earnings estimates have been shaved dramatically on the TSE and are down about 11%, so he is expecting a pretty modest growth of 3.5% for 2015. Canadian banks could also be facing some challenges.

Gold. If the price of gold drops to $700 an ounce, the impact on the Canadian economy as a whole won’t be significant. However, the basket of 17 commodities looks like it has broken its uptrend, so lower prices would also apply to copper, zinc, etc. A large amount of gold companies costs are based on fuel and the cost of oil has dropped more than 40%. Also, a lot of gold companies have marginal properties and will put them into mothballs, and continue to work on the high grade opportunities. Also, there will continue to be a lot of acquisitions. A lot of gold companies will be facing a lot of challenges in the coming 12 months.

Markets. Santa Claus rally normally starts around the middle of December and goes right through until 2 trading days after the beginning of January. It is on track again this year. The question is, what is going to happen after that. All the economically sensitive sectors are probably going to have a difficult time going into the month of January and into February. Also on a technical basis, markets are overbought right now and are vulnerable to a correction, so be very careful after next Monday. The next big issue to watch is going to be 4^th quarter results. This year the big impact is caused by the US$. On average the US$ makes up over 10% on a year-over-year basis. This crunches earnings by the big cap companies that have international operations and means 4^th quarter results on a year-over-year basis is not so good for the big companies in the US. However, what is bad for the US is good for Canada. The Cdn$ has been coming down, so we have actually benefited from the currency. The average gain for the TSX 60 companies is about 7% on a year-over-year basis. Historically in a pre-election year in a US residential cycle, we have a huge run from the beginning of January right through until the middle of July with an average gain of about 12% over the last 85 years.

US$. Usually this comes under pressure late in the year because funds from international companies go back into the parent company. That has a tendency to put pressure on the US$, but that didn’t happen this year. It may go a little bit higher in the next 2 weeks because of seasonal factors, but we are probably getting close to a peak on the US$ Index. That will have an impact on commodity prices going forward.

Bonds. The period of seasonal strength for equities is from the end of October until the end of April. The period of seasonal strength for fixed income securities is from the end of April through to the end of October. Because of this, you can go from equities to fixed income and vice a versa. If you do that persistently, you can outperform the Canadian and US equity markets.

Markets. He has not changed his view that markets will grind higher. It may be a little difficult for Canada with oil and commodities, however. Interest rates may go up but not aggressively. Stocks offer better opportunity for dividends and capital appreciation. You will see a lot more M&A going on around the world in 2015. Valuations are not aggressive and lots of people are flush with cash. The other thing is what happens to oil and other commodities. It is probably China. There is far too much supply of the stuff. There are not many risks that the US will not lead the world in the economic recovery. The Fed will raise interest rates very slowly because it is too risky for them to do otherwise. You should be in stocks because you can’t get the returns from fixed income.

Markets. There is no one that can consistently forecast what the market is going to do in the short term. He uses a strategy that he thinks shouldn’t be dependent upon the direction of the markets or commodities, but just a strategy that can make money in all different market conditions. He tends to spend all of his time focusing on individual companies, as opposed to making calls on the market or forecasting what it is going to do. Always has hedging in place.

Resources. He is absolutely not tempted to put any money back into this sector. Made a decision a couple of years ago to pull out of direct exposure to the resource space. He likes low volatility in his fund. This just comes down to risk management, which means know your names very, very well. Doesn’t think anybody can know resource names as well as non-resource names.

Pipelines. The trouble is that it is a crowded trade and everybody owns it. Since 2008, everybody has been scurrying to the safety of pipelines, so they trade at very, very lofty valuations, relative to their historical band. Also, in a rising interest rate environment, they are going to be harder hit than other sectors because they tend to be dependent on debt. He prefers the derivative plays on pipelines. (See Top Picks.)

Markets. Sam Stovall of S&P Capital IQ is saying that he is looking for the S&P to go to $2,250, a very healthy increase. He is also looking strongly at the tech sector, industrials and healthcare. Along with a couple of others, he has been consistently bullish for the last couple of years, and has been absolutely right. It is just a matter of putting volatility in context. Most people look at volatility and think the market is either going to soar or crash. It is a lot more subtle than that. John Hood likes big Pharma, but also likes a couple of ETF’s that are little bit more diversified in terms of healthcare, providers, equipment, etc. He is pretty much out of Europe now.