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

Which U.S. listed bank would you prefer? He is concerned about buying European banks for 2 reasons. First of all is currency risks. The euro could easily fall further against the US dollar. Also, they have a lot of suspect sovereign and bank paper from southern Europe that is underperforming. Big US banks are in a good environment right now. He doesn’t own Citibank (C-N) or Bank of America (BAC-N), but thinks they are going to do pretty well. The 2 big investment banks, Goldman Sachs (GS-N) and J.P. Morgan (JPM-N) are also doing well. For a pure commercial bank, Wells Fargo (WFC-N) is probably the class of the field. If he were going to buy another bank, it would probably be Wells Fargo.

Markets. He is not resource heavy and on purpose. You don’t control the price of your product in those businesses. Prefers to keep volatility of portfolios low. He owns some oil-related stocks. He has been worried about a global economic slowdown for many years, but did not see the oil glut coming. Oil is the ultimate self-correcting commodity. Spigots get turned off and have to be turned on very quickly. This is temporary situation and will come roaring back. It will take some time to stabilize over the next 6 months to a year. Investors need to take extra risks. There are some bargains. You have to look at companies with temporary problems. Dividends are very important as we will stay in a low interest rate environment.

Dividend paying equities. Everyone is different. It depends on your age. No extra ordinary returns in bonds. Occasional bargains. There are some opportunities in energy royalty finds.

Canadian Dollar. It has gotten hammered along with oil prices. It moves with oil short term and in the long term with interest rate differentials. Thinks it is bottoming out with oil here. Don’t sell Canadian $ and buy US$ at these levels.

Markets. The magnitude of the change in oil is not the big issue. The issue is the speed at which it happened. It is not difficult just for investors, but also for the big companies with their capital budgets, currency forecasts. It has all changed so quickly and so fast that it causes a lot of dislocation and a lot of anxiety. As a result you get a lot of volatility in the market. We don’t know exactly how this is all going to unravel. Everybody’s exposure to Russia is much less than it was in 1998. However, ramifications of what happens in Russia can spill over into the European banks, and you never know what connections that has to Brazilian enterprise, whether or not a company has to make a margin call and do it from a healthy enterprise in Brazil to a very unhealthy enterprise in Russia. This is a very scary time for investors and they have to be looking at their portfolios and figuring out how to prepare for it. He understands that US banks’ exposure to Russia is less than a half a percent. We will probably wake up to something Putin has announced in the middle of the night and it will be something pretty dramatic. Investors need to build some themes and the need to take a look at them. He looked back and figured that China was not a big capital building economy anymore, it was turning into a consumer driven and export driven economy. He then figured that it did not look all that promising for oil, iron ore, etc. Because of that, whenever he was constructing a portfolio, he was keeping it a little bit lighter on commodities and cyclicals, especially in Canada.

Banks. Canadian banks have pulled back recently because earnings were a little less than exciting. As a Canadian investor, you have to be really leery of somebody on television telling you to get rid of your Canadian banks. Royal (RY-T), Toronto Dominion (TD-T) and Bank of Nova Scotia (BNS-T) are really good core holdings. If interest rates go up, although he doesn’t think they’re going to go up a lot, this would be very good for Canadian banks. However, Canadian banks have a lot more exposure to the domestic Canadian economy. CIBC (CM-T) is the most exposed and TD and Scotia would be the least exposed. US banks, in relation to Canadian banks are going to look more attractive right now. It doesn’t matter what you do, money will probably leave Canadian banks, because a lot of US investors have been hiding in Canadian banks, and they are probably going to flow out into some of the US names.

Canadian-based ETF’s that follow the US S&P 500? Believes the S&P 500 will outperform the TSX, and has been his view for some time. As investors, we are really fortunate with the competition that has occurred in the space. You have to decide whether you want to be exposed in Cdn$’s or US$’s. He would argue that you should split your money into hedged and unhedged. Believes the Vanguard S&P 500 might be the cheapest.

Markets. You can look at oil and be scared or you can see a lot of opportunity. Oil prices could stay here for the next 6 months, but fundamentally, half or more of the fracking in the US makes no money. The current price is already priced into oil stocks. Look for when it is going to recover. He would be surprised if the Fed had any material change to the rates this week. The energy sector is a growth sector in the US. Most jobs over the last 6 months are directly or indirectly related to fracking.

Energy. For his sleep at night portfolio, the risk adjusted dividends are more attractive than most other sectors in the world. In the coming months we will likely see much more volatility in the energy sector. Nobody knows. This is characteristic of a bottom, although it could get 10% lower.

Educational Segment. Forecasting Next Year. What he thinks today could change a month from now. Forecasting two years out is nice to have but… In 2015 here is what might happen: Greece: We could be positioned for another exit. We are starting to take a turn. It is breaking down. An election process over the next three weeks may not re-elect, and it could be an anti Euro party that gets in. That is the only way to turn things around there. It would be the first country to leave the Euro. Russia and part of South America: South America is stressed like Russia because of oil being the major export for their economy. Thinks Venezuela could re-value their currency and shock the world. Credit market spreads: are widening and we need to be on the lookout for that. China: next year they could miss their 7% growth projection. China is a big risk for next year that we need to think about. What if the FED decides to tighten next year: Look at Euro futures. By September and December next year, the probably of 1/2-3/4ths of a percent rate hike are already priced in. If oil prices stabilize, the Canadian market might start to turn around. Look at French and German bond yields: The best performing asset this year was a US long bond. We need to watch Euro bond yields and especially French. When we see an extended decline in oil like this, the recovery tends to be about 15 to 25%. We are likely to see a bottom in the next few months,. Earning expectations need to come down. Maybe markets will be just okay next year. Will talk more about these things in January.

Markets. Guest reviewed The 10 Market Rules to Remember from Bob Ferrell:

1. Markets tend to return to the mean over time. Look at the insanity right now. It always becomes sane again. The price of oil will not go down forever.

2. Excesses in one direction lead to opposite excesses in the other direction. Greed turns into fear. Oil has probably overshot in its correction. Investors must be patient.

3. There is no era, so excesses are never prominent. We all think we are smarter than the market. But the market has a mind of its own. We will never understand it.

4. Exponential rapidly rising or falling markets usually go further than you think, but never go sideways. The market will come back to the 200 day moving average.

5. The public buys the most at the top and the least at the bottom. He does not believe in selling oil stocks right here. If we learn nothing else today, independent thinking will always outperform the herd mentality.

6. Fear and greed are stronger than long term resolve. We need to have a plan. Somehow we need to put fear and greed on the back burner and focus on the situation at hand.

7. Markets are strongest when they are broad and weakest when they narrow to a few blue chip names. Try to understand where the market as a whole is right now and where a particular stock fits in. 60% of the move of a security is based on the move of the market as a whole.

8. Bear markets have three stages: Sharp Downturn, Reflexive Rebound, and a Drawn Out Fundamental Downturn. If we are going into a bear market in oil, you will still see a rebound here. But this is how bear markets get started. He doesn’t believe we are going into a bear market for oil, however.

9. When all the experts and forecasters agree, then something else will happen. Interest rates were supposed to go up this year, but they fell.

10. Bull markets are more fun than bear markets unless you are short.

Markets. People wondered how low oil would go. Now it is a case of how long oil will stay low (6 months? A year?). He thinks fundamentally it should be at $75. It is a case of who is going to cut production and how soon. He sees $80 by the end of 2015. When he looks at the volatility of the cash flows in energy infrastructure he is surprised how low stocks have gone. Thinks there are some good values here. You are going to see decent growth coming out of the US. But will they pull the rest of the world up or will the rest of the world pull them back into recession. Follow cash flow streams to see where they come from and how well protected they are. He can manage equity volatility, but tries not to speculate on currency risk.

Markets. Oil was at $70 the last time he was on, and it is a lot lower now. Since then there has been overall concern in the Canadian market, outside of just the energy space, because of potential collateral damage to other sectors. At that time he much preferred US banks because they were several multiples cheaper, and thought the growth rates for the next 2-3 years were going to be better. Canadian bank valuations have come down considerably at 12.25-12.5 times 2015 earnings, and are now 11-11.5. Outside of energy, he doesn’t think alarm bells are sounding, but just that there was too much enthusiasm in places like the banks, the rails, etc. As we get into 2015, he thinks there will be a lot of interesting opportunities. When you see a market coming down, rather than jumping in front of the freight train, you just stay out of the way and let things settle in. With all of the weakness, he is just keeping his powder dry until the new year.

Natural gas. Has very different dynamics than oil. Used in power generation, heating, etc. Natural gas has also come down in the last couple of months, not nearly as much as oil and has had a much better relative year. The cost curve for a lot of the gas companies is far below where gas is trading right now. This a bit of a gamble on winter weather.

Energy. The one thing people don’t talk about is what oil is going to be priced in. The key loser in this whole strategy will be US shale. What does this mean on the geopolitical picture between Saudi Arabia and the US and what is going on with Iran, as well as the deal that Rush adjusted with India? On a long-term basis, he thinks this is good for Canadian producers. It’ll be very interesting over the next quarter as to how quickly production declines. He lowered his positions in oil about a month ago, and is now just waiting to go back in. Thinks we are going to hit that bottom where it is going to be way overcorrected, and then it is going to correct back up to a level where it is going to settle. His company has a $75 oil target where they think oil is going to settle.