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

Educational Segment. Markets and Emotion. They go through cycles. We are in the depression area. People are thinking they have to get out because they cannot take it anymore. But in the Euphoric phase you should take money off the table. XEG-T went another 12% below the decline he predicted in the summer. Risks now are very, very low. Since 2001, XEG-T when it is down 10%, it is a good buy. The last two times we were at these levels they were great buying opportunities. The long term price in oil should be up from here. We should be bullish. We normally go up 20% with an 85% probability over history after these lows.

Markets. He was up 47% and now is down 3-4%. It’s been catastrophic. He believes the initial weakness when it was at $110 was related to the US dollar trade. The velocity of the sell off was the highest since 1983. The financial market for energy is 18 times the physical market so there is a lot of leverage. We then had to deal with barrels of production going back on line. Last Thursday was huge in terms of sentiment. Believes the Saudis are not targeting North American oil production. In the short term, the sentiment is the worst since the financial crisis. Oil will have to go down low enough to curtail some production. The oil industry does not work at $65 oil. There is one very small play in Canada that generates a rate of return below that figure. The oil companies are in a new reality of only being able to spend their cash flows as equity and debt markets are essentially closed to them. We WILL see $80 and $90 oil pricing again.

Markets. The 2 surprises for him for the year are 1) the drop in oil prices and 2) the drop in interest rates. It is always best to not speculate and to never use leverage. The good news is that those who sidestepped commodities in their portfolios and those who purchased US stocks have done well. He sees low interest rates are going to make businesses spend more money; do M&A and all the great things that started this year. With low energy prices, consumers have more money to go out and spend. The table is set for another record year of corporate profits in 2015. As a value investor, he is seeing some reasonable valuations out there. He has no trouble buying stocks and filling portfolios, but is cognizant of the fact that things are not as attractive as they were a year or 2 ago. However, the economy has improved and you can’t have a good outlook and good prices. Those 2 things don’t go together.

Energy. Technicals broke down through the $70’s and have reached a new low in the $67 area. He got out of all his energy stocks by the end of June-beginning of July. Still had some service companies connected to the business and hung onto those because he felt it was more of a price issue on the producers. However, once he got into September, they started acting a little odd. The TSX Energy Index has now moved back into oversold territory, so the herd mentality is decidedly negative. As we retest what looks like October lows, he thinks we are close to finding a bottom and we are getting back to the 2010-2011 levels. At this point, the risk/reward to sort of dabble in energy looks pretty good.

Markets. When a commodity gets smashed down, that is when he mainly wants to own it. Most of the major commodities were going sideways, and in his mind didn’t represent a compelling value. In 2012, he basically got all the resource stocks off his books. The only one he has come back into is natural gas with only a 5% exposure. What is happening with oil is really interesting. This is one of those times when you start to use the negativity, or overreaction, to your advantage. Oil is not going to be a V correction. It is not going to go down to $65 and back to $90 by February, so you have time to do your homework. Feels interest rates are definitely not going higher. What has happened to oil is a confirmation that the global economy has a deflation problem. It is systematic of the problem that the world is not growing anymore. The beauty of it though is that it is a massive tax cut for practically everybody in the world. Very stimulating for the economy, and probably way more effective for the economy than any kind of machinations that can come out of a central bank. He has been positioned, in the last 2-3 years and continues to be, in knowledge based industries. In a slow global economy, the only place you are going to get growth is from knowledge-based industries, such as IT, software, pharmaceuticals, etc.

Portfolios. He thinks a good number for a retail investor would be 8 quality stocks. The extent to which you diversify or concentrate is directly proportional to your ability to pick winners.

Auto Parts. Doesn’t own them at this phase in the cycle. There is a cyclicality to them. The auto business has done quite well for some time now, and he thinks it is going to have to be eased back on now and will probably be reflected at some point in lower sales. Coming out of 2007-2008, there was a real big delayed effect as far as buying autos. Now a lot of people have gone out and we have kind of caught up right now. He wouldn’t be interested in looking at any of the auto parts. They’re relatively expensive in a historical context.

Markets. Panic selling through the energy markets. Tax loss selling is going on at the same time. Today Americans are distracted by the NFL and tomorrow there could be more selling in the oil sector. He likes buying when there is a lot of fear in the streets. If you have companies you like and are watching, this is a buying opportunity. We have some amazing reserves in Canadian projects. We are showing reductions in costs and it is very encouraging in the kinds of rates of return our companies are returning. It is more to do with the balance sheet than the market cap that determines if they participate in this.

Markets. We are not in the midst of a price war in oil. You tend to get an overreaction in the market place when these things happen (OPEC NOT cutting back on production). Canadian oil stocks are great companies. You just have to buy quality. You can then buy them at these levels. Tomorrow could be a quieter day in the US so these companies may open lower. If oil bottoms at $60 it may not bounce right back. At some point in time, since we do use it, prices should eventually go up. There may be a lack of drilling until it does. Some capacity gets shut in. He always looks at the US first before Europe for a sector that he likes.

Markets. Small caps were outperforming earlier in the year, but for the last 3 years have underperformed quite a bit versus the larger caps. There is a lot of selling still going on in terms of tax losses. This is an opportunity to buy them, but he wouldn’t expect them to move up until next year because of people trying to sell their losers by year end. He is very much “growth at a reasonable price”, so is looking for companies that are growing earnings, good balance sheet, good visibility and a management team that historically have done well. His turnover period for his portfolios is about 30%, so he has about a 3 year Hold period for most of his stocks.

Energy. Right now you really have to focus in on the companies that have clean balance sheets and don’t have a lot of debt. With a lower commodity price, cash flow generation is going to be lower. Thinks the energy sector has been overdone and people are throwing out the baby with the bathwater. There is some very good value within the sector. You have to be selective and make sure the companies have good balance sheets.

Markets. China is stimulating. They don’t want to see their economy fall. US is approaching what he would call Escape Velocity, where their economy is becoming self-perpetuating on its own. The only potential fly in the ointment is Europe. The German DAX is up 16% since Mario Draghi started making comments about buying sovereign bonds, etc., which is telling you that investors are pragmatic, maybe more so than certain elements of German policymakers. They realize that quantitative easing is unfortunately necessary for Europe. It is also a response to the fact that Europe by and large, is lower than it has been, so this is a stimulus for European exports. Unfortunately there has been a lot of wind come out of the energy sector, and has come out of the miners for years now. Money continues to go into certain select areas, so this is very much a stock pickers market.

Markets. Thinks the markets will go higher. Valuations are looking a little stretched, but there is no other game in town. Commodities don’t look attractive, bonds don’t look attractive, real estate has been good but he doesn’t see that going much higher. We are in a multi-decade bull market movement in equities. It has gone on for 5 or 6 years now, but what kills a bull market are recessions, and he doesn’t see this, at least not south of the border. The likelihood is that we are marching towards an eventual Fed tightening. Whether it is in the 1^st half or the 2^nd half of next year is hard to predict, but he tends to be in the 1^st half. Once we see that happening, it will be clear that the rally in bonds is over, once and for all. Money that is sitting in bonds is eventually going to have to find a home, and he thinks that is going to be in equities. Equities in this low rate low inflation environment still offer good value, even at this level. You have to pick your best horse, and he thinks that is in US equities, simply because the US has the best fundamentals anywhere in the globe. Because growth is strong and it is rebounding, you want to be in cyclicals i.e. 1) industrials, 2) technology and 3) energy-later cycle, but keep in mind that energy will be quite weak in its financials. And then energy and materials much later.

Energy. OPEC is debating whether to reduce the quota, which is roughly 30 million barrels a day. It really comes down to Saudi Arabia and what they want to do. Saudi Arabia and Iran do not exactly see eye to eye. Nor does Iran and Venezuela, etc., etc. There are huge agendas which has a lot to do with 1) religion, and 2) who is facing sanctions. All of this is weighing on energy, so there is no consensus. However, the history of OPEC has been one of making a statement and then cheating amongst themselves. Thinks oil will remain under pressure, so for oil investors, that is bad news.

Markets. For 18 months, his view has been that we are in a new secular bull market for stocks. Fullbacks are likely to be shallower and shorter lived than we have seen over the last many years. When you have a market that is both growing earnings and a slowly expanding multiple of earnings that investors are prepared to pay, it is a very durable market. For consumer led developed economies, very low inflation is a really great thing. This is because the consumer has a little more money to spend and balance sheets are getting better and there are some big sectors that are big winners from low energy prices and low inflation. This would include transportation and retail. In the US economy, 72% of the activity comes from the consumer. He came out of the move in October, well over 97% invested, so very few of his Stops got hit. The biggest reduction he had from a sector exposure, starting in July and into August, was largely leaving the energy sector. The money was moved more towards things that were more consumer concentric, healthcare centric, transportation centric or technology centric.