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

Markets. They are a little tired. Had such a good run, particularly in the US, that he feels it could use a little rest and thinks that is what your are going to see in the US. So far, Canada is starting to show outperformance. We have been outperforming since last July on the TSX. Cdn$ is rising and we are still outperforming. While the US stocks are getting hit, emerging markets are doing well and Europe is holding up okay. One of the things that has got people concerned is Yellen’s speech where she hinted that interest rates could move higher sooner than people were anticipating. He thinks we are seeing rotation out of the US, not only into emerging markets, but also into European securities and possibly even into Canadian which will add to our potential of performance.

Not thrilled about rebalancing bonds with rising interest rates. Where should I park money for the short-term? You are facing the same problem that money managers are facing. His alternative was to buy Bell Canada (BCE-T) and Bell Alliant (BA-T) and companies that have A ratings and go with the dividends. If you want to stay on the bond side and have some risks but not huge ones, go to iShares 1-5yr Ladder Corp Bond Fund (CBO-T).

What makes the Cdn$ rise and fall and what do you predict in the next few months? 1^st of all you have to realize that the Cdn$ is rather thin. It doesn’t take much to move it. We are still very much a peripheral currency. Just short-term fund flows can knock us around. Thinks longer-term projections for the dollar are lower, $0.85 is probably okay. In the short term, we have seen some good numbers out of Canada and we are heading towards a balance. Price of oil is up which is a major export commodity. On the agricultural side, we are still shipping last year’s crop. Every time we sell 1,000,000 bushels to China, that money comes back and gives the dollar a lift. Probably for the next 4-6 months, the dollar could be reasonably firm, but on a longer-term basis, it could drift lower.

Markets. Years ago there were equality weighted indexes as opposed to TSX and S&P and there is evidence that these outperform the TSX and S&P. Smart indexing tools may replace active management in the next decade. Fees are lower than for anything other than market cap. 50 or 75 basis points over your investing lifetime, compounded, are huge. US market seeing new highs yet earnings are not that good. We are in the tenth month of a breadth decay after which history shows us we get a 10-20% correction. The underlying market is weakening, not strengthening as we make new highs.

Educational Segment. He was at a US Technical Analysis Conference. Last week we had a breakout in the S&P and a decent payroll number, but the markets went down. The last corrections were about 5-6% . Chart – divergence of breadth. The natural number of stocks in the S&P making 52 week highs. But in every rally fewer and fewer stocks are making new 52 week highs. In 1988 the average stock was going down, but a few big ones were pushing the markets higher. In the last rally it was less than 20%. Chart – candle stick charges of S&P, last correction was a break of 50 average and not a 10% correction. Over the last month we have two failed tops and he thinks now we are looking for a correction. IWM. It does not follow S&P at the lows. It may show a sign of a 10%er coming up.

Markets. In the Tech sector the valuations came off quite quickly. It is profit taking. It is a correction within a bull market. The sector has strong balance sheets and good earnings. Don’t jump in now, but the fundamentals are good there. He likes value investments. Anything with a yield. He likes value, defensive and yields. He doesn’t get caught up a lot on daily ups and downs. Holds a fair amount of cash (12%). He may pick away during the summertime. This could be a precursor to ‘Sell in May and Go Away’.

Markets. S&P 500 chart shows a nice upward trend, but has a short-term Sell signal in place right now. This was kind of expected 2 weeks ago. It is now a question of how deep do we get. There was a bit of rotation with some areas not doing too badly, consumer staples, energy and utilities. It’s the next phase of the intermediate frame that we are in that is more important. Thinks this dip will be bought. TSX chart is pretty similar. There are certain components of the TSX, such as energy and gold that have actually have a little bit of floor beneath them.

Copper. Copper is supposedly meant to tell us where things are going economically, but it’s predictive abilities was only about 30% over the last 20 years or so. Expects this has been really skewed by what has been happening in China. In the band of between $2.85 and $3.10, if it goes below that, he calls into question demand going forward. Copper needs China to participate.

Market. We are in the early innings of an investment super cycle that will see nearly $1 trillion in spending by 2025 and over 1 million jobs created. These are numbers published by the American Petroleum Institute on a study they did in December. Last year there was about $90 billion spent in North America on energy infrastructure and we are only a few years into this super growth phase. She launched a fund last year to take advantage of this on the basis that you can make returns that are just as good as the energy producers, but with less volatility. She had about a 20%-30% lower volatility than the TSX energy index with returns up about 22%.

Markets. There is the view that resources have been a tough place to be, but there have been some rays of sunlight, like gas companies. Uranium and gold have shown some life. There are some continued opportunities to continue to invest. There are early indications that people feel better about uranium even if nothing fundamental has started to happen. Nat gas has the strongest fundamentals over the next 5 to 10 years. The cold weather only highlighted something fundamental underlying the commodity. We are at a level of inventories in the US that we have not been at since 2003. Overall growth in the US has been slowing down. We have to go back to normal by the next heating season. We would have to put more gas into the system than we have ever done before. Indications we will not get back to normal by next winter and that will be good for Natural Gas. He is assuming normal summer and normal winter. The whole market needs to take a breather and build a base ready for the next cycle. Everyone is waiting for it but it is what is the catalyst for it to do that.

Interest Rates. 10 year Bonds have gone from 1.5% to 2.7%, about a 100% increase. Rates are getting higher. As the Fed tries to taper, the selling of the fixed income market will continue and that will generate higher rates. He is not talking about the short end of the curve, but the long end of the curve. The Fed needs to keep buying. If you look at their balance sheet, they have been the buyer and they have to continue if they are going to control the yields. They are going to have to print money and REITs are going to go higher. This is involving bigger and bigger economies. It has the feel of the 30s as to how it is involving the whole world.

Natural gas? If you want to have participation strictly in natural gas, U.S. Natural Gas Fund (UNG-N) ETF is the way to play it. There has been quite a cleansing on the natural gas environment, in that a lot of drillers had to switch to a lot more oil than gas because of the price. We have had a great winter for natural gas and inventories are down again.

Markets. A bit concerned about what the smart money is doing. Institutional investors are having a tendency to take money off the table and are raising cash positions. Usually markets kind of peak out when “retail investor” money starts pouring in. 60% of world growth has been attributed to China and we are seeing numbers coming in indicating they are not that great and doesn’t know that China is going to pull the world along. You also need to look at P/E ratios on the US market. Forward earnings on the S&P are trading just a little bit below 16X. The consensus is that the average is about 15X, so we could probably get to 17X-18X and everything will be fine. Historically if you actually look at forward PE’s you are going to find that, except for perhaps the tech bubble in 2000, the market rarely trades above 16X. He is using stop losses and carefully watching things for his clients.

Markets. There is continuing evidence of a very strong underlying demand for equity ownership underneath the surface. Every pullback we’ve had in the last 12 months has been relatively shallow and relatively short-lived. He feels there is under-ownership in equities. Valuations are reasonable, especially against the backdrop of interest rates. Interest rates do not look like they are set to move dramatically anytime soon, so the extra return you can get buying equities, versus yields on the 10 year bond, are very attractive. Ultimately we know that private investors and pension funds under-own equities as a percent of their total values. Over a long period of time, at the bottom of secular bear markets you tend to get down to 15%-20% equity ownership as a percentage of net worth, at the household level. In each of the last long-term 20 year secular bull markets, by the end private investors were close to 30% equity exposed. Today they are sitting somewhere around 18%-19%. He is mostly equity focused, focused on dividends and specifically dividend growth with companies that are paying out little of their earnings but where they are showing a willingness to increase that. The risk is enough of a slow down in emerging markets that they wind up with credit problems or their currencies come off enough.

Markets. Most of the stocks in his portfolio have moved up, therefore there is a better chance for them to move up further and to get to the initial Sell targets giving him a chance to get out. He was reading a statistic that indicated that there were less people in the US involved in the stock market now than at any point since 1998. It is very rare that he buy stocks at this time of year. After mid-April, it is even rarer. He does most of his buying in November/December. However, he watches the annual cycle and the presidential cycles because when you see something happens 75%-80% of the time, it is a clear indicator of how one might react. So much of this game is simply probability.