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

Dow Theory. One aspect that he was paying attention to that gave a bit of a heads up on last week’s correction was divergence. The theory is that Dow Transport index and the Dow Industrial index should move in step, more or less. Transports kept moving up for the 1^st few weeks of January while Industrials were moving down. This is a divergence. Because they were not moving together, it can give you a sort of heads up that the breadth, total participation of the markets, was not in sync. This could indicate a bit of a correction. Recently the Dow has been moving in a fairly tight range and the 1^st level of support would come in at 1725, which was where it hit yesterday. If this decides to correct further it could go down to 1720 or so. So if 1775 doesn’t hold, he is looking for 1725. Either way, he thinks the correction is short-lived. This shallow pullback presents opportunity. He has raised a little bit of cash and is using it to purchase.

How do you take into account both fundamental and technical analysis when recognizing that some fundamental analysts will Buy a technically broken down stock because they think it’s good value or Sell a technically strong stock because they think it’s overvalued? He doesn’t buy a stock that is technically breaking down but has good fundamentals nor does he buy one that has bad fundamentals but has good technicals. He only buys a stock when they are both agreeing. His Sell bias is a lot more slanted towards the technical side. Basically he will Sell on technicals but will Buy only on both technical and fundamentals.

Markets. Have seen the market come off in the last couple of days. Almost nobody is bearish and this is when accidents can happen. In this environment he is concerned about what is going to go wrong. It is 14% bearish, which it never gets to. As he rolls off of valuations, he will just sit on cash. You can get an international something event and it hits all the markets – everybody hits the exit button at the same time. We had the world growing in 2008 at 5% and now it is at 2% rounding up to 3 to 3-1/2%. In terms of consumer commodities it seems like we will get a tightening.

How do we take advantage of the CAD$ going down? Canadian resource stocks just got a discount in their costs. Mid cap Canadian mining companies are good; and oil and gas just got 10% better. This applies to companies taking commodities out of Canadian soil.

Markets. He is anxious to cut the deficit earlier than he previously forecast to. It is a question of whether the economy will let him do it. We are not creating many jobs right now. Earnings season: 74% beat consensus but did not impact the market much. Companies that did well are buying shares back. The question is what is Apple going to do at the close today. Looks like the FOMC is going to reduce its stimulus by another $10 Billion.

Educational Segment. Why Oil and Platinum tend to do well this time of year. With seasonal trades you want to look at three things.

1. The time for the seasonality to occur. For energy it is from January until May. Works 85% of the time with average return 11%.

2. Technicals. Energy index just broke to a 2 year high last week.

3. The Reason: It is cold outside and winter is when most of the drilling occurs in oil exploration.

Markets. We seem to fear emerging markets every once in a while. Any time you have your complacency punctured, people get nervous and start looking over their shoulders. He is betting that the current conditions are a much needed correction. From the high, the S&P 500 was only down about 3.2% as of last Friday and the TSX was down only about 0.7%. Worst-case he sees is 10% to about $1,665.

Economy. Fed up with short-term thinking of quarter by quarter, week by week, what is the Fed going to do. They are fixated on the lack of inflation and he thinks they are looking the wrong way. We have had times in history, most recently the 1950s, when there was low inflation, low interest rates and P/E ratios for the stock market were quite low. We’ve had a great time for stocks from 1952 through to 1960. There have been 3 periods in history when you’ve had 70 years of price stability. First was during the Renaissance, second was the age of enlightenment and the Victorian era was the 3^rd. In between those periods, there were times of war, dislocation and government spending. This current wave started in 1980 with the collapse of inflation and the collapse of interest rates. If this turns out to be only a 50 year cycle, we have 16 years plus of stable prices and low inflation which drives the central bankers crazy. He is looking forward to this and is quite bullish.

Gold. Currently there is a great fear in China that there is going to be a financial collapse of some sort or another. Apparently one of the leading banks floated a fund that lent money to a coal company that was on the verge of bankruptcy. The bank told the fund holders that the bank will not honour the investment. However, there is a story today that China is going to bail out the fund. Secondly, India is going to change their import rules. They had slapped some fairly heavy restrictions on last year. He is bullish on gold.

Markets. A lower Cdn$ will ultimately help the manufacturing sector and hopefully get the economy going a little bit more as well as clear up some of the account deficits that we have. It should support more broadly, corporate profitability and equity markets. The US, being the largest economy in the world, will lead global growth. He’s held the view for the last 2 years that developed market growth would accelerate, while emerging market growth stabilized. This is why he biased most of his portfolios to North American equities, specifically US and Canadian. He is now starting to look outside of North America and focus a little bit on trying to find good, large multinational companies in Europe that have good balance sheets and also pay good dividends and are dividend growers. For the 1^st time in the last 4 years, we really have synchronized growth in developed markets. US, Japan and Europe growing at the same time hasn’t happened for quite a while. This will broadly support an acceleration of global GDP growth, which should support the secular bull market. Although the recovery will be somewhat moderate, looking at total growth, and will take a little more time, this is why you want to own dividend paying stocks.

US Mortgage REITs. Have dropped. Should I get rid of them? This is a tough one. He doesn’t own any of them. Always a little worried that because it was a highly leveraged business model, if there was a little bit of a hiccup they would have to cut dividends. These are REITs that borrow on the short end of the curve and invest in the long end in mortgage backed securities. They typically leverage up 6-7 times. When the spread starts to go against them, they start to lose money and they have to cut the dividends. Historically, the best time to get into these is when they are trading at about 85% of BV. That is about where we are now, so if you own them, you might have to take a little bit more of a haircut on your NAV, but the discount to BV implies that even if they are going to liquidate the whole portfolio, you get a 15%-20% bump on every dollar that you have put into the stock. Because of this, he would continue to Hold.

Markets. Regarding the action in the last couple of days, the catalyst is coming out of Asia with the shadow banking system which is all the borrowing that has been occurring. It is global, but much bigger in Asia. Creating a lot of risk and a lot of instability. What he likes is that it is forcing a lot of Short covering on the gold market so we are starting to see that reverse. US$ is strengthening because there is safety. Gold seems to be shining in here. This whole thing is concerning because it shows how weak the whole system is with regards to credit. The big problem in the whole system is that we have way too much debt. At some point the system has to be cleaned up. Interest rates have to go higher with some loss of control. Credit system is extremely weak and it is a bubble. We have to rebuild the monetary system. The US$ cannot continue to be the reserve currency of the world.

Markets. We are entering a secular bull market. A chart he brought showed 50s and 60s after which we entered a bull market until the tech bubble. We have now broken out of the 2008 financial crash and have now entered a new bull market. It is now about picking good stocks and staying long the market. He wanted to be US last year but now, there is a rotation. The TSE had a tough time last year. Often times if you think of the dips of the Dow theory where you buy last year’s dogs on the Dow you move to the mean. There may be a significant correction later in the year. We are not there yet.

Economies. Quite bullish on developed market equities. If there is something he has to watch, it is what is going on in Asia, specifically China. The biggest risk to the current good equity markets is some kind of credit problem blowing up. Has virtually no developing market exposure and very little commodity exposure. A lot of South American countries’ currencies are quite weak and there are some issues that will need to be addressed. He has been Short Chile, Brazil and Colombia. However, those same things are helpful to develop markets because disinflationary pressure coming from weaker commodity prices is good for the North American consumer and is certainly helping margins overall for businesses.

Markets. This is a great market if you are an active investor. It is the kind of market that by picking your stocks you can really add value, because for the last year, the degree to which stocks behaved the same has been coming down. There are some that are doing very well and some that are doing poorly. By picking your spots, you can really add value above the index. He has seen very clear leadership themes in financials, industrials, healthcare, technology and the consumer. If you have been in those spots over the last 12-14 months, the market has been very, very good. Thinks this continues. We are in a market where the themes have some longevity and we are no longer in the secular bear market that we went through from 2000 to 2012. Corrections are going to be shallower and be seen by people as an opportunity to add to positions.