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

Markets. US markets near record highs once again. Didn`t think they would announce tapering this month and they did. The market took it well. The market likes clarity. The seasonals are strong in December through mid-January. Thinks it goes to 1850 in the next couple of weeks, at which time he would take some money off the table. In the last two weeks he has heard very little chatter about how good or poor the Christmas season shopping has been. There has been pretty good discounting in stores. Storms in Canada may impact pre-Christmas shopping. Crude oil will trade from mid-$80s to $110 for the next couple of years. Pipelines could make a difference in getting Canadian oil sold at world prices.

Educational Segment. Market Breadth is Breaking Down. Chart 1 compared the NASDAQ index with the number of NASDAQ stocks making 52 week highs. They are diverging. 52 week highs are going down while market is going up. This often leads to a period of consolidation, 3 so far this year. We are seeing weaker and weaker participation. Chart 2 is percentage of stocks above their own 200 day moving average. Almost all are below that average near the time of major bottoms (>80%). Usually 75-80% are above this point at market highs. The number of stocks above 200 day average is currently declining. Chart 3 is advance/decline line. Showed how in 1998 this number peaked but markets went higher for 18 months with less and less stocks participating.

Markets. It’s been a mixed year. Some emerging markets have been quite flat. Canada has been pretty good and the US side has been spectacular. Up until a year or so ago, money coming from the federal reserve went to emerging markets. That changed a year ago. Looks like money flows are heading towards developed markets. Early tapering will keep helping for the time being. We will get a correction at some point. In a bull market, corrections are quick and not that extensive. Difficult to know when during next year it will come.

Markets. He is a “Buy and Hold” investor and monitors and switches when appropriate. He is a very patient investor. His best ones are ones that were made 3 years ago. His criteria are good quality companies with reasonable prices in industries where he can sleep at night. Still seeing lots and lots of value in the market. There is no other alternative except for good quality stocks. Has been fully invested 4 years and doesn’t see that changing. Avoiding anything interest-rate sensitive. There are a number of great Canadian success stories that have done really well in 2013 and expects that to continue. Believes the economy is going to improve in 2014 and interest rates are going to rise, but will stay very, very low.

Interest rates. Expect they will rise in late 2014. The taper talk is done and he can see interest-rate/inflation going higher. The economy is strong and it is time to get rolling. If the GDP goes up and interest rates go up, he could see 10 year bonds at 5% in the next few years.

Pipelines. An interest sensitive sector with a high valuation. What he likes about pipelines and the whole sector is the irreplaceable assets and that big, big, booming exposure to oil sands and the demand for crude. Good companies but feels the upside has been all priced in. He likes and owns Keyera (KEY-T) and Pembina (PPL-T).

Markets. Thinks we are already in the Santa Claus rally. We survived the taper talk, which seemed to have created instability and negativity, but the actual taper itself seemed to create “certainty”. This is a wonderful illustration about how markets actually trade. They are very scared by uncertainty but the minute you have certainty there was a huge rally off the $10 billion taper as well as the certainty about interest rates. The message is that there is no inflation visible in a 1-2 year forecast. Business can go ahead with a lot of investment on a lot of the capital side, with certainty that they are not going to get crushed by rising rates in the near future. It also tells consumers that they can go ahead and loosen the purse strings and, if an American, buy that house and car.

Natural Gas. A little optimistic, but feels there is a very big overhang as a result of drilling for LNG exports. You have some big players that need to prove out a lot of natural gas to get their export licenses for LNG. Thinks there is going to be a big increase in production in Canada, which could put a lid on price increases.

Economy. This time last year, the US federal government said they were going to stop printing money because they were at $3 trillion and they were going to stop their QE. All year long we were expecting them to stop and it is now at $4 trillion. They are now saying that at this time next year they will be at $4.9 trillion. They are going to taper back a little bit of the siphoning of the bonds that they have been going through. They are trying to start the process which will create other issues, but if you really look at their balance sheet their assets are over $50 billion and are now sitting on over $4 trillion of debt. As they start to taper off, the value of that debt is going to devalue. They face a very tricky situation in terms of how do they unwind the process and then unwind all of those securities. He definitely expects we will have higher interest rates to prepare for that scenario. Economy seems to be improving a bit, but some of those numbers are negative/positive. They are going to have to stop buying. The Chinese have said they are not going to be buying any more treasuries and a lot of people are walking away from the treasury market. What concerns him is that they are pulling $5 billion a month off the mortgage backed securities, which will affect US municipal pension funds. The key risk is much higher interest rates and they might lose control of the situation at some point. Thinks this is still very bullish. Gold is being siphoned off to Asia and the Middle East, etc.

Markets. Feels you still have to keep an eye on the precious metals. Gold and silver have to be a component of the portfolio. He particularly likes utilities as well. Natural gas and oil prices are looking very good. All of these are inflationary pressures that are coming in. The setup for stagflation is still in place. The only caution would be on REITs because they are interest-rate sensitive.

Markets. People were looking for a reason for the market to continue because it had been strong. They are moving into the large cap because of more liquidity. Then it is trickling down the small caps. After a big run up like we have had it could be volatile over the next year. Watch that your picks don’t have a big PE. He is bottom up and finds there is good value is some technology companies. Dollar came down and so some lumber companies moved up.

Economy. There doesn’t seem to be any alternative to stocks. Will probably see higher interest rates, which will be very good for financial services. US is sitting with about $2.4 trillion in reserves in the banking system. Normally $1 in reserves is expected to generate about $70 of economic activity over time. Current reserves have been delivering roughly $1.4 of economic activity for every $1 in reserves. This means there is a huge amount of money if the economy starts to move and consumers start to get more confident. This could cause an almost tsunamic effect to the US economy in the longer-term, and maybe it will turn out that the US equity markets correctly predicted where things were going. If so, then Canada will be even better next year because they have to play catch-up to the US. He likes the financials because of this. The export sectors in Canada are going to look interesting. He is not as comfortable with the commodity base as there is no inflation in the system. Gold will be a tough one. Oil will be okay, but not great, and you will probably be better off in other sectors.

Option premiums. If we get more retail investors back in the market, the implied options volatility will start to pick up and option premiums will start to rise a little. They have been low for a long time and he wouldn’t be surprised to see that change next year. When premiums rise, that is when option writing strategies become particularly attractive, and he is looking at Index Options, specifically. This is the one trend he would look for next year.

Markets. The Investment industry has a tendency to analyze everything Ad nauseum. When an event does happen, it is basically a non-event because we have so many opinions of what is going to happen. Where we get hurt is the event that we don’t know what is coming. If the market weakens because of the Fed tapering, use this as a buying opportunity. He is very bullish on global economies.

Markets. We are in a new secular bull market. There is always room for a correction but that is a few months away (10-20% correction). There may be one in later 2014 or early 2015. A second year presidential year tends to be a little softer. In 2009 there was a trough and he finds they happen every 5 years, so that brings us to 2014. Then markets have room to run after that. Any correction will be a very good buying opportunity. He is a big believer in rotation. Some of the old leaders are just beginning to roll over. He is trying to buy into emerging leaders.