Download Dec 7-14 Good Afternoon To All I am between hockey games for my

Dec 7-14
Good Afternoon To All
I am between hockey games for my sons local midget hockey tourney and wanted to get this note out
today so here goes—in rush mode—yikes!!
The market news is all about oil prices and the recent positive jobs numbers so let’s start there before I
get into the macro and the MIPP.
Oil is now down almost 40% since June and the question is how much is excessive supply vs weak global
demand?? I think it is both and in the short term this will be a positive for some markets such as the
consumer lead US economy-market, but over the midterm my suspicion is that it is a net negative as it is
more reflective of a slowing global economy! There will be winners in the short term (US consumer
stocks) but also losers eg. the TSX has been hit hard over the last several weeks with plunging energy
stocks and now the TSX is only up 6.1% YTD.
The recent US job numbers were very strong and supports strong holiday sales in the US and most likely
higher US markets in the short term. This has raised the odds of an earlier IR hike by the FED but they
must also now contend with a rising US dollar which hurts their exporting multinational companies and
to raise IR now would only exacerbate this problem.
Here are the Macro Trends I am following and changes I am making in the MIPP to accommodate for
these trends:
#1 Weak Oil Prices—will continue!
My bet is that oil prices will stay low longer than most suspect and may even go lower ---the causation
is excess supply (shale oil) and weak demand and OPECs influence (to keep supply high despite weak
demand) —yes this will correct eventually but not in the near term-even midterm and so I see lower oil
prices ahead!
For this reason I am lowering our MIPP energy-oil exposure by selling Gibson and Pembina BUT also I
want to take profit and luckily we have been doing this for the past 2-4 months selling high (esp. on
Keyera and Interpipeline).
Additionally, I also want to redeploy these $ in other sectors and countries that are offering better value
or stand to benefit from lower oil eg. India (and the US health care sector)---remember the goal is to sell
high folks and BUY LOW…that’s what I am doing here even though we are wired to second guess this
behavior—all of you will see these changes in the next MIPP (Master Investment Portfolio Plan) that you
receive.
The risk with lower oil for those many countries that are dependent on $80-100 oil is prolonged
recessions which would not be good for the global economy…think Russia, middle East etc. …it will be
very interesting to see how this plays out but my humble bet is that there will be more NEGATIVE effects
of lower oil than positive in the short-midterm globally…this will then have a negative effect on the solo
global US engine I believe.
#2 CURRENCY Wars---A strong US dollar is the End Result!
I think we are going to see more countries weakening their currencies globally and this will put
increasing upwards pressure on the US dollar, and I want to benefit from this so I am increasing our US
exposure in all MIPP and most likely I will be adding more US health care positions.
I suspect that the ECB will do more “variant” QE in 2015 to help its ailing economy and to lower its
currency. China and its Asian partners will also be doing this to compete with Japan and its repeated QE
programs…the net result is a stronger US $ and this in turn is negative for all commodities such as oil,
gold etc… But it will be a win for Cdn investors with US equity exposure after the currency translation…I
aim to benefit from this.
#3 Small Cap Exposure
Small caps have been hit hard over the last several months and consequently are offering great value
now and I have been adding to our small cap positions over the last several weeks in most accounts that
can accommodate this addition.
#4 EU Exposure
There is no doubt that the EU has a rough road ahead but I think that is priced in and so I have been
adding to our EU and International positions in most client accounts—recall we are wired to shiver when
we buy low folks BUT it’s the correct BEHAVIOR in the mid-long term!!
#4 Emerging Market—India
Many of the EMs are getting hurt by the global currency wars but others are benefiting from the side
effects such as cheap oil that they MUST import—India is a case in point and that is now on my radar
and I will be adding this position going forward in all accounts. I will also be dropping Brazil as a core
position asap (we have no positions fyi thanks to my tactical call) and moving that MIPP exposure over
to India.
#5 Gold and Inflation
There is no inflation right now and with declining oil there is more deflation pressure so gold is not a
favorite place right now for me, BUT our core Franco Nevada continues to do very well and so it remains
as our core gold position.
#6 US Jobs
The recent jobs numbers in the US were excellent and this points to stronger holiday sales and lower
unemployment numbers…my bet is that wage inflation is just around the corner and so I worry about
profit margins when this happens….the other risk of course is a policy mistake by the FED re early IR
hikes…it would not be the first time that they got this call wrong…but when unemployment gets down
to 4-5% the FED will be pressured into raising rates ..maybe sooner than we all expect and faster as well.
Most believe that the US economy-consumer-corporation can do just fine with higher IR but that is not
my take at all…higher rates will be a real hurdle for such a tepid economy EVEN with lower gas prices.
Despite this - I am betting that US stock markets will rise further based on good job numbers and retail
sales and we are positioned to take advantage of this as outlined in our last newsletter…but then the
Caution Flag will likely get raised higher yet again.
#7 Market Valuations
The US market is very, very over valued and the risk vs reward is very much tilted towards risk and that
is why we all have our Defensive Investment Strategy in place in all portfolios. All the evidence points to
the Herd being FULLY invested and it is only a matter of time before they realize this—my best guess is
this will happen in early 2015??
CONCLUSION
Remember folks –the time to play defense IS BEFORE you actually need it—implementing “delayed
defense” in the investing world is a serious tailgating violation!
But because nobody knows when the markets will correct I have implemented a Defensive Investing
Strategy that allows for decent growth and lower risk while we wait patiently for a better buying opp for
our cash reserves.
I aim to lower this investment risk even more once we get into Feb-March by continuing to sell more
winners as we have done with our energy stocks but there will be more notes on this to come.
Finally—I am going to be selling all positions in POW over the next several months and replacing it with a
new core financial position that will allow us good EM exposure as well as insurance exposure…I will get
a note out to clients on this very soo.
Time to head back to the rink—tis a semifinal game!!
Terry
ENCLOSED ATTACHMENTS
1.
Mawer on oil—don’t catch a falling knife!
2.
Guggenheim on dark side to falling oil
3.
Dr James Paulsen on unemployment –excellent summary
4.
Gavekal on buy India
5.
Bull Markets?? Humbug
6.
Doug Short on market Valuations---expeeeeensive folks
7.
US consumer Healthy–maybe?
This commentary is based on information that is believed to be accurate at the time of writing, and is
subject to change. All opinions and estimates contained in this report constitute RBC Dominion
Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are
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Dr. Terry Curran| Investment Advisor and Associate Portfolio Manager, RBC Wealth Management | RBC
Dominion Securities Inc.
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