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Peter Brieger.

Peter Brieger is chairman and managing director, GlobeInvest Capital Management. His focus is North American large caps.

Top Picks:

Toronto-Dominion Bank (TD-TSX)

One year consensus price target: $58.72; Per cent gain: 8.8; Yield: 3.5%; One year target return: + 12.3%; Date and price of last purchase: February 19 at $54.49

It seems the consensus view for Canadian bank earnings is between 3 per cent and 5 per cent for 2015 and possibly 2016. There are certainly some potential headwinds in the Canadian sector related to slower consumer borrowing and the possible impact of lower oil prices for longer than many expect. Without denigrating those possibilities, we think that the saving graces will be a better-than-expected result from its U.S. operations, the positive impact from a lower Canadian dollar, as the U.S. economy picks up, an indirect positive impact on both Canadian businesses and consumers alike and finally further dividend increases supporting a potential 4.0 per cent yield.

Pembina Pipeline (PPL-TSX)

One year consensus price target: $49.38; Per cent gain: 25.4; Yield: 4.4%; One year target return: + 29.8%. Date and price of last purchase: February 18 at $39.81

The case for Pembina Pipeline is one of steady earnings' growth based on either long-term fee for service or take-or-pay contracts mainly in the oil sands area. The potential for further expansion is high. The reason for its recent price decline relates to the 38 per cent of operating income which comes from its mid-stream operation and which is commodity sensitive. It is management's objective to reduce this to less than 20 per cent during the next several years. In the meantime, until that per cent target is reached, any recovery in oil and gas prices will have a positive impact on cash flow. We also expect further regular increases in the dividend.

iShares S&P/TSX Capped Energy Index ETF (XGD-TSX)

One year target price: $12.80; Per cent gain: 16.6%; Yield: 0.3%; One year target total return: + 16.9%; Date and price of last purchase: January 30, 2013 at $17.76.

The case for this TSX gold index is based on our one year target for bullion of +10.5 per cent. Given the recent cost-cutting by most gold companies, the expected price increase would have a positive leveraged impact on the cash flow and prices of this index's components.

Past Picks: February 24, 2014

Crescent Point Energy (CPG-TSX)

Then: $39.07; Now: $31.23 -20.07%; Total return: -14.10%

Inter Pipeline (IPL-TSX)

Then: $28.91; Now: $33.86 +17.12%; Total return: +22.06%

Central Fund of Canada - A (CEF.A-TSX)

Then: $16.69; Now: $15.32 -8.21%; Total return: -8.13%

Total return average: -0.06%

Disclosure:

Personal

Family

Portfolio/Fund

CPG

N

Y

Y

IPL

Y

Y

Y

CEFa

Y

Y

Y

Market outlook:

In the very short-term, the S&P 500 is overbought as measured by the Investor Intelligence Bull/Bear Ratio of 4.01 as compared to a normal upper valuation of 3.0. While this indicates the potential for a correction, a correction does not necessarily follow. Markets can work off that overbought position by moving sideways until the B/B ratio recedes to less than 3.0. Also, if one looks at the TSX and S&P 500 estimated 12 month forward price earnings ratios, (to February 2016) at 16.9 and 17 .6 respectively, they are moving higher toward an 18 PER, which would definitely be a red warning flag for us. However, if the current 2016 estimates come to pass, the respective 2016 PERs decline to 13.8 and 16.2 (Yardeni Research) or 15.5 (the consensus).

So at this point, excluding the appearance of a swan regardless of whether "50 Shades of Grey" or just plain black, the main clouds in the sky are geopolitical. For example: a) further misadventures by Putin in the Ukraine, thus triggering further military action because of a more aggressive NATO response; b) further ISIS sponsored activities particularly in North America; c) in spite of everyone's best efforts Greece final walks. At this point, possibilities "a" & "b" are the most worrisome. We put a low probability on "c".

From a U.S. domestic fundamental perspective, a report in the Wall Street Journal points out that "sub-prime lending is at the highest level since the 2008/09 financial crisis, driven by a boom in car lending and a new crop of companies extending credit. Almost four out of ten loans for autos, credit cards and personal borrowing in the U.S. went to sub-prime borrowers during the first eleven months of 2014". Should these lenders put a brake on their activities it would not be helpful to auto sales, which have been one of the staples of this recovery.

However, happily in my view, the expected good news going forward more than makes up for the potential negative mentioned above. They are:

  • A better outlook for consumers as past seven year bans on credit are lifted, thus improving the ability to access credit for an estimated 10 per cent of households (data in these bullet points courtesy fundstrat – February 2015);
  • An easing of bank lending standards which improve the outlook for another 20 per cent of households;
  • A sharp decline in mortgage delinquencies and in consumers’ Debt Service Ratio from the 11.3 per cent to 13 per cent at the top of the cycle to 9.9 per cent today;
  • Stronger labour markets, the benefits from lower gasoline prices and pent-up demand;
  • A potential pick-up in U.S. corporate capital spending as plant capacity approaches 80.0 per cent.

In conclusion, while markets are currently overbought and without ruling out the potential for a 5 per cent to 10 per cent correction, I remain very bullish looking out for the next two to three years.