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

Private REITs? Has looked at some of these in the past. The challenge is liquidity, and for him visibility. Public REITs put out financial statements that are very clear and very easy to understand and simple to compare with each other. Accessing information on private REITs is more difficult. The biggest question is on liquidity. You have to be comfortable with management. Real estate has had a great run. He doesn’t know when rates are going to go up, but at some point they will and the sector will face more headwinds. You don’t want to own a Private REIT in that scenario.

Markets. US stocks are very near a record, back to 18,000. This is a funny market, because Value guys can say there is not that much value, but there are also trillions of dollars sitting on the sidelines. The bond market looks like a trap, and he thinks quite a few people are going to lose money in bonds. Where do you go? Do you sit in zero? Do you go to gold? If you can, pick a good dividend paying stock and just take your chances. Wishes the Fed would increase rates 25 basis points. Doesn’t feel BREXIT is a big enough hurdle that they should hold back. Wage inflation is between 3.5% and 3.8%, which is high these days. Looking at the last employment number, it doesn’t look like it is going to stop. Also, some of the benefits of low energy costs are going away and thinks $50+ oil is a reasonable level. That is when the DUCs, real but uncompleted wells in Texas, come in. The benefits of the drop in energy is behind us, and now we are going to see that come back and bite a little bit on the inflation side.

Gold stock or ETF? GLD-N would be more of a way to go. He hasn’t jumped into the gold market. The really big positive for gold is if we see inflation coming back. He would wait a little longer to see how it is going to work.

Which country to invest in? We are fine in the US even if we are in for a minor correction. You should revisit and rebalance regularly.

UK Bank Stocks. If you have room for risk, then these work. The time for them to pay off is unclear. Hold for at least a year to a year and a half.

BREXIT. His guess is that the UK is not going to leave the EU. The political chaos is quite overwhelming. There is no prime minister, the leader of the Labour Party is beleaguered. 80% of his caucus wants him to go. Somebody has to introduce legislation in Parliament, usually that is the government. He would say that the betting people feel the next prime minister is a “remainder”, not a “leaver”, and she will not be wanting to introduce that legislation. He also feels nobody really wants to do anything before the French and German elections that are coming in the fall of 2017.

Markets. They have been range bound. He is looking at the situation in the bond market with interest rates going down and down. The US 10-year bond is under 1.4%. The Cdn 10-year bond broke the buck; it is 99 basis points for 10-year money. He would question why you would not want to own a Canadian utility, a Trans Canada, a Bell or a bank where you have a dividend of 3.5%-4% tax advantaged, compared to owning one that pays you under 1%.

Toronto Dominion (TD-T), Bank of Nova Scotia (BNS-T) or the ETF (ZEB-T) for a 5-7-year time horizon? He is bullish on the banks. When you buy an ETF, you get the good, the bad, and the ugly. He prefers to analyse in order to differentiate and pick the ones that he thinks are better than others. He would never own all 6 Canadian banks, and certainly not equal weights.

Markets. It seems to be whipsawing back and forth, but the way he has his portfolios structured is that he always has Longs and Shorts in place. Thinks of the Shorts as portfolio insurance. When the market moves up or down, the portfolios can react. Tends to care less about these types of nuances, partly because he uses Pair Trading. With this method he can take out 3 of the big investment risks. 1.) Market Risks where the markets go up and down. 2.) Industry specific risks and 3) company specific risk. He tends to be company specific, so is agnostic as to what sector he invests in. The only exception is that he doesn’t do resources such as oil/gas, mining, agriculture or forestry. He typically has a 1-3 year time horizon, and doesn’t sweat out the day to day fluctuations.

Market. Underneath the surface, there is a lot of good value in the marketplace. The drug industry has been under attack and has been a political issue, and getting closer to the election those kind of issues will be set aside. Technology stocks lost their leadership last year and a lot of them are trading at pretty good valuations. Metals/materials stocks had a big, big run. It’s a bit of a grab bag, but in the end, investors are still confronted with the issue of what they have to do with their money now. In the end, investors have to earn a return. There are individual investors which are increasingly investing through ETF’s, and then there are big institutional investment funds that have rules and they have to invest for the long-term, and have to take a very long, long term approach. There are a lot of good companies that are paying decent dividends. Earnings growth is okay. The US economy is doing fine. Interest rates remain very low, which is good for consumers and for business. The Federal Reserve Board remains very accommodative. Employment growth in the US is pretty good.

Correlation between Gold & the US$? This is two very different markets. If you look at the correlation over a very long time frame, there isn’t a strong correlation at all. The US$ is going up because investors see it as a safe haven and a high yielding currency compared to European currencies. A lot of people that buy currencies do not buy gold. A lot of Gold is a store for people, sometimes speculative. It is also a very small market so it gets pushed around a lot.

Markets. It is hard to be an individual stock picker in this environment. It has become much more of a trading market as opposed to an investment market. He is looking at some of the unintended consequences and some of the long-term trends that are occurring in this environment. First of all, interest rates are very, very low, and concludes that the longer they stay lower, the worse it gets. It is also changing people’s view on risk and return. You have to be very, very careful of utilities, staples, telcos, etc. because this trade gets more crowded every day. Doesn’t like the bond market, which is rewardless risk. Finding really attractive 5%-5.5% yield in the preferred market, and it is post all this reset that caused all the problems. Gold is interesting and is starting to act like a currency again.

Reset Preferreds? This has probably been the least understood area of the market. Coming out of the financial crisis, banks, utility companies, energy companies, etc. were looking for capital. The world was afraid there would be a spike up in interest rates, and they set the yield on the preferred shares as a margin over Canada 5-year bond yields. At the time, no one expected Canada bonds to go to 0.05%. The only way you will get your par back is if interest rates go back to 2.5% on a 5-year. You have a tough decision here. You either take a capital gain and look for income elsewhere, or ride it out as a low income yielding vehicle.

Markets. He has been negative on the markets for quite some time. There are persistent issues such as high valuations, global debt, excessive debt that he feels can never be repaid, and now the issue of negative interest rates proliferating around the world, which is a very serious problem for financial markets, which will spread. Eventually we are going to see a tightening up of lending, resulting in weak economic growth. Investing in equities has become an exercise in handicapping Central bankers, which is a very, very difficult thing to do. The TSX is probably the best performing equity market globally, but it is largely attributable to the rising price of gold, and is not representative of economic strength.

BREXIT. The reaction to this, despite the down and the spike back up, is very interesting in that you have a Pavlovian response that everything will be fine and Central bankers will be left out. This is an opportunity to Short names that are appealing, financials being one of them.