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

Markets. It’s the most significant bad news that happened over night that he focuses on first each morning. China has been frequently generating bad news. He has been 2/3rds US, 1/3^rd Canada in recent months. He can buy in on the US dollar and make money if it rallies. Don’t be too worried about the US/Canadian dollar at this point because the best part of the move has already happened. Defense's in Canada are some of the few that investors are revisiting because of a lack of alternatives. Companies don’t want to come to the markets with IPOs when there is uncertainty in the market.

Equity Portion Portfolio Construction. An ETF may not have diversification depending on where the bulk of the equity is. It might just be a small number of big names. A closed end fund can trade below net asset value where as an ETF would not. He thinks you should build a full portfolio of stocks, rather than rely on one ETF. If you own ETFs and stocks, then make sure you are aware of where your stocks may be held within your ETFs.

Dividend payout ratio over 100 – is it safe? It means they are laying out more than they make and it happens mostly via leverage. It is not a viable long term solution and should raise eyebrows. It has to be a unique situation that makes you buy when the payout ratio is over 100%. Choose something that is more defensive.

Capital losses can be carried forward indefinitely so this can be used to offset big gains. You should make investment decisions based on the investment merit, rather than the tax considerations. You have your money in something that performs.

For an RRIF you know you have mandatory withdraws on an annual basis. You want to make sure you have liquidity in that account. It is important to maintain balance between fixed and equities in each registered and non-registered account. Knowing there is a need to withdraw, holding dividend yielding stocks is essential. You don’t want to be forced to sell assets below what you paid for them for liquidity. Don’t be afraid to hold some cash in an RRIF. Don’t try to hit home runs in a TFSA. Keep it diversified.

Minimum Rate Preferred Shares. There are different types of preferred shares. They can look and feel like a bond. But you don’t see a lot of those. Perpetuals don’t have a maturity date. It will trade like a bond that is 30-40 years long and so be sensitive to interest rates. Fixed rate resets have a fixed term of maybe 5 years and at the end of the term the issuer can extend it for another 5 years if they want to, but they will be at the Gov’t rate for 5 years plus a small premium. He is cautious on perpertuals because we are at all time low rates.

Markets. There seems to be a lot of negative news around, but the market in the last 1 ½ months has been pretty darn good. It caught a lot of managers offside as a lot of them bought into the negative sentiment. You can’t make money being on the sidelines. Ever since the 2008-2009 downturn the negative attitude has really taken over. Any time there is a small pull back, everybody is expecting it to happen again. The reality is that things are not bad. We have that low, low interest rate environment that is good from a multiple aspect.

Markets. He is getting quite cautious. Not a lot has changed fundamentally, even from 8 weeks ago, but valuations have really come back. He saw some really good opportunities to add to core positions, but recently has been adding to his cash flow because the margin of safety has eroded in many cases. Doesn’t really care what the market does, but cares more about what the companies do.

Markets. Doesn’t have a strong general outlook for the stock market, but does find that governments globally are adding so much debt to their balance sheets that it is going to create problems. It is debt and leverage that creates major, major difficulty. This whole idea of negative interest rates is stupid. You are trying to force banks to make people borrow money, which doesn’t make sense. Effectively a lot of governments are adding risk to the system, in a system that is already highly leveraged. At some point, you can only kick the can down the road so far, and it is going to be a major problem. Debt levels in Canada are at an all-time high. At same time, there are also a lot of positives out there. He sees a lot of stability. You have slow growth which he doesn’t think it is necessarily bad. Oil prices are low, which are hurting certain parts of the economy, but is helping others. Gold prices are staying in a range. Inflation is low.

Markets. US corporate profits are likely to start turning up in the back half of the year, which is likely to juice the equity markets. Earnings year-over-year for the 1^st quarter will be down 7%-8% largely because of energy and currency headwinds, along with a moderate decline in the 2^nd quarter. The US$ seems to be finding a range here and she is not expecting the appreciation that we saw in prior years. Energy seems to be consolidating in the $40 range. Eventually energy prices will improve. Those 2 factors will be beneficial to US multinationals. The S&P 500 is trading at about 17.5X forward earnings, so we do need profit growth to come in order to keep equity markets moving forward, and thinks that will eventually come through. Wouldn’t be surprised at a bit of a pullback, but the earnings season is turning around now in the US. You have to watch the tone of what companies are saying in terms of their global growth. The “Sell in May” adage may not be as strong this year.

Gold? As an asset class this is pretty low on her portfolio. It has recently rallied. Gold tends to work in an environment where there is inflation and where the US$ is weak with a lot of volatility and uncertainty. For the last couple of years this has been a very low weight for her and we really haven’t reached the inflection point.

Markets. He structures portfolios that are relevant given the current market climate, so it is really important to understand the macro environment and that you don’t have to be invested all the time. We got to extremes in the 1^st week of February. The percentage of stocks that were performing well got to the lowest level, which had happened only 5 times since 1998. Since then the percentage of stocks performing well has expanded, money is being allocated to equities and realistically, with bond yields at close to 1000 year lows, the return was to be had in equities. The S&P 500 exceeded the highs from 2000 at the end of 2012, and 2.5 years in we had a 12% correction. After the beginning of the last secular bull market in 1981, the market pulled back 7% over 2 months and then rallied 150% in the next 2 years as people under invested had to chase it. The same thing happened in 1953. As at the end of last January, there were fewer bullish advisors than any time going back to the crash in 1987. In January/February the PMI (economic data) came in ahead of expectations, so people had a very negative view. To him it looked like there was an inventory correction through 2015, the first slow down in a new bull market. It was a correction, not a bear market and he re-accelerated. Not only has it rallied 16%, but it took out the most recent high, which negates the fact that this could just be a rally back into resistance. You still have to buy companies that are good and getting better. You need to see price in securities doing what it should be doing, so he looks for longer-term upward prices. You only need 40 great companies to build a portfolio, and there are 66,000 to choose from.

Converting euros to Cdn$? Longer-term, he would say the Canadian dollar is a little weaker than the US, but the euro can continue to appreciate. Very often, in the early cycle, the US$ will be strong, but as the rest of the world starts to catch up you will get strength in the euro and the yen. He is making a call to have some exposure to Europe and the euro. Would be more inclined to be more euro-centric than Canadian centric.

Stop losses? When investing money, the thing you get fired for is losing money. You can’t recover from a big mistake. He has always had a premise that if he uses stop losses and ratchets them higher, he will stay in a winning position until the stock doesn’t work, but then you have a small loss, not a big one. He uses point and figure price charts that identifies inflection points.

Markets. China is slowing. You can’t fight that. They are going to continue to do stimulus. It is the second biggest economy in the world. Slower growth is the message. There is more downside risk than upside risk in the markets. You want to come in and buy the dips.