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

Income products. Still thinks you can find value in dividend stocks. If you look at the performance of some of the dividend oriented sectors like REITs and utilities, they have been amongst the worst performers in the US this year, which is really creating a buying opportunity for longer-term oriented investors. In the real estate sector assets are at a significant discount to replacement value. Locking in single digit yields you should be able to make a lot of money as the economy improves because cash flows will go up.

Markets. There is a lot of noise and we are distracted by a couple of macro events. On the other end of the spectrum there are certain types of investors, including him, where they are focusing on great companies with resilient business models. When you get market weakness, it creates a chance to buy those great companies cheaper than what you could otherwise. He is not overly worried about the situation in Europe or the potential Fed rate hike in the fall, but he is focused on finding great companies that can become long-term compounders. The 10 and 100 baggers come from 2 areas. One is the lottery ticket junior resource type of company that out of nowhere they discover oil, gold, etc. and the stock goes through the roof. The problem is, those can’t be predicted in advance. The other area is the compounders, which is what he is looking for. The company that you can buy today which can compound, compound and compound. He looks for consistently high returns on equity, which is usually backed up by some kind of a competitive advantage, as well as a management team that is very good at allocating capital to keep that compounding rate going.

Do any Canadian banks have greater potential for growth than any of the others? Generally speaking, no. It is a great basket of companies, but doesn’t think there is one that has an exaggerated potential for growth going forward. It is quite remarkable when you look at them year after year after year as to how much they grow together. He doesn’t get enough growth out of the banks and that is why he generally does not have the bank stocks. For the long-term investor who wants a good dividend, owning 3 or 4 of the bank stocks is great. Buy whichever one is cheapest that day.

Growth through acquisition. There are often cases where it makes more sense to acquire than it does to advertise. A lot of the most attractive businesses have very, very sticky client relationships. If they have this, then so do their competitors. The challenge is that you can up your advertising and promotion costs dramatically and still not get very many customers, because once the customer is captured, they are stuck there. It is often far cheaper to acquire a smaller company with a good customer base than to try to advertise your way into getting more customers.

Marijuana stocks? He is a big skeptic that there is a big enough market for marijuana companies to backfill. There has been a certain amount of speculation that there will be some liberalization, but he feels the space is saturated and nobody is making any money. The scales they need to justify valuation is massive in relation to where they are.

Markets. He thinks ultimately Greece moves out, except there are pressures from other members, particularly Germany, to keep them in. They want them in to justify the existence of the euro, and probably also to act as a buffer from threats rising in the Middle East, which he feels is quite a serious concern. The markets, altogether, are really fairly normal. Where corrections are required, normal things are happening. It is a bit choppy, partly because the power of money is so great now that they are swinging in and out on a short-term basis. There are some reliable stocks that seem to just keep going up forever.

Markets. The Euro got down to the $1.06 level and there are a lot of calls for it to go to parity before year end. Today’s move was fairly benign. Crude oil has really struggled in the last couple of months. We are probably heading back for a re-test of the lows over the next number of months. It depends on what the dollar does relative to the Euro. If it dips below $50 then it is an opportunity to look at energy stocks. He likes ZEO-T because it is equal weight. He has been adding a bit recently. He wants to buy oil stocks on this pullback. Gold can only be range traded for the next couple of years. The recent flight to safety has not done much for gold (GLD-N).

Presidential 3^rd year of the cycle. This would normally be a year of spending, but because of the debt level it is much more difficult and so it won’t be the norm this time.

Educational Segment. How you may want to invest during the Greek Meltdown. GREK-N is an ETF that trades in the US. There are no Canadian banks that deal in Athens trading. Forget about the Greek debt. The individual cannot play that. In 2012 we came off the bottoms and got a massive rally. The potential to double your money is great, but it is not risk free. The two year Greek bond is trading at about 33%, suggesting the probability of default is 50%. The Market is telling you they are leaving the Euro. You have to view the investment after currency conversion. The risk is 50% on taking a haircut based on the currency risk.

Markets. Markets were looking for an excuse to decline and the Greek news was just the trigger. He is taking this as a buying opportunity. It is clear that Greece has very little bargaining power or leverage. The Fed is on track to raise interest rates in September. It will be the first one for 9 years. Dividend stocks are a broad category. There are traditional utility or other sectors that have a lot of debt, but he looks for dividend champions that can raise their dividend and do well. Consumer and healthcare sectors have some such names. Multinationals that left Canada are not automatically coming back, but it helps those that have expanded. Dividend champions are those that can raise them year after year. He is realistic in a slow growth economy. They have to beat inflation with dividend increases. You want companies that can do well in a recession.

Silver. Demand from industrials is not that strong. Gold and silver will move in the opposite direction of Silver.

Markets. We are down to the end game with Greece, which is a good thing. It has been 5 years trying to sort this out. Had thought the market had paid way too much attention to Greece. It comes down to the uncertainty of the event more than the event itself. Not sure on how it is all going to be played out. His suspicion is that the referendum will be the end game. Even if they vote No to the austerity measures, it doesn’t necessarily mean that they are going to exit the euro zone. It could play out for some time to come. This is a great buying opportunity. You have a crisis that was really not that big of a crisis. We have had an increase in volatility, and one of the things that investors want to keep an eye on is the notion that we have had 5 years of very strong markets without much in the way of a correction. The #1 strategy has been momentum. If you bought momentum stocks in this low volatile environment with low interest rates, you have done very well. As volatility starts to come up and interest rates start to rise, you may start to see a shift into more value kind of strategies or stocks. This is what he is looking at right now.

Selling deep in the money Calls on high dividend stocks? This Reduces the cost of the stock to the point where the dividends actually looks very attractive. You are getting a 6.5% yield, whereas if you bought the stock in the market and didn’t Sell the Call, you would get whatever the normal yield would be. The problem is that when you have a “deep in the money” Call, very often you will find that they get assigned early. If you write an option that is a year from now, each quarter when the dividend comes due, that option can go into a point where it has no time value. That option will often get exercised and the other person will take the dividend. Arbitrageurs do that all the time.

Mining. We are getting closer to the end of the bust in the sector. We went through a 10+ year super bull market in commodities and a lot of excesses were built up with excess money being thrown in and it was time to start getting rid of that. Thinks we are nearing the end now, but we’ll still be dragged along for a while. The mining cycle has always been boom and bust. When we come out, it will look even better. The sector is down 50%-80%, depending on which index you look at. Because of this, things are a lot cheaper, but that doesn’t mean everything is worth buying. There are a few good projects and companies out there worth buying. He is focusing on identifying very competent people that understand what a real economic project looks like early on, and trying to get in with those groups on the discovery/pre-discovery stage. We are producing more metal than what we are finding and it is taking so much longer to find these projects and they are so much more expensive to bring them into production.

Markets. We are in a holding pattern until we get this whole Greek business settled. He does not feel it is all that critical anyway. 70% of the Greeks want to stay in the Union. He thinks there will be a draft agreement that will kick the can down the road. Numbers on the US housing side are getting back to a more normal level. There should be a backlog of demand for housing. Unemployment is down and wages are up so we are on a roll. Recently it looks like US consumers are spending some of that savings on gasoline. He is drifting to ETFs. He favours certain sectors for ETF investing.