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

Markets. If you look at the US economy it is doing well compared to other parts of the world where there is QE still in place. This will create a buying opportunity for investors. The improvement in the US economy will likely continue for 3 or 4 more years. Europe will probably do well as they are early in the recovery. The US$ strength is a benefit to Canadian investors who have US holdings. He does not hedge his US$ exposure. Rates are incredibly low and there is a natural maximum to how high interest rates could go before they have an impact on growth.

Interest rates and REITs. People fret about it and how it will impact the REITs. You only have to be mindful if a REIT is trading at an astronomical rate. In the last 30-40 years in the US when rates have gone up, REITs have outperformed. Interest rates are bad for REITs with longer duration leases. If you have to refinance your debt before your rent comes up for renewal, then you suffer from interest rates increases.

Markets. The S&P 500 is eking out another record high today, with the Dow and NASDAQ pretty close. In the last little while we have seen a narrow range. There is not a lot of direction. We are making new highs, but are not making meaningful very, very strong moves on the upside. Given that we have some traditional seasonal weakness ahead of us; markets could probably tread water for a while. There is some trepidation about equity valuations and there are the US$ headwinds as well as the Fed’s shift in policy. At this point you want to be cautious. Expect markets will grind higher for the year, but over the next few months you want to be somewhat cautious. Generally speaking the May to October period tends to be somewhat softer. Not only are the markets weaker, but valuations are also stretched at 17 or 18 times earnings.

Economy. He looks at a lot of economic indicators, which help to forecast when a recession might be coming. A Bear market typically leads a recession by 6 to 9 months. He wants to make sure he knows where things are going economically, and right now they look very strong. Watches the Leading Economic Indicator and specifically, the 18 month moving average to make sure the leading economic indicator is ahead or above the 18 month moving average. When it crosses below, it can mean that a recession is coming fairly shortly. Also, likes to watch interest rates and make sure that there is a normal yield curve. Any time the yield curve inverts, he knows that it is a real solid sign that we can see a recession in the near future. Also, any time energy prices rise by 80% or more, in a given year, it usually leads to recession. This year we have had quite the roller coaster in energy. It bottomed out in March in the $42-$43 range. So far we are just under $60, and probably have room to about $75 before we have to be concerned.

Economy. The Fed met today and the key takeaway seems to be that it is unlikely that rates are going to be raised in June. The bigger issue is September. Do they delay it until next year? That is the big issue. He believes they will probably hike in September, but very, very slowly. A lot of this has to do with normalization of the economy. If you have an economy that is growing decently and there is US growth beyond 2% along with employment growth, don’t you want to normalize a bit? With inflation rates of 1.5%, you should probably have mid-rates of around 2.5% and long rates around 3.5% in the US. The winter was harsh, which impacted economic numbers. With US growing beyond 3%, we have to start now to be putting in higher bond yields, which is what we have seen over the last 6 weeks. Bond prices are down around 3%, which is very aggressive. Probably another 25 basis points of tightening in the bond market will suffice. This is a great environment for corporate earnings with global growth at about 3%, the lowest funding yields we have seen in 2 generations, labour costs not going up that much and trade agreements with global possibilities going on all over the place, so this is a great time to own companies. Thinks equity markets will continue to tick up, not aggressively, but grudgingly. This is the greatest opportunity to be in the equity markets.

Markets. The US$ is in a secular bull market, but all US assets will go up as well over time. The Dow and the S&P 500 hit new highs yesterday. 2015 is going to be the year of the macro, and not the year of the stock. He wouldn’t be a stock picker too much this year. This is going to be the year of central bank actions including China. The only proviso he would give is that if a company disappoints the market, either through sales or earnings, the market really takes them to the woodshed and you could be down 10%-15% in a day. This is a correction in a bull market until the 10 year bond breaks 2.712%, at which time all bets are off. He is looking for 1 or 2 interest rate hikes from the Fed in 2015.

Economy. The recent US housing numbers were great. Very similar to what happened last year, specifically on the weather, but with GDP growth formulas basically biased on the back half of the year. It started out slow and moving better off into the tail end. Whether or not we see that continuing is everyone’s question. Perhaps some of the low oil price money, that everyone thought was being saved, is moving into bigger purchase items such as housing, which would help fuel housing starts and building permits. This is consistent with his view in that the 1^st quarter will follow through into the latter half of the year in Canada and the US as well as emerging markets, starting off slow and continuing along.

Economy. The recent rise in bond rates indicates investors seem to be suggesting a return of inflation. Part of that revolves around the US particularly because of the dramatic pickup in household formations. Since house formations and housing represent about 42% of the US CPI, expectations are that the strength will help with 1) employment and 2) will ultimately lead to higher prices which then may also lead to a higher CPI. The Fed has stopped tapering and globally there seems to be an indication of bottoming in commodity prices, and an expectation of an improvement in the economies over the next 12 months. Rates are a little more normalized now. The previous run, when there was a steepening of the yield curve in Aug/11, analysts are currently expecting 10 year bond yields, currently around 2.25% may get as high as 3%, and in 2011 there was a 29% lift in stock prices in the following 8 months. Doesn’t know if there is going to be a 29% lift, but he is certainly expecting it will contribute to a positive backdrop for stocks, and particularly for Canadian stocks because of being providers of raw materials.

REITs. They have been a bit of a seesaw lately. As Canada bond yields started to climb, REITs were declining. However, over the last couple of days, bond yields have been settling in again. Thinks the market is having trouble believing that we are in a strong rising rate, that the economy in Canada is that strong that we need to be significantly thinking of higher rates. US REITs have been disconnecting from the different moves that have been happening to the US 10 year bond. In that case, he thinks there is more of a story of economic growth. In Canada there is a little bit less confidence, so a little more focused on the downside risk. This year has been a very strong year for REITs. In January, they were a table pounding buy and had a nice little run up. Now we are getting a bit of a breather and he would think that this is the point now where you are focusing and want to upgrade your portfolio, locking in some good yields and looking for some quality that is on sale. Ontario seems to be doing better, and Alberta is still kind of in flux. Oil has bounced up 30% from its lows, and yet the Alberta centric REITs really have not bounced back at all. He believes there is a bit of an opportunity there.

Markets. He runs conservative money for balanced portfolios. He focuses on a safety and value strategy. He is cautious because it is 6 years onto the bull market without corrections. He can justify current multiples on the market. Stay the course. He does not let his clients get out at the wrong time. If you can’t handle a 10% drop you should not be in the market. He sees increases in interest rates led out of the US. Canada might be slow to react due to oil prices. He is comfortable having more money into stocks at this point and he is getting out of bonds.

Markets. Thinks 2015 has had a positive beginning. The US has been hitting records every other day, but has been feeling a lot choppier than one would have thought, but he thinks this is normal. A lot of stocks are trading at higher elevated multiples, so you need to be more selective in this market. Things are getting better in the US with lower unemployment, etc. He fully expects a snap back and earnings will get better, especially with the retreat of the US$.

Energy. The recovery from the low $40 to the $60 was faster than what he had thought it would be. He had fully believed that we would reach $60 by the end of the year and we have done that already. We are starting to hear talk of US shale drillers coming back and spending more money now, now that they can hedge prices at the $60 level. Unfortunately, that will keep the oil range bound between $60 and $70 for the next couple of years, until the global demand really starts booming again.

Markets. Expecting equity markets to be flat over the summer. A lot of people like to go to the cottage for the summer, but also there is still a lot of uncertainty. He is looking forward to quite a strong fall. Expects a quarter of a point rate hike by the Fed in September and that will be it. Looking for strong US earnings growth in the fall, driven by the consumer along with continued strength in the employment numbers. On the Canadian side he expects to see the oil price continuing to recover. That will give a little more confidence and will continue raising the Cdn$.

Canadian banks. It is really hard to go wrong buying Canadian banks. His top pick at the moment would be the Royal (RY-T) with Toronto Dominion (TD-T) close behind it. The Bank of Nova Scotia (BNS-T) have a lot of investments in Mexico, which looks to have good industrial growth, but also some real turbulence in some of their politics and in the drug wars.

Telecos? The only telco he owns is Verizon Communications (VZ-N). Canadian telcos are great companies, but there is an oligopoly, there are high prices and you have a government that he thinks is determined to knock down rates one way or another. Thinks there is some peril between now and the Federal election, to give a better break to consumers in the cell phone and cable world. Wait until after the general election.