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

Markets. The bond markets are telling us that the economy is looking better than the stock market gives it credit for. The labour market is getting tighter in the US and he thinks unemployment will fall below 5% and wage pressure will come into it and this will cause some inflation. There is a change of mindset amongst bond traders that numbers will be better globally. This will lead to more growth in the US than people give it credit for. Option premiums have gone up. TLT-N has a great premium. He thinks we will see 3% next year on the 10 year in the US. The US market will probably stay in a relatively narrow trading range for the remainder of the year. Canada will tag along for the ride because we export a lot to them. He thinks we can make it work at $65 for the oil price. He likes Europe and Japan as well as China.

LEAPs. A long term equity anticipation: an option that has more than a year until expiry. They are like a warrant in some senses. There is no negative impact for time value erosion. He won’t buy one for more than 30% of the cost of the underlying equity. He looks at at-the-money LEAPs. He looks out a year and a half or more. A good way to play the market.

India. It is a decent long term play. He likes the ZID-T and INDA-N. India makes sense because of the size of the population. Their middle class population is the same as the entire US population. This is probably an opportune time to look at this, but it should be no more than 2.5% of your portfolio.

Health Care Pharma ETF, equal weighted. It is hard to understand the litigation risk in this sector. VHT-N and XHS-N are examples. A great sector to own in the US economy. Having a position would make sense.

A Capped ETF means that a company can’t ever be more than a certain amount of the portfolio, no matter how big the company gets.

Bonds. Government bond yields are very volatile right now. He expects there was an overreaction to what had happened in Europe. They had gone down to unrealistically low levels. At one point the 5-year Canada got down to about 62 basis points with the 10-year way under 2%. We have had a bounce back and it has been extraordinarily volatile. The 5-year Canada yield went from 62 basis points all the way up over 1%. Thinks it is one of those pendulum swings. Went too far one way and maybe will swing too far in the other direction, and settle somewhere in the middle. Thinks bonds are extraordinarily dangerous right now. The direction is certainly stable to upwards, and he doesn’t see very much of a downward movement on yields in the next year or so. The chance of getting beat up on bonds is better than the chance of getting rich.

US banks. An individual bank or an ETF? He is never in favour of ETF’s. The trouble is that you get the good, the bad and the ugly. Prefers Goldman Sachs (GS-N) and J.P. Morgan (JPM-N), and thinks both are poised to break out with considerably higher earnings. Also, both have scope for both share buyback and increased dividends.

Markets. This earnings season was better than expected, in part because the bar was set quite low, particularly in the US, because of the headwinds from the strong US$, so people had tempered their expectations. In Canada people understood it was going to be a weak quarterly earnings, both because of energy and the side effects of energy. If you set the bar low enough, pretty much anyone can jump over it. However, there were quite a large percentage of companies doing somewhat better than expected. He would say the earning season was nothing to get excited about either way, and the market has reflected that. Price earnings multiples are stretched, but that is justified because rates are so low that they still offer better value. When you have blue-chip stocks paying a yield that is 5 or 6 times what you can get on a 5 year bond, you can see why people would rather own a blue-chip stock than a bond. The US offers some very interesting opportunities that we don’t often see in Canada. We have such a concentrated market in Canada. It is a small market in Canada with a few big stocks, so when he is looking for diversification, it is natural to look to the US.

Markets. Yields on the fixed income business were really moving higher with a huge selloff in treasuries. This caught everybody by surprise. It started off in Europe, then came to North America, and we actually saw US treasuries moving up as well. They moved about 40 or 50 basis points in the last couple of days, but if you look at where treasuries were a year ago, we are still 30 or 40 basis points below that, so they are still actually quite low. Rates may have got too low globally, and we are just seeing a reaction to that. There is not a lot of liquidity in the market which has helped drive prices down even more. US reported strong employment numbers on Friday. She doesn’t think we are going to see a sharp pace of rate increases. There were some decent US job numbers that came out on Friday which gave comfort that the economy still has legs. As the year progresses, consensus should improve. Going into the US earnings season, it was expected that the 1^st quarter earnings would be down 4.5%, but they actually came in up 1.7%, better than expected. If you exclude energy, earnings are actually up over 11%. A strong US economy should have a healthy impact on Canada.

Markets. There is some good and some bad with the change of government in Alberta. They are going to up the royalties and taxes. When he looks at ETFs he likes the energy sector, he sees a 5-10% correction coming. The market is not finished worrying about the new government in Alberta. China is going to do whatever they can as they have some growth challenges. They have some real issues for a number of years. The stock market rally has nothing to do with economic outlook, but is purely speculation. The PEK-N tracks China. It has more than doubled in a year. The spreads are terrible in this one so it is not good for getting in and out, but it tracks the Chinese stock market.

TFSAs: Can you only have 5% in any one security in a TFSA as Larry recommends in general? This does not apply to ETFs. If you have 20 holdings in a $40k account, you are looking at $2k per holding and at 9.95 per trade it is very expensive. So don’t use single securities, but rather use ETFs.

BMO is the largest provider of ETFs in Canada. Google “BMO ETFs” and it will show you how to use them in portfolios. Advisors with big banks should have no trouble buying ETFs from other banks for your portfolio.

Gov’t of Canada Bonds – ETFs containing short, medium and long bonds. He thinks rates will stay low for the next decade. Central banks are printing money everywhere and it is not generating inflation. It tells us that the aging demographic is a far more influential factor to the inflation story than the printing of money. See education segment of today’s show.

Preferred Shares. Perpetuals will fall when interest rates rise, but resets will come back as they reset.

Educational Segment. Fixed Income. There are 4 ETFs he wants to focus on. In the following table ‘Duration’ is the sensitivity to interest rates.

The 10 year German bond is at 0.57% and Greek 2 year is 20.16%. Canadian 30 year is 2.29%. Now look at a 1% move up in interest rates:

• The German bond moves 10.5bps
• The Greek bond moves 50.6bps.
• The Canadian bond moves only 5bps.

The longer your duration, the less sensitive they are to interest rate increases. Dividend stocks have tremendous volatility to interest rates (twice the standard deviation). Increasing bonds reduced volatility to a portfolio dramatically.