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

Fixed Income Suggestions. There are a couple of things to consider. You have credit risks. Corporate bonds, with the worse quality of these being high-yield or junk bonds. You will get a much higher yield, but those correlate a lot more with equity returns than they do with bond returns in general. If you don’t want a lot of interest rate risks, then a short term, 1 to 5 year laddered bond portfolio. All of the providers have them. If you fear that credit might be a problem at some point, then you want something with a bit longer duration on the government side. If stocks fall, government bonds will tend to do well. Longer maturities tend to do better than shorter ones when you have a flight to safety.

Gold. At $1150, he kind of likes some exposure to gold. If you are going to hold gold for a long period of time, you are probably better holding gold equities, as gold bullion yields nothing. If you are thinking about trading, ETF’s are fine for that. He would suggest 5% or 10% in your portfolio.

Natural gas ETF, based on an outlook prices will increase in 3-5 years. There are 2 ways to play this. In the US FCG-N is the large cap natural gas weighted ETF of the companies. You get a dividend on this. In Canada ZJN-T is the Junior natural gas weighted ETF. If you have a 3 to 5 year view, do not even remotely consider any ETF’s linked to the underlying commodity. The underlying NAV erosion, over a long period of time, could be toxic.

Greece. We are now in Act III of the Greek tragedy. No one knows for sure how this is going to play out. For a German taxpayer, who has just had his retirement age raised to 67, to use his tax dollars for his government to fund Greece, where a guy there retires at 55, it doesn’t add up. Feels it ultimately comes apart, but the pride in Europe is really strong and they are going to try to keep it together. A chart showing capital outflows as a percentage of GDP in Greece shows the intensity in the last 6 months is far greater than in previous ones. People with money in the banks in Cyprus actually lost money on their deposits. This is why money is fleeing Greece. About a year ago, Greece was able to come back to the bond market and issue bonds. They issued a 3 year bond at 3.38 which is currently yielding 27%. That is pricing in over a 50% chance of default. The European bank Index is still 60% below its peak before the crisis of 2008-2009. We are back up to the levels where we had seen problems. The vast majority of European banks failed the stress tests. He doesn’t think a QE is going to help and fix this.

Energy. Has sold all his energy producers and is out of energy completely, except for Pembina Pipeline (PPL-T) and Keyera (KEY-T). Hasn’t made a lot of money on energy, even in good times. Prefers owning companies that have strong pricing power, have the ability to raise their prices, and the ability to raise and compound capital over time, in a more certain business environment.

Markets. 25% of the Canadian Index is tied to energy or energy related companies, as well as other related plays in the index. Not easy to get diversified, so he has gone outside of Canada to get exposure. The great companies have PEs priced at excessive levels, because there is nothing else to buy. When you gravitate to looking for non-commodity related companies, everybody else is looking for them too, so valuations are too high. Because of this, he is looking outside of Canada and has found a lot of good ideas in the US. US and Canadian financials look extremely cheap. Also, healthcare and US technology also look attractive.

US currency and the US market? He wouldn’t put 100% of his clients’ money into the US, but currently is about 65% Canada and 35% US. The currency has worked in his favour recently, but that doesn’t mean it is going to continue to work in his favour. You have to own the best companies that you think are reasonable, cheap on valuation and are going to grow. Currency has a way of working itself out over the long-term. The companies he buys, he plans to own for 3 to 5 years or longer.

Currency hedging? His issue is that this is costly, and if you do it through a hedge product, it will eat into your fees or your dividend. Because of this, he doesn’t do it. He would be buying J.P. Morgan (JPM-N) or Goldman Sachs (GS-N).

Markets. There is a greater than average probability of a correction this summer, probably 10%-20%, or probably a bit higher. There are a lot of different factors involved. First of all there are formations on the market. We have not had a 20% correction on the S&P 500 for literally for 4 years. Lack of volatility is not a great thing. He is also starting to see some of the secondary indicators that are showing that volatility might return. When levels of the VIX (volatility index) get too low, we tend to not stay there forever. His chart show that we have been hanging around in the low end (10 to 13) for a couple of years. This can’t last forever and he thinks we are probably going to see a move up. Looking at Breadth, it basically says how much participation there is in the stock market. He is looking at a 40 day moving average of the new highs and new lows on the NYSE. The chart shows stocks are moving up, but the moving average is heading down. 71% of Dumb Money (unsophisticated such as retail investors) is very bullish, versus 35%-36% of Smart Money (basically professionals, i.e. insiders, pension managers, sophisticated investors, etc.) A 2 to 1 ratio. Not such a great thing when Smart Money is leaving the room and Dumb Money is piling in.

Economy. He is waiting for rising interest rates in the US and everywhere. What is fuelling the stock market is what he would call just free money. Worldwide investors have been pouring money into equities, because fixed income is either providing very little or nothing. Large US multinational companies are being hit with currency issues because of the strong US$. Has been scaling back his exposure to equities, as he has found it much easier to Sell than to Buy. Hasn’t been adding anything in the multinational area, but has doubled his position in 3 banks, 2 US and one Canadian. For the most part they don’t have the exposure. Also, valuations are much, much more reasonable than multinational companies, especially consumer stocks.

Markets. He looks at what drove returns over the last few years and he had stocks that were undervalued. There were earnings expectations where the bar was very low. As well as this, the US economy was recovering. Today stocks are no longer cheap, earnings expectations are no longer low, but the good news is that we are seeing the US economy continuing to recover, but there are just not as many inputs driving equities higher. For the last 4 years, he has favoured the US market over the Canadian market, primarily because when he looked at the TSX, which is made up of commodities and banks, he has been pessimistic especially on the commodity space. Equities as a whole, whether you are looking at the US or Canada, the easy money has been made and we should expect more volatility as we move forward.

Where is a safe parking lot for cash, while waiting for opportunities? The primary objective is to keep it safe and have it liquid and available. You could do that with a high-quality money market instrument, or even the banks, depending on how much you are parking. Banks have high interest savings accounts and you can buy that right in your trading account. Yields are somewhere between 1.25%-1.5%.

Markets. Investors are looking at 2008 with memories of painful losses. They are kind of ignoring the fact that corporate balance sheets are much better, interest rates are at historical lows, earnings are solid and there is lots of takeover activity. Corporations have a longer-term viewpoint. If they are going to buy a company, they are looking at a 30 year timeframe, while individuals are only looking at the next quarter. Who knows what is going to happen in the next quarter? Looking at the big picture, corporations are quite happy to borrow money, basically at 0%, and buy growth. If a company is willing to pay 100% more for a stock to take it over, maybe individual investors should not be so worried. He has seen so many “doom and gloom” stories in the past 30 years, and he constantly gets bombarded by his customers about reading an article online. Basically it is the same old, same old, where someone has predicted a market crash and have backed it up with data. On the other side, there are people buying stocks, and they are not stupid, and they have backed it up with data as well. For Canadian investors, energy, resources and materials may not be the best place right now. He has been trying to focus his customers on companies that are growing 15%-30%, because scarcity of growth will be worth the premium in the market. He’s just launched a Growth portfolio with 25 stocks. Some of them are growing at 50%-60%-70%, and those will get a lot of attention down the road.

Interest Rates. Interest rates, going up in the fall, could trigger a lot of economic activity in the housing market, etc. and this is where investors are missing the ball a little. When the tapering came in, everyone worried about that for over a year and stopped buying bonds and the market went straight up. Thinks the same thing will happen with interest rates. There have been 7 years of preparation for interest rate hikes. When they actually do go up, maybe that will trigger some sort of event where money will start to flow faster and you get the acceleration of money, and people will start to feel that now is the time to buy that house, or to buy that car, because rates are going to go up. It could be quite good.

Airline sector? Today there was the Can-Jet problem where they are laying off two thirds of their staff. Industry capacity has changed a little bit. Historically it has been a horrible business. Why put yourself through that bother?