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

Energy. The rally in the past few sessions was just a head-fake. There is nothing fundamental about the move above the $50-$54 range. He believes we are going to see a $30 or lower price before we see $60, probably in the next quarter or so, but by the end of June. This is because production continues to grow. What drove the move higher was the reduction in the rig count, but beyond that you see that production is still growing in excess of demand. Also, you have huge inventory numbers. Through January, the inventory numbers were the highest in terms of inventory in 80 years.

Copper. He would say that the copper price is widely expected not to recover until mid year 2016. Currently we have too much supply and too little demand.

US Economy. Last Friday’s US employment report pretty well put the seal on a rate increase this year, probably by June. The US is on a self-sustaining expansion now. We are way below where rates should be, so one modest increase here is not going to halt the economy in its tracks. A 2.5%-3% would be a normal rate, sort of in line with GDP growth.

Cdn Economy. He had a feeling that the Bank of Canada was going to drop the rates, because the two-year yield had fallen like a stone, but he still didn’t see any reason why they had to do it. Another increase is already discounted in the market for 2.5% next month. If there is anybody thinking that the Bank of Canada does not want the currency lowered, they now have their answer.

Preferred shares price declines? The Bank of Canada really triggered this with their surprise cut. This all occurred when global rates were falling, which means that five-year yields have just absolutely tanked. They are going to call most of these preferreds, and probably issue them at a narrower spread.

Risk in bond ETF’s as opposed to individual corporate bonds, if held to maturity? There are a few subtle risks in ETF’s that should be explained. With individual bonds you know exactly what you are going to get back, when you are going to get it back, and how much it is going to be. ETF’s by nature invest in a basket or an underlying index of bonds. There is no guarantee they can buy all the bonds in an underlying corporate, because some of the corporates are impossible to buy. Your money never matures in an ETF, which is the same criticism he has in mutual funds. The good thing about ETF’s is that they have good diversification and low fees, compared to mutual funds. He prefers individual bonds.

Equities vs. Bonds? Thinks stocks are not that dangerous right now, because they are being underpinned by cheap money. Bonds are probably a little riskier right now than they have been for a long time, because their yields are artificially compressed, and at some point in time will rebound.

A corporate, government or other ETF that would do OK in a gradually rising interest rate environment? You could look at iShares Core Cdn Short Term (XSH-T) which has a short duration of about 2.8 years. Also, the iShares 1-10 Yr (CBH-T) which has a duration under 5 years and a reasonable diversification. These are 2 that he would recommend. (See Top Picks.)

Senior Secured Floating Rate Loan Fund for a 75 year old? He has a problem with this investment. He would like to know who the issuer was of the paper and decries this kind of investment, because people are reaching for yield in products that they have no business being in.

US bonds? Doesn’t think you should buy any US bonds right now. The Cdn$ has fallen too far and too fast, and has fallen below its purchasing power of parity. Over time it will work its way higher again, maybe to the mid-$.80’s and perhaps close to $.90. You have much less risk by staying in the Canadian bond market at this point.

3 months to 1 year effect on Canadian markets of the recent Bank of Canada rate cut and European quantitative easing? Indirectly this has an effect because it makes people look for more risks because bond yields are going to be close to zero for the next period of time. People look around for something to buy that makes more sense, and Canadian equities would be an attractive place for global investors to look.

What do rising rates do to high yielding equities such as Emera (EMA-T), Fortis (FTS-T), TransCanada (TRP-T) or Enbridge (ENB-T)? In this marketplace, the yield on bonds is so much lower than these higher yielding utilities, that if there is any weakness at all, it will be very, very slight in the early stages of rising yields.

Rate Reset vs. Perpetual Preferreds? Definitely avoid perpetuals, because they will be the worse hit by rising bond yields, which is going to happen eventually. Rate resets are the only preferreds to buy, and right now you would want to buy bank ones trading at a discount from their Call price if you can find them.

Laddering bonds using 20% RBC Target 2015 (RQC-T), 2016 (RQD-T), 2017 etc.? He likes the target maturities. These are a bunch of bonds in a basket of each of those maturities. Very low cost. Bank of Montréal has ETF’s similar to this, with a shorter maturity. Not quite as effective, but very attractive.

Target maturity bond ETF’s as an alternative to buying individual bonds? He still prefers individual bonds.