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

3-12 month effects from the recent Bank of Canada rate cut and the European Quantitative Easing on Canadian markets? In his opinion, a lot of the rally in the equity markets has been driven by central bank policies. They have inflated asset prices, and equity markets are one component of that. The European move probably makes Canada look more attractive as a place to invest in. However, Canada is cutting rates because they see sliding growth, which is generally not good for corporate earnings or equities. He doesn’t think rate cuts are going to help drive the TSE further.

Are Strip Bonds a viable investment option? Canada has one of the most well-developed strip bond markets in the world right now. Effectively you are going from an interest bearing instrument to a compounding instrument. For example, you are buying $100 that comes due in 2025, and today you only pay $.70 on the dollar for that. It’s a great way to lock in a rate of return and a great way to compound your interest in a tax-exempt account. You don’t want to do this in a taxable account as even though you are not receiving any interest, you have to pay tax on it every year.

Why is there such a large market for low yielding bonds of 1% or less? The main answer is liquidity. In GICs, you are locking in your money. What if you need your money in 6 months time?

(A Top Pick Feb 24/14. Up 13.17%.) Ville de Montreal 3.5% Sep 1, 2023. This one outstripped what the overall market did. This still looks relatively cheap compared to provincials.

Rate reset preferreds? The preferred share market is very cheap right now. They really haven’t followed the rally in bonds at all. These are perpetual securities. As much as they have lower interest rates (because a dividend does reset every 5 years), it comes along with some Call risks and a lot of credit risks, because it could remain outstanding forever. They are a good investment, and up to 25% of your fixed income portfolio could be in these. You want to hold them in your taxable portion because of the advantages of the dividend tax credit. Be selective and stay with investment-grade of P2 or better.

Ontario government bonds? This is probably the credit to Buy right now when you look at what is available. BC, Alberta and Saskatchewan trade at well below what Ontario does. Ontario and Manitoba are the ones that you want to look at right now.

Markets. People were hoping they could finish 2014 with some great holdings and some great returns that they had had for the whole year. The minute the calendar changed, there was a big repositioning amongst a lot of money managers, and this is having a lot of repercussions now. If you look back 30 years at the Canadian market, there were 3 major eras. 1.) There was the whole restock piling of China in the last 7 years and we outperformed the S&P 500 for some period of time. 2.) There was the whole restocking in the 80s as well as some of the postwar periods as well. The commodity cycle was starting to show a lot of weakness about 3 years ago. 3.) This then started showing up in stock prices and in oil, probably in earnest about a year ago. We are now at a point where if oil can consolidate here and give us some breathing room for a little while, we might see a bottoming process here. With the extra drop-down in the Cdn$ after the bank announcement, we are getting an equilibrium here where the question is, do you want to buy a beaten up Canadian infrastructure stock or do you want to convert the currency, hope for some more downside in the Cdn$ and maybe pick up a US bank or a US growth name. This makes it even more confusing for portfolio managers and investors.

Should I purchase US stocks in US$ or Cdn dollars? He would prefer the US market and a majority of the US names over the Canadian names. Staying in US$ and the US market is still preferable. However, the marginal benefit for the average investor is getting a little long in the tooth.

Markets. We are seeing the Euro recovering after today’s Greek announcement. The market anticipated it. The focus now is on QE. Equities in Europe should move higher. It is the right time to put your money into emerging markets. They are outperforming. EFA-N covers the rest of the world other than North America. The seasonality is from Feb. to May of each year. This year we are seeing international markets outperform North American markets. The strong US dollar is causing companies to give negative guidance, but after January things look very good.

Gold. Strong from July to October and mid December until the beginning of March. XGD-T has already had a run as it went into the period of seasonal strength. It is pulling back now and providing an opportunity to buy on weakness. HSBC downgraded Canadian gold stocks today so wait until they come down and then buy on weakness.

Educational Segment. He is at the largest ETF conference in the world. Every ETF provider in the world is there describing their new products. Greece is a hot topic. He showed a chart of 10 year Greek bond yields. Yields have really come down. The question of Greece leaving the Euro could lead to a rocky road in the markets. What is happening in Greece is having an impact on your portfolio and you have to know how to handle it. They are projecting the global ETF market will double to over 5 trillion dollars next year. If Greece defaults on its debt it will have an effect even on North American markets.

Markets. Stocks are still the best game in town. Stocks that are geared to a growing economy are the right place to be. The safety trade is way overbought. Telcos, grocery stores, utilities, pipelines have all gotten overbought. There is a lot of momentum money in these stocks and when they get out they get out indiscriminately. We have seen a lot of fear based investing. The next step is when people turn away from high multiples.

Banks. He is not that positive on the Canadian banks because of oil. By spring we should know where the price of oil will be. You want to look at banks in the fall.

The baby boomers are shifting out of fixed income and into dividend stocks. They are being forced to. Some rates in Germany are negative. In Japan it takes 10 years to get a 1% return in fixed income.

Markets. We are in a market of haves and have-nots. Capital is constantly being reallocated. Canada had a great cycle on the back of China’s growth and emerging markets, between 2000 and 2012. Since 2012, capital is slowly moving away from commodities, away from emerging markets and back towards consumer led developed economies. Canada still has some big pieces that are tied to that other world. We just have the wrong sectors. He has very close to a 0% Canadian bank weighting in his portfolios. In the US, he is more interested in the regional banks. In Canada, 70% of the market is made up of materials, energy and banks. That makes it tough in the Canadian market. Fortunately there are some great opportunities in the US, and there are some sectors that really benefit from what is going on. This is a market where you pick your spots. There are some great opportunities, and there is some stuff you have to avoid.