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

Educational Segment. How to Sleep at Night. Risk and return go hand in hand. The average market correction of more than 10% is 19%. People sell mutual funds at this point, which is wrong. Financial planning relieves much of the stress of investing. Those that have a financial plan in place have much lower levels of stress and can sleep at night. Talking about money with the spouse is very stressful.

Markets. Markets are weird. They are a game. The US dollar is once again the savior. Safety in gold is not the case. Oil is dropping off the map. Trying to predict can often be difficult. Sectors are important. When major sectors are out of favour then these are the places to look. There are a number of sectors that are way out of favour. There are definitely opportunities. He has not bought anything yet, but over the next 6 weeks there will definitely be opportunities.

REITs. So many more people are buying online now. Chains are downsizing or closing stores. REITs could find in the next few years that they have to cut some of their rental rates or have vacancies go up. Retailing is changing fairly quickly.

Canadian Dollar. It will probably go down by the end of the year. He has been transitioning from 75% US down to 65%. He would like to buy more in Canada. The value of the loonie is not out of sorts.

Markets. It was just announced that Japan is in recession, but he doesn't think anyone was surprised as there have been lots of indications that is where they were going. In Canada, what we are most concerned with is the US and secondarily, China. He has been of the opinion all year that US growth would be better than most people had thought, and he thinks it can keep that momentum up well into 2015. That doesn't mean you have to be all in the US. There are lots of ways to play that in Canada. Benefits may be from getting revenue in US$’s, but having a cost basis in Cdn$’s. There are 2 risks that he considers as near-term. Neither of them are things that could cause a bear market, but could cause much more downside volatility than we have seen in the last 2-3 years. The 1st would be the Fed starting to prepare people to the fact that eventually they are to move rates off of zero. If that is correct and the economy stays strong, then you start seeing the transition in the language they release in their monthly statements. That could start as soon as December. The 2nd would be the strength of the US$. Historically that has caused indigestion in emerging markets, most notably those countries that run current account deficits. The countries at the front of the list for that kind of problem would probably be places like Indonesia, Turkey, Brazil and even India.

Energy. He is of the opinion that energy costs are going to stay low for a sustained period of time, which is good for industrial production generally in the US, where they are benefiting from cheap energy costs.

Canadian Banks? He has no Canadian banks at this point. Prefers US banks, which in the last 6-9 months, have done better. Canadian banks are great businesses and great franchises, but his view is that your best bet is something with exposure to the US, which is going to grow quicker and more steadily than something in Canada. Ideally you want something with exposure to business lending in the US, which would be Bank of Montréal (BMO-T).

Markets. He would describe himself as mildly constructive on equities. Notwithstanding the correction that has occurred, valuations remain high. More so for the smaller and mid-caps, but nonetheless the S&P 500, trading where it is, causes him a bit of caution. Had been planning for some form of correction and had raised cash through the summer, but just hadn't thought it would come back as quickly. You are starting to see the debt issue spread around developing countries, such as China and India. Also, he doesn't think the European debt crisis is over, by any stretch. Also, doesn't think there will be a huge rise in rates in the near term.

Economy. The signal that Japan sent, when they increased their QE to devalue their currency, is a beautiful example of a country exporting its deflation. Looking at it from the US side, it is a rise on the currency, but by the same token it is a rise on the debt. They have been trying to control the low interest-rate environment, and they say they might be able to control interest rates much further down, but the currency is being kept. All of a sudden you have a rise in the currency, and that is almost the same as a rise in interest rates. That is deflation. China and everybody is feeling it, and in order to control it they either have to accelerate QE on their own country or try to devalue their own currency. This is similar to what has happened in the 30s. Because of that he thinks that at the currency level we are going to see a lot more volatility, because countries will have to deal with it. If you listen to what China and a lot of other countries are saying, they are all affected by the volatility in the US$, and it is getting harder and harder to do trade. We are starting to see a dislocation in a lot of the processes that we have set up over time. He had instituted a lot of stop/losses for his clients and did raise cash levels in September. Staying flexible is still important. Also, feels that precious metals should be a part of everybody's portfolio as insurance.

Energy. What is happening right now with petroleum prices is good for Canada because it is killing the shale industry in the US. Shale industry has extremely high outputs and then levels off, so it is not a very productive industry, and it needs a lot of money and high prices. Long-term the geopolitics of the middle east should overtake any short-term decline in price.

Precious metals. Between gold and silver, he expects silver will outperform gold, but we have to wait for gold to take off. Thinks the miners are going to take off first. Looking at that sector, he would rather own the miners before he owned the commodity. You have to be careful in what you are buying. You have to look at management, the geography, etc. People are buying silver. The demand out of India has increased when they were switching out of gold.

Markets. Earlier in the early days of summer, he felt it would be nice to have a 10% correction in this market and that is pretty much what you got. It was a cleansing and a need the market had before continuing its healthy trend upward. Some people may wonder if this market can handle this trajectory without the extra help of QE. He feels we are 2/3rds or 3/4ths of the way through this cycle. You have to be selective and adjust asset allocation according to change in the environment. You have to be ready for a transition to take place sometime next year.

REITs. REITs have been very strong this year. Took a bit of a dip last year, which was very painful, but what this has proven is that this is not the kind of asset class to have those sharp selling reactions. The value of real estate did not plummet and increase in the last 6 months. This is proof of the steady cash flow that these products produce, and shows the strength of real estate, as people sell out of some of the more volatile sectors in oil/gas/mining and have been coming back into real estate. One of the main attractions is the yield. If you look at some of the other yield sources, such as bonds, yields in REITs look very attractive. He is favouring some of the US REITs over Canadian, but also there are some Canadian REITs with some kind of US connection. The US REIT market has had quite a run and has done very well, so there is a chance of a short pullback. That would be a buying opportunity. A lot of smaller cap REITs have been neglected and have very attractive value in some of the names.

Are large indoor malls dying? There is a question as to what are our shopping habits going to be in the future. He doesn't think the mall is dead. People are not going to sit at their computers and shop all day. Shopping is a community experience, so they are going to continue to go to these areas. It is the smaller, secondary, tertiary areas that are going to be difficult. There is also a certain amount of re-tenanting that is going to have to happen. Certain stores are just not going to survive the Internet age, but they will be replaced.

Silver? This is different than gold, because silver has industrial uses. The US$ is getting stronger and will likely continue to strengthen against the rest of the world. Gold and silver are both valued in US dollars. The weakness we have seen in both precious metals, is partly because the US$ is outperforming everybody else. It may be a little while before you see a turn in either precious metal.