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

Floating Rate Preferred Rate shares. The rate gets reset as interest rates rise. This is what you want. He referred to XFR-T to show one year performance of rates and preferred shares.

Economic Growth. This is a slow and steady progression out of the great recession of 2008-2009. The world economy has a lot of stuff going for it, but there is some stuff pulling it back, so instead of having a robust growth which we usually see out of a recession, there have been 2 steps forward and 1 step back. Thinks this is continuing. It is mostly the US that is really picking up, which is super important because it is the biggest economy globally. There are still problems in Europe. China is maybe a little bit slower than it used to be, but is still growing robustly.

Markets. We are in a secular bull market. When he looks at the signals, he tries to understand what the market is saying. In general, in a healthy market over time, a broader and broader number of securities should be participating in market strength. In the spring, the developed markets were leading the world, led by the US, followed up with Europe and some other developed markets. We have seen buying in equities spread beyond developed markets and into developing markets. China is certainly behaving better for the first time in 2 years. Latin American markets are behaving a little bit better. The breadth of buying in markets has been expanding, and does not look overcooked when looking at credit markets. Corporations are being able to borrow money at very low rates so the market is not concerned about business risks at this point.

Market. The market has been very good, but we are always vulnerable to a pullback. Everybody keeps talking about a 10% pullback, but we haven’t seen that yet. Given the strength of the market, it will be sensitive to any potential negative news. Economically the growth in the US is quite good. There have been very strong industrial manufacturing measurements in the last couple of weeks. The Fed will be finished tapering in November and they’ll probably start to increase interest rates at some point. If the US economy comes on too strong, she could see the market pull back. Thinks growth will be somewhat muted, but because of the strong manufacturing activities, we’ll see job growth accompanying that, which will be positive. Outside of the US, things are slowly improving, but it is very bumpy. The Ukraine/Russian situation is having an impact on the European economy, but we have seen the central banks there inject more liquidity into the system to keep everything going. As long as profits keep rising in the high single digits, she expects there is more upside.

What are your favourite REITs? Feels there is a place for having some REITs in your portfolio, whether you are an income or a growth investor. Maybe 5%-6%. High quality REITs do provide a quality cash flow stream and give you yields of 4%-5%. She owns Chartwell (CSH.UN-T) in seniors housing. She also owns H&R (HR.UN-T) which has a high quality, blue-chip portfolio list of tenants. Occupancy is very high. If there was a high spike in interest rates, REITs would probably not do very well.

Markets. In the Scottish referendum it looks like they want to separate. He remembers when Quebec had a referendum to separate. The British pound is reacting. If Scotland separates would they use the pound? They would have to assume part of the British Debt. Job figures are being criticized. The average error is 90k-100k. But this is the only information on jobs we have. It was not a bad number, but off the current pace. The US is doing well because interest rates are low and that is funding the recovery. If years from now the economy is booming and interest rates have risen then he will be a huge bull.

Oil and Gas. Oil prices have to go up because the cost of getting it out of the ground is going up, but that is over decades. There is some technical selling that is playing out right now. Crude oil will be in a trading range for the next 5 years because of new supply coming on line. The stocks are going to trade. Buying opportunity for stocks will be about 3 months for the next low.

Educational Segment. Financial Literacy. Seniors: Increasing bankruptcies. Larry’s guest is trying to develop a national financial literacy strategy. Seniors are entering their senior years with more debt and don’t have good financial literacy. In terms of low interest rates, it is a great time to pay down debt before interest rates start to go up again. The guest wants seniors to know what questions to ask about the products the advisor is suggesting they get into.

Markets. We had muddled growth since the last recession, but he still see some growth for the next couple of years. We are starting to see positive numbers out of manufacturing. 8% equity and 2% bond returns will be normal going forward. Brent oil fell below $100, could go lower than that still. Sees robust prices on oil, but not as high has previously. $80-$90. Oil demand is starting to flatten worldwide. Sees US production increasing. If Iran sanctions get lifted over the next couple of months we see even more supply. He is not long on any shale producers that have higher costs, but is long on oil with net backs of $30-$40. Canadian dollar at $0.90 is good also if it stays there. Nat Gas inventories will be at 3.4 Billion cu. Ft. this fall which is below where we were last year. There are seven states in the US with snow this week. Suspects Nat Gas will act well this winter. It should be driven higher.

Bonds. Bond performance this year has generally been terrific. Doesn’t think any bond manager in Canada thought that we would see a 6.5% return year-to-date or a 7.6% return year-over-year. We were coming up with such a bad year last year with a small negative performance on the overall bond index with an even bigger negative return on preferred shares. There was a lot of fear, but we are really having a terrific year. He starts top down with a macro view and then starts getting into sectors and countries. Obviously the US is doing very well. Canada a little softer. Europe is still in a kind of quagmire. We are in the 4^th quarter where we will eventually get into rate increases, which is usually danger for the bond market. It usually lasts only a short period of time, but it is the period of time that people remember and are most fearful of. Easy money has been made, so at this time you have to be really selective.

Good time to purchase a European bond? Which type? Corporate, high-yield or government? Europe is a good place, but you have to be careful. When you’re talking about corporate or high-yield, it is a very different environment there than what is in North America. Financing tends to be through banks so there are a lot of bank issues. It might be best to play this through an ETF or an index. Sometimes it is better to take your time, work through an advisor and look for opportunities that make sense for your portfolio.

Owns Government bonds. 20-25 years at 4%-4.5%. This would be subject to more volatility. The further you go out, the more volatility there is. However, the Government of Canada is a good solid credit. Surprised at the high interest rate, but this was perhaps purchased 30 years ago. A 10 year bond today would be around 2%.

T-bills, one year, 10 year, etc. are always quoted at current yield. What are the coupon rates and are they always set at the same rate? Coupon rates are not always set at the same rate. Usually bond managers are looking at yield to maturity. Each quarter, the Bank of Canada will issue new bonds, usually a 2, 5, 10 and 30 year bonds, or they may add to existing issues. There are approximately 50 existing issues being traded right now, and each day they get shorter and shorter. The 10 year bond you got last year is now a 9 year bond. As it comes down the yield curve, the coupon stays fixed. In order to make up for that yield differential, the price goes up. Sometimes they do quote current yield, which is basically just that coupon over the current price. This is not very accurate, so bond managers use a calculation called yield to maturity. This is the true yield that you should be using.

Closed End Bond Funds. What are the risks in holding this fund until it winds up? You don’t see too many of these around, because there are usually pretty hefty fees on them, which makes it pretty tough to make any money.

Building a 10 year ladder. With most bonds selling at a premium, won’t this result in capital losses? A ladder is a passive strategy and not a bad way to go. All the bonds now have a premium. They were issued with a fixed coupon, rates have come down and the price of the bond is at a premium. As a bond manager, he looks at “yield to maturity” and takes a little bit off the coupon that you would be getting and this does shrink the yield. He would do it with corporate bonds rather than government, or perhaps mixed, when they are at a premium. A better way to do it would be through a fund or an ETF, instead of doing a ladder.