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

Markets. London is more biased to raising rates. In the end the ECB will step on the gas, though. The trend is inflation vs. deflation risks. Deflation is thought to be the bigger risk in the EU. People need to make asset allocation choices. Bonds have outperformed equities this year.

Covered Call Gold ETFs. Makes more sense if you want to play gold. Without the covered call you have zero return after inflation.

Educational Segment. You want components of fixed income and equity when you create a diversified, balanced portfolio. The strategy is difficult because of the low yields of bonds. The reality is that equities have twice the volatility of fixed income. When the market is strong like it is now, you want to rebalance.

Markets. Still thinks the second half of the year will be good, lead by US equities, where they resume their upward climb. We have an unusual time in the markets where bonds have rallied. Thinks stocks will win the day. You have buying opportunities, such as the industrial sector because of a partial correction. Don’t swing at everything. You should be selective and be prepared to wait. Avoid utilities, particularly in the US where they are highly levered and slow growth. They grow at the rate of inflations, about 2%. Canadian energy and materials are still relatively attractive and you could stay there. They will continue to do well.

Deep Value Investing. This means buying things when they are very, very cheap i.e. below intrinsic value, below transient Book Value or Breakup Value for sure. He is finding deep value in certain little niches. For example, in 1989 Japan was the hottest market in the world and the Nikkei index was 38,000. Today, even after a rally, it is at 15,000, so he is finding tremendous value in this area. A number of companies are trading at less than their cash. Some European stocks qualify because of difficulties in Europe. He is having trouble finding good, cheap stocks in the US. It is a tough hunting ground for a value investor. He is currently holding about 30% in cash. He never buys anything unless he knows what his exit strategy is.

Markets. Believes that the US is going to be the last country standing. Thinks yields in Europe are going to depression levels. GDP in most European countries are mostly negative. Japan has its own issues trying to get its economy going again. To him, China is a big ex-factor. Over the long term, money will migrate to the US because there are rates of return. Also large cap stocks in the US are still very cheap and all their yields are 150-200 basis points above 10 year US treasuries today. It’s going to be money looking for return, and he thinks you will get return on the US$ and any sort of US assets will be good for investors. About 30% of his clients accounts were in US$ when he made a call on the Cdn$ back in 2002. We had a secular bull market on the Cdn$ at $0.68 to well over par. He now has a reversal of this view. Client’s assets are now 30%-35% US, which will probably migrate up to 50% in the next year or so. He wants international diversification through large international companies which are trading 20%-30% below what he thinks is FMV.

Canadian banks. As a group, Canadian banks are getting very expensive. They are hitting his FMV. National Bank (NA-T) leads the list with a 23% upside. CIBC (CM-T) has a 12% upside. Bank of Montreal (BMO-T) has 10%. Toronto Dominion (TD-T) has 4% and Bank of Nova Scotia (BNS-T) has 1%. Royal Bank (RY-T) is trading over his calculated Fair Market Value. Yields have driven up all the banks to FMV, and it is really hard to see, unless they get really overvalued, where investors are going to make money here.

Markets. The Russian/Ukraine situation is a very touchy situation. Doesn’t think it means much for the markets. He still remains cautious on the markets. Feels it is pretty reasonably priced. When everything is quiet, that is usually the quiet before the storm. When markets run too much on the upside, that is when people get into trouble with too much margin and they get a little too risky. Some are in the market and shouldn’t be there. Thinks a 5%-10% correction would do the market some good.

How do you position your portfolios in the possibility of a 10%-20% market correction? One of the rules is that if you have 7% or more in a particular holding, you keep it that way. If it grows to 10%, then you knock it back by 3%. This assumes that you’ve got a relatively diversified portfolio. If you have a high beta stock and the market sells off 5%, it will sell off 10%, so that is where you probably try to lighten up a little. Also, dividend stocks tend to react better in difficult markets. (See Top Picks.)

Markets. This year had lots of drama without the volatility. Every draw down is met with a wall of buying. We have a month and a half of a seasonally low period, but indicators tell him the smart money is going back into the market. He wants to buy smartly and to buy on dips. US economy is growing quickly enough to justify earnings. Interest rates are going down because of plateauing global growth but earnings are trending up 8-9% in the US. Capital flows are coming into the market and should drive it to an overvalued price. US is the best looking developed country in the basket.

Economy. Thinks rates are going to remain low, probably into 2015. The Fed is doing the right thing by moving out of QE, which people were so worried about. That is not really increasing rates. Increasing rates is really when they push up the short end of the yield curve because of inflation and high growth. You are seeing better growth in the US. Unemployment is coming down and job growth is better. Also feels numbers out of Europe are better. It is too risky for the Fed to increase rates too rapidly when they feel the economy is recovering. Rates will go up, but at a much slower pace. He doesn’t think we will see rates go up until at least 2015.

Markets. Costs are still being cut, so we are not seeing top line growth as aggressively as we need to. In order to keep margins where they are or improve, we are going to have to see better top line growth. You do need this because, at some point in time, they can’t cut any more costs out of the system.

Markets. The market opened modestly higher today and then got a much poorer than expected retail sales number. It then scooted off to the upside, because “bad news” is still “good news”. We have seen this over the past several weeks because everyone fears the Fed is going to tighten. Coming into an interesting period, with the end of tapering and the Jackson Hole confab next week. Feels that Yellin is going to be dovish for a while, but the market is going to worry anyway. His view all along is that we would accelerate as we move through the year. GDP growth is well into the 3’s and this is what he thinks we are going to get as we move through the back half. That is good for certain sectors of the economy.

Gold. Japan is printing quite a bit of money, more aggressively in relationship to their economy than the Fed did. Europe has threatened that, but have threatened before and not actually done anything. It may be that the Europeans are forced to eventually do outright QE, but he feels they’re going to wait longer than people think and it may well be into next year before we even get some hint of that. This is a positive on the gold radar screen. Most of the things that drive gold are credit stress and inflation, and those types of things are quite low right now. His view is that all the central banks globally are going to find it difficult to escape zero interest-rate policy. As much as the US economy is improving and they are getting off the QE program, the odds are that something bad will happen over the next few years, long before they get back to normal interest rates, and we’ll be back into the printing money game. That is a positive dynamic for the price of gold, but you have to be a long-term holder of that asset. Trading around it on a short-term basis is very, very difficult. To play gold, he feels it is best to favour the miners. At the current level of gold, the miners are cheap. If you think that over the next few years gold can get to a higher level, then you want to own miners that have great operating leverage to that and can finance themselves through to that time. He would favour Yamana (YRI-T) or Goldcorp (G-T).

Canadian banks? Canadian banks have had a tremendous run. There certainly rich when you compare them to other places where you could buy banks around the world. Very high ROEs when you compare them to what you can find in other markets. Their ability to keep ratcheting up the dividend has been phenomenal.