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

ETF’s for beginner investors? He would wholeheartedly recommend ETF’s for investors that are starting off. The tricky part of investing is deciding which stock or sector you start with. There is no end of information. If you are starting a portfolio, just keep it simple. You just want to focus on asset allocation.

US ETF in an RRSP. Is it better to hold a basket of individual US dividend payers so I don’t get taxed? That is a very good idea. You do not get US withholding tax on a registered account.

Base metals ETF’s. Would you choose equal weight or a cap weight? He does like base metals. They have taken such a beating and have had a horrible 2 years. He would tend to be more in big cap weighted stocks rather than equal weight. (See Top Picks.)

Investing. Russia is an ongoing saga. When the first market dip came and then bounced back he said it was not done yet, but that it was only market noise. It does not impact global growth. The best way to battle Russia in their new cold war is for the world to take less of their resources, so that will benefit Canada. But that could be years away. For now it is anxiety taking place in the summer months and investors may decide to defer buying. Stocks are weak in Europe with financials leading and we see it going below a long term trend line so it might be a good idea to back off and not be an aggressive buyer. One of the best ways to be defensive is to buy the US dollar.

Shorting Equities – which equities to short: He is negative on the energy sector in the short term. One bullish thesis is that North American supply of oil offsets OPEC. The US is importing less and less from OPEC, moving demand to Canada and that changes demand dynamics dramatically. But names like SU-T are overbought. You might short as a quick trade, but there is nothing that is particularly overvalued at this point. RWM-N plays the short side of the Russell 2000.

Equity based hedge for inflation over 15 years? The only inflation he knows of is inflation-linked bonds. TIP-N in the US. There is one in Canada also.

Educational Segment. Selling out to Cash Because of Possible Correction: We should see a 5-10% correction including seasonality and geopolitical events at present to occur soon. Selling out to cash is risky because if markets go up, then you lose out. It is harder to buy it all back much higher (psychology of investing). If we get a correction, it is normal and mild. We should not be overly concerned about it. Typically in this situation, the Canadian dollar goes south. He would play it by holding US currency or buying US investments that are hedged to the US dollar. Holding US$ during a 10% correction would only lose you 8%. ZWH-T adds a covered call component to reduce that loss to 6% yet when the market goes up you typically gets a 6% yield so if you are wrong and there is no correction you still make money.

Markets. Behavioral Analysis: Technical Analysis is a sub section of Behavior Analysis. It tells you how people behave according to the market. By looking at people’s actions you want to predict up trends and down trends of a stock. A lot of people are now worrying about the market having gone on for 4 years, but there is no law saying the market cannot go on further. A lot of people got out of the market in 2008 and they have not all gotten back in. We are in a major secular bull market. S&P and TSX are more or less working in tandem.

Markets. The first few times the federal reserve ended quantitative easing, the markets didn’t like it at all. Now they are slowly unwinding it, and it is supposed to end in October. You would think that there wouldn’t be a problem, but the market always comes up with some kind of a reaction, so it really depends on whether we have had some kind of a meaningful correction before then. If so, then he thinks we’ll be okay. If we haven’t had anything, it might be an excuse for it to pull back. A little too early to tell. Even with bad news, the market doesn’t seem to want to go down. There is still a lot of cash on the sidelines, so that any meaningful pullback looks like it is going to be bought. Good companies and dividends will still provide positive returns.

Economy. Feels we are in the middle of the economic cycle which has been elongated by central banks. You have the Dow Jones up 3%, S&P up 6% and the TSX up 12%. You are really looking at a continuation of markets chugging along this mid-cycle period, where companies within industrial or technology spaces get the benefit from an increase and a ramp-up in capital expenditure. We are still working in the wake of the great recession, which saw about $400 billion of capital, escape the markets. One of the byproducts of that is that there are companies sitting on $1.7 trillion of cash. That cash is starting to get deployed in the realm of capital expenditure, and you are starting to see a little bit of increase in merger and acquisition activity. An example of a company that would be a beneficiary of the increase in overall infrastructure and industrial buildout would be United Technologies (UTX-N).

Markets. It is difficult to see where anything is going to come out and really hit the markets. There could be an adjustment of 10%-20%, but it is going to be short. The markets are going to come back. You could have volatility, but there is nothing out there that is going to push us into something like we had in 2007-2008. Generally earnings have been great and he thinks that is going to continue. Feels the US recovery is real and is going to continue to carry on.

In a TFSA account, is it better to buy ETFs or individual stocks? Which stocks or sectors would be a smart bet for a long-term hold? He would recommend an ETF, because how many stocks can you buy in a normal sized TFSA account? ETFs gives you diversification, and avoids the risk of an individual stock. Consider XIU for the Canadian and XSP as well as some of the competitor products from Vanguard. As long as they are good, broad-based ETF’s, you’ll be fine.

How would you structure a $60,000 RESP for 2 kids, grade 9 and 6, using ETF’s? You are looking at a 4 to 7 year time horizon. Grade 9 is a relatively short period, so you might go with something with 70% equities and 30% bonds. Consider something like 25% (XIU-T), 25% (XSP-T) along with some bonds in the (XSB-T) with maybe 10% in the (ZWB-T).

Investing. You always have volatility in oil, be it geopolitical, or whatever. We could have $100 or so as the floor for oil for the next few days or so. There is $15 in the oil price for reserves that are off line around the world. It will trade around $100 for a while. Gas is a buying opportunity now that we are trading back at the $4 level. Thinks we will almost get our gas reserves up to where they should be by winter. Our cool summer is bad for Natural Gas, but he thinks we will have another cold winter. There are hot oceans in the Pacific east that are causing rain to keep our temperatures lower. He is predicting a $5-$6 gas price over the next few years.

Markets. Discussed a Zigzag tool, a filter that filters out all the choppy stuff. This tries to pick significant rallies and significant pullbacks. This can be set to look for movements of any percentage you want. He set it for 5% or more, and was looking for how many months there were, on average, between rallies where there would be a 5% or more correction. Since the beginning of the bull market, there are a lot of 4, 5 and 6 month periods that met the criteria. Chart indicates this current rally is a little long in the tooth. Seasonally there tends to be a soft spot between mid-January and around the end of August. Any pullback that we get would be an opportunity to Buy. Currently we are in the midst of a new secular bull market that is right for probably another 10 years, but that is not to say that we can’t get a 20%-25% correction somewhere along the way.