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

Tobacco stocks? Has decided that he won’t own tobacco stocks any more. He doesn’t want to own something that kills people. This is a personal choice.

Preferred bank shares in volatile times? The beauty of bank preferreds is that they pay better than cash. They got hit creating a pullback in March 2009, and he bought preferreds in 3 Canadian banks. If you own preferred shares, even if they go down in value, you are effectively clipping a coupon. He is a little down on Canadian banks as he feels they should be paying down their debt loads.

Markets. AA-N will kick off earnings season. For all companies, profit growth going forward is the most important. She thinks earnings will grow over 6%. Earnings should pick up going forward (10%). We are seeing stronger data out of the US, housing starts, manufacturing data. Global economy is stabilizing as well as China. PEs has expanded in the last couple of earnings. We are at the historical medium. She is pretty fully invested. We might get a 5% dip, but a geopolitical risk could push it lower. She is concerned about the middle east. If crude prices rise enough for a recession then it is not good. If inflation rises, then the Fed can’t be as accommodating.

Markets. The summer correction is when all the traders go on holidays July 1^st so it is like a buyers’ strike. Seasonality kicks in. It has felt rather weak over the last few days possibly for this reason. Everyone thinks there is going to be a correction which probably means there won’t be, yet we have had such a good run that we do need to have a correction. He expects a 5-7% pullback over the next 5-7 weeks. He is more fundamental and less technical, but it looks like the market is toppish and rolling over, even though company earnings are strong. Global growth is humming around 4% and North America is recovering nicely from the winter. Interest rates have hit the lows of the last 30 years. It’s hard to impress the bond market. The emergency lending has started to wrap up and rates should go up next spring. Rates will still remain relatively low, however, on a historical basis.

The US housing market is going sideways. There are supply issues. Banks would not lend to many consumers so it was people from other countries going into Florida and buying up properties for cash. Thinks it will go up 5-7% later in the year.

REIT Prospects. REITs got hurt when rates increased a while back. If rates go up again, REITs will certainly be hurt. However, their payout ratios are now lower and they are locking in all this long term funding. So interest rates are becoming less of an issue.

Markets. Target Date funds in the US. You buy a retirement package that matures late in your life. Dropped in 2008 even though it was designed not to. They don’t eliminate volatility, but over the long run they do well. The growth of this sector is fantastic and they are now coming to ETFs. You can buy target date ETFs. 17 basis points cost. A robo-advisor is a program on the Internet that spits out a portfolio when you put in your risk tolerance, etc. There will be a correction at some point. This is when you need your advisor.

REITs are interest rate sensitive. It looks like the Fed consensus is to raise the interest rates around mid-next year (March to June). The market knows this. The economy needs low interest rates right now. He thinks the rise in interest rates when it comes will be little.

Because volatility is right now at all time lows. The cheapest form of insurance is options. A put option on the S&P or TSX will hedge you against a 5%+ decline and cost about 5%. Buy put protection from the indexes. He thinks the correction will be 5-10%, but not 20%.

Markets. Rates: They are looking for lower for longer. The US economy should do better in the second half. Longer data rates should inch higher in the next year. As data from the markets comes in stronger, the Fed should be pushed a little. Jobs data coming out later this week should be mild. There should be no rate adjustment in Canada in the next while and the economy should lag the US in growth. Play a bit defensive, overweight good quality corporations. Get some US dollar exposure. Maintain a short duration portfolio.

Rising Interest Rates – how to play in the short term: You don’t want to get too bearish on bonds too soon. Own a fund that has the ability to own floating rate bonds, rather than own them directly, so they can manage them.

Educational Segment. Does Rally Have More Room to Run? Divergence readings continue to build and sentiment indicators are not extremely bearish or bullish. Market breadth lets you see what’s going on under the market. Advance/decline lines show how many stocks go up vs. down. NYSE A/D line has made higher highs whereas the NASDAQ has not. Russell 2000 stocks corrected 10% this year and other small caps corrected up to 20%. The large cap market did not correct during this time. Last week the R2000 came very close to a high. The NASDAQ has not made a new high. History tells us that the Large Caps should follow suit, but he is only looking for a 5-10% correction. There is no reason for a bigger correction at this point.

Convertible Debentures. Tricky security. Make a lot of sense in theory. If the stock does really well you have upside participation. The strike price is usually 25-50% above the current price of the issue, and the paper is subordinate. You want to be careful about where you are in the capital structure.

Bonds vs. Life Insurance. Corporate bonds have a yield spread above government bonds that provides a cushion against rising interest rates. Lifecos typically do a bit better in a rising rate environment. It has to do with the present value of bonds as rates rise and the eventual liability lowers.

Laddered GICs vs. Laddered Bonds. Instantly cashable GICs cost you in terms of rate. You have to be willing to commit the money for a GIC. An open ended mutual fund allows you to invest in something else if you want to at some point. A corporate bond ladder means you are constantly investing, but you can’t take advantage of rates being high or low in making a trade. Laddered bonds are a more mechanical portfolio. If you know that in so many years you need the money for something, then you can use a ladder to get to that date.