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

TSX. About 400 points away from its all-time high it hit in 2007-2008. If you look at the Canadian market and compare it to the S&P 500 and you overlay a chart, one against the other, the correlation between the 2 markets has been extremely tight for a long time. It drifted apart at the moment QE3 started and when the US market took off. Had thought Canada would play catch up this year. Canadian economy last year played off real economic activity, which was very positive. Thinks Canadian economy will go a long way to catching the US markets this year. Wouldn’t be surprised to see us at record highs sooner than later this year.

Covered writing. Using Goldcorp (G-T) as an example, it is trading at around $26 a share, which isn’t a bad price. You might buy the stock and then write a $20 Call 3 or 6 months out, depending on your time frame. You would get a premium for selling that option. The premium might be $1-$2 a share depending on the strike price and the distance to expiration. That is yours to keep no matter what happens. You still own the stock. If the stock rallies, which he doesn’t really see for any of the gold companies, or gold itself, you will be called away at $28 a share. You are giving up upside for immediate cash flow, that is really all that covered writing is. Taxed as a capital gains which is tax advantage strategy for Canadian investors.

Convertible debentures, 5-year term or less with an attractive interest rate? If these have an attractive interest rate, this is usually telling you that it is a higher risk company and you have to look at the credit quality of the company that is issuing the debentures. Putting that aside, he actually likes convertible debentures. They have been priced more efficiently in the last 20 years, since options have become so popular. If you really think about a convertible debenture, all it really is is a call option on the stock and the fixed income investment in the same company.

Covered call ETFs? This comes down to how much of this do you want to do yourself. Writing covered calls against ETFs is certainly a good strategy. You could buy the TSX 60 (XIU-T) which has a 15 basis point MER, virtually no cost to running it. You could write your own covered calls. You also might want to think about that when talking about Covered Calls ETFs which tend to be writing options against individual stocks within the ETF. Options on stocks tend to have a higher premium than options on an index because the index, by definition, is of less risk than individual stocks. The risk in this strategy is that if you have a diversified portfolio to start with and you start writing options against all of it, the good stocks are called away and you are left with the ones that didn’t do so well. When you rewrite, you are buying high and it doesn’t work very well.

Which is riskier; owning bonds, or owning bond ETFs? If you own bonds, they are going to mature at some point. That is the risk of one versus the other. It comes down to the durations of the ETF, the ETF will never mature, so psychologically there’s something about having a product that at some point you know exactly what you are going to get back. Bonds are emotionally easier to hold onto. An ETF is always going to have a rolling duration. That maturity factor gives comfort to a lot of people.

Energy. Thinks there is going to be energy independence in the US in 2015. Not a believer that energy is going to take off into the stratosphere. If anything, more supply coming on to the marketplace may actually suppress prices. Russia’s deal with China was interesting and feels that fact could also put somewhat of a cap on energy as we go forward.

In a TFSA, is it better to buy ETFs or common stocks? This is really a small component of a portfolio because you can only have $30,000 in an TFSA based on your contributions. He tends to buy common shares such as Bank of America (BAC-N) and Bank of Montréal (BMO-T). He is looking for growth.

Generating regular income using weekly options? Perhaps a Canada covered call? Weekly options have come into the marketplace and they expire every week, so you have an opportunity to write an option, see the stock get called away, and then write another one. In order to make that have any real sizzle to it, you have to look at companies that have a little bit of volatility to them, so that brings up names like Twitter (TWTR-N), Facebook (FB-Q). Somewhere down the line, you are going to have a stock go in the other direction and you’ll have an option expire without much downside protection. That is the risky play in this field.

Europe. They are talking about deflation more and more, which is interesting, because Germany is an inflation hawk at its core. The fact that they have come out starting to say that deflation is a much bigger risk, tells you that they are going to be easy on policy in Europe for quite a while. Recent statements were that we should expect the ECB to add some stimulus, maybe by outright bond purchases finally. It looks like the bond markets are already reflecting that. Many of the troubled economies in Europe, where 2 years ago the bond spreads were massively wide, are trading at lower yields than the US government bonds right now. A couple of weeks ago we saw the euro hit about 1.40. Looks to him like the euro can pull back to 1.30 or even a little lower. It really depends on the degree of stimulus that the ECB can step in with here and he thinks they are going to do something.

Emerging markets. In the very long run, he loves the emerging markets such as India, Indonesia and Malaysia but when you look at places like Thailand and Philippines, there is a lot of political unrest and they are going to have their growth issues. However, when you look at demographics as a factor of growth, the average age of the workforce in India is 28 compared to the developed markets which are very, very old. Japan is going to have over 50%-60% of their workforce within 20-30 years, over the age of 65. They will have significant funding problems in retirement. This is a problem for China also, which has a rapidly aging population.

Market correction? “Sell in may and go away” does not work every time by any means. If you look at the seasonality of the S&P 500 and go back to World War II, the high comes in June or even early July and is weaker down through September-October lows. US has had 31 months now without a 10% correction, 2^nd longest rally in history. What we have seen in this correction phase is not Large Cap stocks correcting. We have seen a big correction in small caps and people are speculating that was it is all we get. Earnings were okay this quarter. Still feels we are going to get a correction this summer but will only take us back to the lows we saw in February and will be higher by the end of the year than we are today. Markets are not terribly overvalued here and as long as earnings keep growing, the markets can keep grinding higher. Institutionally there is a huge underweight in equities as it relates market exposure, as compared to the past cycles. It seems that on every pullback, money is being put to work, which seems to be limiting the downside.

How is the price of an ETF determined? On the share prices of the underlying securities or on market demand of the ETF itself? In almost all cases, the ETF NAV is driven by the equities. In sectors that are more difficult to own, or occasionally you are going to trade with a little bit of premium to the underlying because it is the issue to trade the ETF than it is to buy the basket of the underlying stocks.

International REIT ETF. Just sold his holdings because it had a really good run and on a risk/reward basis, he can get the 4%-5% yield out of a lot of other places. If the ECB actually buying bonds, we will get one more squirt in terms of yield in Europe and that will be the peak for a while in terms of bond prices. That usually means an interest rate sensitive sector like the REITs will have a correction. Also didn’t like the currency exposure in international REITs.

Educational Segment. Smart Indexing or Smart Beta. Two ETFs he wants to focus on are First Asset MS Cda Value (FXM-T) and First Asset MS Cda Moment (WXM-). A value way to play the TSX and a momentum way to play the TSX. It’s nice to deliver an above average return but if the volatility is significantly higher to get that return, that’s not great. These 2 ETFs methodology is that volatility is equal or even slightly less in most cases and the returns are fantastic. The holy grail of that type of investment strategy is to deliver above market returns and below market volatility. They screen for very specific attributes in stocks and apply it on and unemotional basis to a portfolio of stocks.

Markets. A little bit cautious. We have had a pretty good run year to date, particularly in the Canadian market. Thinks there could be a little bit of a consolidation phase over the next couple of months. A lot of names she would normally invest in, valuations are looking relatively full. Things that are cheap tend to be cheap for a reason. Expects Q3 and Q4 will be pretty strong in the US. Year to date, the US market has been relatively flat and that is on the back of a really strong run in 2013 as well as somewhat weak numbers, in terms of the data coming out of the US. A lot of that seems to be weather dependent, but everyone is still waiting with bated breath to make sure it is only the weather. Does expect their economy to firm up in the 2^nd half of the year. As that happens, it should spill into the Canadian economy as well.