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

Hedging. The best way to hedge a portfolio is to first do it before you need to hedge, i.e., have all the facilities in place. Have the ability and understanding to sell Covered Calls and Buy Puts if you need to. If you have a large portfolio, have a futures facility in place where you can just strip out beta if you need to. For example, if the world is going down the tube, you would start with the most liquid name with the S&P futures and you would go opposite. The other way for most people is to just have good asset allocation. Be diversified, have your bond, have dividend stocks. If markets go down, collect the dividend and interest and use it to buy more when nobody wants to.

REITs. 2013 was a difficult period for REITs. Coming out of a financial crisis investors were looking towards stability, income, visible cash flow growth and their REITs benefited from that. In 2013 risk appetites increased and people looked towards businesses that were more economically sensitive so the allocation of capital moved away from sectors like real estate. Coming out of the talk of fed tapering and the reaction of interest rates, it made investors reassess their real estate holdings. What they wanted to get from their holdings was some sort of buffer with respect to a rise in interest rates. Wanted to make sure the internal growth from the real estate businesses they were buying was high enough, such as occupancy, rent increases and redevelopment, were going to drive the average free cash flow growth. Those REITs that are poised to deliver above-average free cash flow growth have performed better than those doing below free cash flow growth. Feels 2014 is going to be a little bit different.

Interest Rates. His view is that while you saw a sharp rise in interest rates in 2013, going forward the share prices are going to be somewhat more difficult to see. There are some headwinds to US economic growth as well as global economic growth. Right now we are seeing many emerging markets decelerating with respect to growth. Also, the fed is very acutely aware of the US housing market. They realize that any material rise in interest rates is going to affect applications for mortgages or the secondary home price increases that we have seen in the last 12 months or so. In the last 6 months of 2013, we did see home price growth slow including mortgage applications.

US mortgage REITs? Had a tough 2013 which is really predicated on the fact that interest rates headed higher and their business model is driven by borrowing short term at very low rates and buying mortgages that are lending out longer-term at higher rates and generating a spread. As that spread compresses, your earnings get hit and in turn, your dividends are going to get hit. Have performed better year to date because there has been a stabilization in the 10 year bond yield and interest rates in general and people are able to forecast earnings better going forward. They were trading close to .85X of their BV as a whole, but are now trading about 5%-15% higher year to date. This is because they overshot to the downside. Book Values fell, but the units fell much further. Going forward, he expects much more volatility in the sector. Until he sees more stability, he is not going to be allocating any capital there.

Interest rates. Fed members seem to expect interest rates to start rising at an earlier stage than previously thought, maybe April-May in 2015. If interest-rates rise, we can expect they are rising because the economy is getting stronger, and if the economy is getting stronger, the underlying companies that make up that economy are getting stronger, which means the market should be stronger.

Markets. Thinks it is relatively fairly valued. Any growth of the market will probably come on the back of earnings as opposed to revision of valuation or multiples upwards. 2013 was a fantastic year in the US equity markets and certainly earnings didn’t rise as much is prices, so, by definition, valuations rose. Thinks we are at a point where we are fairly valued, not overvalued.

US banks. Rose with the prospect of higher interest rates. Banks basically like this, even though what we saw was a flattening of the yield curve. People had expected long rates to rise steepening the yield curve, but what we saw was that short rates actually rose, flattening the yield curve, which traditionally isn’t good for the banks because the net interest margins that the banks sort of live with is low. We have to dig in as to why the banks rallied today.

Market timing. Looking at the TSX or Dow market curve, would you buy stocks today or wait for the in investable downturn coming this year? This is a very important issue. What if the market messes us up and goes up 15%, and then corrects back, but is at a higher level after the correction? He uses an asset allocation model. Each client comes in and he looks at where their asset should be placed, based on their own personal circumstances and their risk/reward and he ends up with a balanced portfolio. This mechanically forces him to Buy low and Sell high. As the market goes up, the equity portion on a percentage basis will rise and he is forced to trim off. Conversely, as the market drops, the equity portion becomes less of a percentage and he starts to edge in and Buy low. (You can find this article on his website.)

Markets. Dow 30 chart shows a bottom of 7533 in March 2009. He likes the Dow because it gives you a birds eye view of what is going on in the US. They call it the “Dow Industrial Average” but he almost prefers “Dow Consumer Average” because half of the Dow stocks are actually consumer related. Chart shows 3 uplegs. Normally you would have 3 uplegs which would be the peak. However, this extended through 2013 because it was Fed induced, not a natural advance on the bear. At the end of 2013 and into 2014, there are a lot of issues that are not making new highs. This sets up a probable A-B-C correction. Basically an A-B-C correction occurs after we’ve had a 5 wave advance. In this case, it is a 7 wave advance. The ideal peak in the Dow is probably early January. It corrected down to point A in early February. The 1^st corrective period is always thought to be a buying opportunity. It then rallied back and we are fighting now to make a new high. If you are going to reduce, this is the ideal point to lighten up. The next wave down should take us below the previous low of around 15.2 and we should end up lower in maybe 6-8 weeks. That point is unpredictable.

Markets. The market feels very topish right now. Very hard to find really outstanding value. Not a lot of momentum from a technical point of view. Most of the technical indicators are suggesting that a correction is coming. Doesn’t see any economic storm clouds, but thinks the market is a bit ahead of itself. Has positioned his portfolio in anticipation of a correction. A good time to be gathering cash. Look at your lowest conviction names, the things you have the weakest conviction with and not the portfolio. Typically some time between April and June we will get a correction and most things you are interested in owning will be cheaper, so he wouldn’t dillydally now. March is a good time because there are still a lot of RRSP inflows so now is a good time to clean up your portfolio. Raise some cash where you can.

Markets. Fed meets this week but it is probably a non-event. Thinks the upcoming meeting will be a status quo meeting. Slowing in January was probably weather-induced. The underlying economy is strong because money is cheap. Doesn’t think it can handle normal interest rates. We had a corporate default in China. DSUM-US is an ETF that shows this.

European ETFs. EUR-T and ZEA-T are examples of how to play it. Be careful about currency risks. VGK he got out of for this reason. You want a hedge with Europe.

Educational Segment. We are into the 29^th month without a 10% correction- second longest rally ever. This rally is in the category of extreme extended range. Believes possibility of a 10-20% correction could play out. Review his ‘sleep at night’ portfolio. People should consult their advisors to see what they should do. ZUE is the S&P 500, up 45% and ZWA is up 18%, both since 2011 lows. ZWA is going to go down only about 70% of a correction, but you participate in any further rally. XIU vs. bonds has done much better but would be impacted much more by a pullback.

Markets. Ukraine crisis. The markets don’t like uncertainty and now that the referendum had a 97% result, the markets have rallied. Resource, energy and materials stocks are doing better these days. Likes industrials, techs and cyclicals also. In the copper market he is not worried about China stock piling it as a collateral and upsetting supply/demand dynamics. He has been adding copper stocks. Primarily he goes south for tech stocks. There are areas of the market that are in a bit of a bubble, but when you look at cyclicals in Canada, they are really trodden down.

Markets. Feels the risks are more sided to the downside than to the upside. 2013 was the strongest year in the S&P since 1967. Every major developed market was up strongly so we are up 20%-25% ahead of where we were at the beginning of 2013. Things are getting frothy. You look at all the IPOs that are coming. People are selling holdings because their valuations are good. At the same time, Crimea in the Ukraine has reminded people that political risks are still out there. China’s slowing growth is a major concern and you have seen big slides in the price of commodities like copper and iron ore which are used as collateral by lots of Chinese lenders. Thinks you should be taking some off the table, not necessarily in Canada which was a big laggard last year, but for the ones outside of Canada, whether it is the US, Europe or Japan.