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

Utilities. Doesn’t think you will see the same negative influence of interest rates on utilities this year as there was last year. We are probably in a new range of something like 2.8%-3% on a 10 year US bond. However, given the choice, he would prefer to look at pipelines as compared to the straight utilities. Within pipelines he would prefer the midstream energy companies as opposed to the pure pipelines. He likes Keyera (KEY-T), Pembina (PPL-T), Inter-Pipeline (IPL-T) and AltaGas (ALA-T) and he owns all of these. You are going to get more dividend growth from these than in the pure utilities.

Markets. He is constructive on the US. He looks at the macro data and over the last 6-9 months not much has changed. The economic improvements in the US should continue. Believes this is one of the best places in the world to invest. He is selectively interested in companies in Canada. Needs great management teams with international exposure and able to champion the businesses into other parts of the world. We also benefit from the weakness in the Canadian dollar. He is bullish on Canadian energy. He finds that there is an active energy patch with excellent management teams. He is cautious on emerging economies because data does not encourage him that growth will continue.

Canadian Dollar. There are lots of factors with currencies. His view has been very, very negative over the last 6 months. He continues to be bullish for the Canadian dollar relative to the US dollar. Over next 3 months, if Canadian interest rates go up it will cause another leg down with the Canadian dollar.

Markets. Thinks there is still a ways to go. He can see 2014 being as good as 2013 for Canadian investors. Heavens have sort of cleared in the last little while. We may run into some more heavy weather in the fall when the US November elections come, but in the meantime, things are okay. The lower Cdn$ is going to help a lot of our firms, certainly the oil companies, and it may stay down for a while. He is continuing to invest in the US. In his strategy, he is looking more to the growth side rather than the income side, but is still emphasizing the income side to keep those cash flows up.

Coal stocks? You have to recognize that coal was and still is in the US, one of the best sources of energy, particularly for the Hydro industry. We still have an excellent opportunity to ship coke and anthracite coal offshore. Coal itself is a difficult fuel to use, without creating all sorts of nasty side effects. It is a major pollution problem. This is what stands in the way of it continuing to be kind of a mainstay for fuel in the US and Canada. Natural gas is a much better fuel. On a long run basis, coal is probably not going to be in the same position as it was in the past. Long-term prospects are not bright for coal.

Gold. He is on the sidelines as far as gold is concerned. There has to be some sort of a catalyst that gets people interested in gold again. It has to be some kind of indication that we are coming into more inflation or there is some sort of a financial crisis lurking in the background. This has bounced off the bottom but there is no indication that there will be a sustained recovery.

(A Top Pick Jan 25/13. Down 19.09%.) Sprott Gold Bullion Fund Series F – SPR 226. Not totally negative on gold but has only 1% or 2% holdings in portfolios.

Interest Rates. As anyone who has held a portfolio of REITs has found out, the moment there was a suggestion of the US beginning tapering, the market collapsed on the REITs. This was very much overdone and there has now been a reasonable recovery. Feels REITs are now reasonably priced. Doesn’t think the concerns about REITs suddenly roaring up was ever justified, and the market is beginning to realize that. There will be a gradual increase in interest rates over time, but with inflation so low, he doesn’t think this is something that will happen very fast.

Forestry sector? He is pretty light in this sector, but at the same time with the Cdn$ being down, it is a real benefit. They are selling into international markets. The forestry industry may benefit as well from increasing Chinese demand.

Markets. Central banks globally are remaining very accommodative and putting a floor under the market to protect. Expect rates are going to stay low for the foreseeable future. World economy is very fragile. Europe is barely coming out of recession, fighting deflationary forces and still has huge amounts of sovereign debt to deal with and the banks are not in great shape. Also, have high unemployment and aging demographics. Japan is desperately trying to reflate its economy and the value of the yen, which may lead to another Asian currency crisis at some point. China is really slowing down. Trying to stave off its own debt crisis, because their banks have overlent to corporations and local governments have overspent on infrastructure. US is plodding along with not great growth, but growth. Low rates are here to stay and that is going to keep a floor under the market, but things are getting very expensive. For his clients, he has been increasingly conservative over the last few years. Has about 10% in cash and still has about 35% of his portfolios in high-yielding dividend stocks such as power companies, pipelines, telecoms, renewable energy, etc. Even though they are getting a bit expensive, he still feels dividend yield is very important, and give some stability to portfolios.

Markets. We are in a very low interest-rate environment and there is a lot of money in the system and that money is creeping its way into the system. Looking at the S&P 500, revenue growth has been very, very low for the last couple of years, so businesses have done a great job of squeezing profits out of very, very flat sales growth. It continues to be a challenging world to be an investor. While everybody is looking for stronger economic growth, there will be a point in time where interest rates start to rise, probably above nominal GDP growth of about 3.5% or so. That will start posing a problem for stocks at some point from a competitive threat and also these falling rates have been a real win at the back of corporate profitability because they’re borrowing costs have been falling. There is a potential for rising rates, US$ has been strong lately, which could start crimping international sales profitability of the S&P 500, where about 6% of sales come from. The stronger US economic growth could start becoming a bit of a problem for stock valuations.

What impact will the declining value of the Cdn$ have on the investment banking portion of the big banks in Canada? If you want to look at direct exposure to the American$ through operations in the US, the 2 biggest banks would be Toronto Dominion (TD-T) and Royal (RY-T). RBC Banking have done a fantastic job of building up their capital markets exposure in the US and are one of the top 10 players there now and continue to execute exceptionally well. You also have to look at Bank of Nova Scotia (BNS-T) because of the Latin American currencies. A strong US$ and a weak commodity environment is going to be pretty bearish for those currencies as well.

Markets. Does not think the Canadian gov’t will cut rates because it would further inflate the housing market. $0.89 is a good support point on the Canadian dollar. We are experiencing some disinflation in Canada but the lower dollar is boosting prices of imported products. This is not ‘good’ inflation with ‘good’ inflation being increased job salaries, for example. Mining has been crushed and will not come back immediately. It is setting up for a nice trading rally. Gold is not going to do much here. Thinks gold will go below $1200 sometime in the summer.

Japan has been doing QE for 17 years and it has not been working. No organic growth and they don’t want foreigners coming into the country. We are in a weaker yen cycle. EJW is a good way to play it. DXJ has a currency hedge. He doesn’t love Japan right now. It has had a good run but has not got a lot of upside.

TFSA’s: If you are going to speculate, you should do it in the TFSA. If you are successful you will never get taxed. A cash account gets taxed right away. If you think of the TFSA as a bank account and are in and out then don’t speculate. ZRE-T is a good way to play it. Thinks REITs will start to get attractive.