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

Educational Segment. Fight or Flight response. Significant losses in the portfolio cause this response. We see it in functional MRI research bit also in mutual fund money flows. E.g. 2008 crisis, Leman crisis. When returns are generally good money flows in and when returns are bad money flows out, which means people are chasing past performance.

Markets. Some people question if we are in a secular bull or bear market. He has no doubt we are early in the secular bull market but early in the cyclical bull market. Energy markets are coming alive. Some stocks might be subject to a correction but longer term it is a bull market.

Markets. There might be a 5%-10% correction in the US, but given where interest rates are and where global growth is happening, he doesn’t see us having a major correction. Some things are fairly valued and some are highly valued. There are some sectors that did really well because of high dividend yields, etc. But overall, he expects to see reasonable growth in the US of about 3% and expects it will be a very good year there. Globally we could have a better year. Corporations are in good shape. People are saying margins have peaked and is going to be an issue, but they are forgetting that if you have top line revenue growth, margins can expand. The cost structure of a lot of these companies are way better than they were 5 years ago.

Markets. Optimistic about 2014. Seeing the positive signs in the US economy and the European economy as being a lot less of a drag. Biggest challenge we have is in Canada, but hopefully the US strength will pull us out of it. Expects there will be a bit of a lag in Canada. Weakening of the Cdn$ should ultimately be good for a lot of Canadian businesses. Likes lumber for the homebuilding in the US. On the retail side, cost of goods is obviously going to go up as a lot of them are priced off the US$’s. Something like lumber or manufacturing sector, where they are selling goods in US$’s with a lot of their input costs in Cdn$’s is definitely a win. Airlines had a big run and the drop in the Cdn$ is definitely going to hurt them on the cost side. Fuel makes up about one third of their operating expenses so that is definitely a headwind for them. They’ve had great runs, so he would probably avoid this area.

REITs. Fear of higher rates was overdone. REITs had a very good run for long period of time and there were a number of equity issuances and new REITs that came out at that time. When Bernanke made his tapering comments that was the tipping point. Bad news has now been priced in so it is now offering a good opportunity to get back in. Long-term investors in real estate should be looking at REITs as a form of cash flow. Return on real estate mainly comes from income, so you want to look at its yield. Sometimes you have to go beyond just the dividend yield because a good REIT will not pay all of that out but will keep some of it. You have to look at if the cash flow stable. With the amount they hold back, they are able to regenerate returns, right in the middle of the portfolio with real estate they already own, finding better uses for it.

Significance of a distribution of a REIT being designated as Return of Capital, particularly when the percentage is a very high percentage of the distribution? In the dividend that you receive, it is actually composed of different kinds of capital. If you have a return of capital, that actually lowers your base so your book cost goes down that amount. If you are holding this in a taxable account, you don’t pay tax on the income. Theoretically, you should hold these in taxable accounts, not in an RRSP.

Markets. He is seeing an alignment of opinion on Wall Street. Fixed income vs. equities. It is unanimous that equities will outperform bonds in 2014. Tapering economic stimulus is not tightening. Fed has said they will act prudently to what happens in the capital markets. He believes there will be a reacceleration of economic activity in the US. Growth will be 3%. Believes it is compelling to continue to lighten up on bonds and move into equities. It is just a question of how much money you want to risk losing in bonds over the next few years.

Economy. We could see a transition from a central bank assisted growth to the private sector taking over. This thing has been so long in the making and has taken so long to engineer, whatever taper happens it will be “taper responsibly”. It will happen when the private sector can handle it. Any way, you are going to have either the transition or a whole lot more liquidity and in either case it shapes up pretty good for stocks. Weaker Canadian$ is going to help a lot of sectors such as energy, materials, banks, etc. Canadian dollar probably goes lower and this will be a tremendous benefit to the TSX.

Dividend Stocks. He looks for companies that have dividend growth and cheaper than its peers. Also, wants organic growth or growth by acquisition.

Markets. For the last number of years we were in a Bear market and we have started to now see some changes in investors’ preferences that are look more towards growth. Now in a period where we are going to see higher earnings and probably higher multiples as well. Over the last 3-4 years investors wanted to be in the safest stocks they could be in, such as grocers, drugstores, etc. Those stocks outperformed the TSX. Now starting to see, on a longer-term basis, that the TSX is taking relative strength away from consumer staples, indicating investors preferences are now changing to more growth investments. Also, going into the 2^nd year of the presidential cycle. If you look at all the quarters and break down their performance over the 4 years, 2^nd quarter and 3^rd quarter are the weakest two quarters of the whole presidential cycle. However 4^th quarter is the strongest. This is going to take some active management and investors are probably going to need some dexterity.

Canadian Markets. He tries never to get wrapped up in the year-to-year, week to week movements. It’s all about the long term.

Energy & Materials. - Falling Cdn$ is going to help because most energy producers’ costs are in Cdn$ but the commodity is priced in US$. Feels Materials is more of a sentiment play. Commodities have been beaten down globally and we are starting to see some more robust economic growth figures coming out of the US, as well as globally. Commodities are late cycle performers, so this space, with a 20% annualized generalized decline in the last 3 years, is bound to revert to the mean, and that definitely helps buoy the Canadian market.

Markets. US$ is not only going to have a good 2014, but he is seeing hopeful signs that we are in the early stages of a bull market in the US$ that should go for 5 to 7 years. We are only in the 1^st or 2^nd inning. Economics in the US are very, very strong, the top one being energy. His average client is at least 40% US denominated but he wouldn’t mind getting this to 50%. Feels all assets in the US will do really well, including real estate, equities. Anything with a US$ denominated should do well. Stocks that are showing up in his screen that are doing really well now are the Large Cap value, the top 100 of the S&P 500. There is a lot of value in that group. Suspects stocks will not only go to Fair Value but will get to an overvalued position.

Brian’s Model Prices. Uses an algorithm that is very robust. He can do companies from every industry, from banking to industrial companies. He takes earnings estimates and a few selected pieces of the balance sheet and comes up with Fair Market Value which is what he calls his Model Price. Goldcorp (G-T) made a bid for Osisko (OSK-T) at a little over $6 and when you look at his Facebook model price on Osisko, it is $8, which indicates to him that they are not paying Fair Market Value. It’ll be interesting later on as to what actual price the deal is consummated. This is a way of looking very, very quickly on Facebook of any FMV of any stock that you may have in your portfolio.

Markets. Everybody is wondering where the employment growth is and how come the commodity cycle is not turning. A lot of this can be explained by US housing starts. Housing used to be 1-1.5 million starts a year and then it became over supplied and dropped to probably a half-million a year. It is just coming back now. That is important because a 2100 ft.² house takes 60 to 90 days to build and takes 20 to 25 people to build it, 400 pounds plus of copper, 16,000 board feet of lumber and that is just on the direct building of the home. Feels this is a missing ingredient for global growth. What he expects to happen in 2014 is a housing acceleration. Also, auto sales are back to pre-crisis levels and this should continue as the average car on the road is still quite old.