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

Interest rates. Have been extraordinarily low. He is looking for around 4% this year and end up at 5%. Pretty gradual but central banks will keep short-term interest rates very low.

Portfolios. When you look at putting your portfolio together, you have to look at all asset classes. He puts about 30% of his clients’ money in fixed income and about 70% in equities. Of that 35% is in the US, 20% in Europe and international and about 15% in Canada. On his bonds, about half of it is in short-term bonds and on the balance there is high-yield still, with a little bit in preferred shares.

Pharmaceutical ETF? He doesn’t have any in this sector at the moment. The easiest one is the SPDR Health Care (XLV-N) but there is SPDR Pharma (XPH-N) which is just pharmaceuticals. In Canada. There is the BMO EqWt US HealthCare Hedged CAD (ZUH-T). However, you don’t want to be hedged at this point.

Should a US ETF be hedged or unhedged? You don’t want to be hedged at this time. Cdn$ looks oversold, but eventually it is going lower. His view on what made the Canadian and Australia dollars so strong over the last 2 or 3 years is that both countries had 2 advantages. We did not suffer a financial banking crisis and short-term interest rates in both countries were considerably higher than in the US. When you have high credit rating and higher short-term interest rates, a lot of money flowed into these countries from US money markets. We are now seeing that money flow back out.

A materials ETF to hold from now through May? He kind of likes the mining side and you can play at 1 of 2 ways on the Canadian side. XBM-T is an iShares base metal, which has all of the big metals companies in the world, but does not have gold in it. Also, CMW-T is an iShares, which has gold in it as well.

Preferred shares ETFs. He likes iShares S&P/TSX Preferred Fund (CPD-T), which is the key one. One that he has been using more and more is BMO S&P/TSX Laddered Preferred (ZPR-T). These had suffered as interest rates went up but the spreads between yields on preferred shares and yields on the 10 year bonds are actually pretty high, both in Canada and the US.

Gold. He likes the big gold mining stocks. People are fascinated with looking at gold from the standpoint of inflation or any kind of disaster scenario. We really should be looking at gold the same way you would be looking at copper. There are very few mining companies where cash costs are less than the price of gold. Gold mining companies used to trade at huge premiums to their net asset value and are now trading at massive discounts and everyone has basically thrown these things out. Very speculative. You could put a small part of your portfolio into XGD-T or GDX-N.

Covered call ETFs? Nothing wrong with these. The strategy of writing an option against an underlying position is a standard thing to do. He typically doesn’t like buying covered call or exotic ETFs. If you have a good broker and you buy something like XSN-T, your broker can write covered calls for you and probably at a price that is cheaper than what they are charging on the ETF.

Markets. 12% earnings increases on the S&P is probably optimistic. Analysts are forecasting companies they cover and are biased on companies they cover. In 2007 they were forecasting 8-10% earnings growth for 2008 and we know how that worked out. However, now there is no bearish catalyst to worry about. This is a 4.5-5% global earnings growth trajectory. The earnings are growing at a lower rate than they has in past cycles. The market should not grow at this high a rate. The market is at risk for some setbacks if upcoming company results don’t deliver. Markets could pull back 3-5% on debt ceiling market noise.

Fundamentally businesses are in good shape and the market pays a higher multiple for growth in the future. But he thinks once things normalize there could be problems again and potentially multiple contraction and that is where you get the big corrections. It doesn’t mean you can’t stay with a high multiple for a couple of years.

Educational Segment. Evolution of Investing. In the last decade we found that it is all about what people think about the investment decisions. A gold chart pattern shows a double bottom and a breakout on gold and shows it is a high probability trade:

1. Would you sell the security
2. Continue to hold because momentum is good in the gold sector.
3. Tighten your stop so you at least make some money.

There is no right or wrong answer, but rather how the individual approaches the trade. You have to understand how your mindset works and execute the trade accordingly. Your return to risk needs to be at least 2:1.

Markets. Hostile bid for OSK-T by G-T. It is a continuation of the trend for takeovers because of depressed prices. Great if you bought it last week. Lots of investors will see gold stocks be taken out at prices lower than what they bought them for. Gold stocks are beaten up enough but there are no clear catalysts. There is obviously base building going on. He is not racing at it but he thinks these stocks have probably bottomed out. He holds 50 stocks in his opportunities fund. He is up 43%. He is still seeing opportunities.

US$. Hang on to them. You have a strong trend occurring at the moment. CAD$ is at $0.91 now. A resources boon could help it, but more likely it will help the markets.

Energy. Expects another pretty good year. Energy index was up about 13% last year and thinks this year is going to be relatively similar. Brent oil has been over $100 for about 17-18 months. Oil market is probably much tighter than people are expecting. We seem to get a $2-$3 vacillation every day when there is talk of Libyan oil coming on stream. Look at all the political barrels that are off-line right now due to political issues. E.g. oil fell $3 because of one single field in Libya that was supposed to be coming on stream. The country has 9 militias with some of them better armed than what the government has got. Saudi Arabia is currently exporting 6 million people out of the country, 25% of the population as it has been speculated there is concern about potential uprising. Global oil market is very, very tight because demand was much stronger last year than people expected. Global economy is recovering and had a much stronger rate than people were expected. In North America, we are seeing differentials between WHI and Brent because of US domestic oil production exceeding the increasing demand. Feels there is a potential that US growth may not meet some of the loftier expectations as there were some people thinking production may be up as much as 1.2 million barrels per day. In Canada, you have the impact of the loonie. Typical oil producers just received an 8% price increase because of deterioration of the loonie and, at the same time that difference in price has narrowed to about $5. First time in 5 years that the value of Canadian oil actually exceeds that of US oil. Shipping by rail is hugely significant, and is an expensive means of getting oil out of bottleneck Alberta, but for as much as $60-$70 transportation costs receiving Brent, you’re looking at about $90 US, almost $100 Cdn, so even by rail it is not a bad solution.

Natural gas. Had a huge run on the back of extremely cold weather. There’ve been huge drawdowns on natural gas storage. Spot price has increased materially but the “later-out” months this year and later years have come down pretty meaningfully. If you were to go out even to 2020, you can’t get above $4.50 in MCF so it has been a flattening of the curve. As we are heading into warmer weather and, as well as the next couple of months last year were very, very cold, the year over year comparison is very challenging. Could be a 5%-10% correction.