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

Markets. We are in a secular bull market, which he defines as a bull market over at least 10 years. Feels the bull market started in March/2009, so there is still a long ways to go. When he thinks of bull markets, he thinks of a return between 8% to about 12% per annum. You should expect, over a very, very long term, (over a century) equities should perform around 6%, so you are getting about 50%-100% better return than your average markets. Believes the US started to lead the recovery and they are restructuring now so that things are slowly improving. Everyone is looking at the very slow job uptake in the US and feels this is just a natural result of global economics in trade and labour arbitrage.

Economy. Looks at inflation from a labour wage standpoint. When he sees the volatile numbers coming through on a monthly basis, his focus is on what are wage increases doing, as that is where inflation pressure is really going to come from. Inflation pressure will start from the US. Doesn’t look likely this year, but it could be next year.

What percent of your profits are generated by Short Sales? Because of his bullish view on the market right now, he currently has 100% of his fund invested in equities. From there, he restricts Short Sales to 30%-40% of that Long position. After he shorts the 30%-40%, he takes the cash and adds it on to the Long position. "In the end, he gets 130-140 to 30% Short position in the fund".

What percentage of a portfolio should be in equities and what percentage in fixed? As a broad rule of thumb, take your age and that is the percentage of what you should have in fixed income oriented products. However, he presents about a 10% skew according to what the investment return is. E.g. for someone 69 years of age, no more than 60% of your income should be in fixed income products. This is because he has a very bullish view on equities and a very bearish view on bonds. Also, how much do you really need in terms of cash? If you do not need a cash return over the next year or 2, you should be in more growth oriented names.

Vanguard FTSE Developed ex-NA (VDU-T) or Vanguard MSCI EAFE Index (VEF-T)? If this is purely a currency question, he would advise you to be in US$. If it is Euro$, there is probably a little bit of an upside versus a Cdn$. He would almost take an unhedged product in any US$ or Euro$. Sometimes hedged products have tax implication that comes back to Canada. Really doesn’t know the specific of these ETFs.

Stocks. She is very driven by numbers and looks from a bottom up to see what companies are doing and how they may be mispriced in the market. You always have to keep an eye on the macro and the top-down but she tries to take the “stock specific” approach and run a more concentrated portfolio and really not pay too much attention to what the index really tells her to own. She just looks for the best opportunities and invests in them. Spends a lot of time on how to protect capital. If you have good companies with a strong management team and good balance sheet, typically these types of companies can withstand any sort of a market downturn and come out even stronger. Feels she is well-positioned in owning a more concentrated portfolio of 25 stocks with the best names. Has about 25% of the portfolio allocated to companies with growth above what the economy in general can do.

Heath Care Industry. In bull markets and great markets, it tends to do very well. Thinks it will do well going forward, but would prefer cyclical sectors. He owns stocks in this sector with specific drivers. KCP-O is up over 200% today because they seem to have a blockbuster drug out.

Economy. Expecting GDP growth in the US to be 3% plus this year. He is still into cyclical stocks, particularly US ones. Expecting to see some increase in consumer spending. However, retail results for the companies that have reported lately have not been very encouraging, but thinks this will pick up later in the year. His average equity allocation right now would be about 28% US and wouldn’t be surprised to see it go up to about 35% by year end. The very bad weather, both in Canada in the US certainly affected retail sales in the last 10 days of the year, which will affect quarterly results. However, for manufacturers and durables, they were pretty strong. Expect earnings will come in as expected.

Industrial sector stocks? This sector suffered greatly during the recession both in Canada and the US. We are now seeing a return to North American manufacturing. He is playing this through autos and auto parts such as General Motors (GM-N), Magna (MG-T), which he feels are industrial companies that can do pretty well. You have to recognize that the reason those manufacturing jobs were lost was because of low wage competition, chiefly from Asia, but also from Mexico. Most of those jobs will never come back. The glory days of North American manufacturing may never return.

Energy. Many people focus on West Texas Intermediate or Brent, but there are many other focuses we should be looking at in the Canadian oil/gas network that makes a big difference on big change for some of the companies involved. He likes to look at Canadian prices (Edmonton par price), which should be looked at carefully. On natural gas, we should be looking more carefully at Canadian AECO "C" prices. Within that, there are subsets of other prices in the whole complex. These setups are very interesting investable trends. This is one of the times when we have the most amount of freezing off of natural gas wells, so the supply has been taken down. Also, there is the weather demand coming at the same time. Both of these forces are driving natural gas to current levels. Looking out over the spring and summer, we are going to be driven more and more towards investable levels, rather than these peak levels.

Markets. US markets were incredible last year. Historically, when they go up that much, there is a 75%-80% probability they go up double digits again the following year. In Canada, it’s a different ballgame. Cdn$ has been getting hit again, real estate seems really high and banks are really high so we could be in for some skittish times. There have been warnings about an interest-rate increase. He has more of his portfolio in the US than he has ever had before. November/December are his major Buy times, but he only bought one stock last year, partially because most of the tax loss selling was done in the 2-3 previous years. January he is still ready to buy, and even into February, but after that it is pretty rare that he buys until the end of the year. His portfolio was up 49% last year, giving him a five-year annualized return of 33.5%. One caveat going forward. There are 20 stocks in the portfolio with 15 up and only 5 are down. If 5 were up and 15 were down, that would bode better for the future. His 10 year average return is 12%.

How do you recognize aggressive accounting? Sometimes there are rumours that a company is being overly aggressive. Sometimes he’ll look at financial statements and they’ll just be way too complex. When he finds that things are overly complex, that means it is easier to hide aggressive accounting. There is no clear cut rule.

Markets. The consensus is that we are overbought and waiting for a pullback. US was one of the strongest markets globally and Japan was the only market that was stronger. A 5%-8% pullback would not be surprising, but we have our season coming up now where money flows into equities. Earnings season coming up will be very important to see the views of corporations and if they moderate earnings guidance going forward. Has been fairly cautious, so she is not really expecting any big downward revision. Longer-term still bullish on equities and would use this as an opportunity to add exposure. Canadian market has lagged the US. It was only up 13% last year, versus the US at 32% plus. She wants to be exposed to the US market in 2014 and expects it may once again outperform the Canadian market marginally.

Markets. Earnings need to show us something in the next several weeks for markets to go higher. Some companies are seeing earnings contract and others are trying to over perform. E.g. Valiant Pharma went up 12% today after their investor day. Likes consumer discretionary more than staples. Also, late cyclicals: energy, industrials, tech, financials and healthcare. He goes to the US when you don’t have enough choice in a sector in Canada. Likes US banks more than Canadian.

Markets. Canada is independent of the US for interest rates, but Canada may need to raise rates. But he thinks BOC will sit on the side lines unless the economy really picks up or the FED in the US raises interest rates. The exchange rate is big. It raised your US return in the markets closer to 41%.