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

Markets. Market is frothy and a correction could be coming. There is no bubble. He has cash on the sidelines (<10%) to invest. The US is slowly recovering and Europe is coming off a bottom, Canada has muted growth.

Large US Banks. BAC, MS, Wells Fargo, which one? He prefers the regional banks in the US. The large banks have large capital market divisions and he is not interested in that because they make their money in the bond area. Prefers regional banks that benefit from loan growth especially in the Real Estate area. Likes Bank United BKU-N following their acquisition of a New York area bank. 2.6% yield. It is growing faster than the others ones and the dividend will grow more quickly too.

Federal Reserve. It appears that they want to end tapering. The problem is, as soon as that happens, there is a great shoot up of anticipation of higher bond yields. They really want to keep short-term rates for the next 2 years and possibly only to as far as 2017 as close to zero as possible. They want to keep the housing and automobile businesses going, both of which employ lots of blue collar workers.

Markets. Valuations on stocks relative to Price Earnings, if you look back from World War II to the high, excluding the blip in 2000, the range was 7 to 21 times. Last Friday we were about 14.5X forward earnings in Toronto and close to 15X in the S&P 500. Slightly overvalued, but not particularly excessively. Has reduced his cash to about 10%. There are some stocks he would like to buy, but they are at the top of their Bollinger band and he usually likes to buy them at the bottom.

Inflation. For now, inflation seems quite tame. If you take a look at the components of the CPI in the US, the service area runs about 2.4% with a few components running as high as 5%, mainly hospital care. On manufacturing, consumers’ goods side, you are running about 1.1%-1.2% negative year end, some components are lower. Inflation appears to be contained. Back in the 50s, you had inflation running at 1%-3%. After the Korean War, you had a PE ratio is low as 7. At the end of the decade, it rose to 21, but inflation stayed contained. You had the corporate earnings go up a bit in the mid-decade, but by the end it was back to where they were in 1952.

Gold. How do you buy Gold? Traditionally, he has gone through the Bank of Nova Scotia (BNS-T) or with people who want private deals of selling their gold bars. If you are going to buy bullion in an equity security, he would recommend Central Funds of Canada (CEF.A-T) which is roughly 50% gold bullion and 50% silver. With inflation being contained for a while and low interest rates, it is probably not going anywhere fast. Gold has been making a base and he is cautiously optimistic that it will be maintained. The best price he could see in the next 12 months is between $1300 and $1500. There is no reason to own it now.

Economy. Expects the tapering will be in the new year, most likely March, but maybe January. US tax revenues are growing and borrowing is becoming less. As the economy is showing signs of continuing improvement, $80 billion a month can be started to be pared back a little. Canada is weaker. We have been sitting for 2 years without an interest-rate hike so there will be one, but it is just a matter of when. He is expecting late 2014 or 2015. He is advising clients to pare back on their bonds and ETFs is he expects pressure to continue for the next 2 years.

Ville de Quebec. 2.3% bond due Dec 4/18. Municipal bonds are basically priced off, provincial bonds. They are much more balanced. You are getting .05% over what you would get with the province. Relatively cheap right now.

Real Return Bonds? Likes these as an asset class. This is actually an adjunct to holding fixed income. Even though there has been a big selloff this year, there is more to come over the next several years. Right now, the bond is yielding about .05% plus whatever inflation is. In the near-term, that is expensive, but looking over the last 50 years, that real return has been closer to 2%-2.5%. Even though there has been a big selloff this year, there is more to come over the next several years. Bond market and government have pushed real rates artificially low, and that is coming off. As tapering comes off, that real rate will continue to rise and these bonds are going to continue to get hammered.

Holding a sizable amount of cash for only 6 months? He would use cashable GIC’s and/or savings accounts as they pay more and there is no market risk and offer a better return. You can get some enhanced rates by going to some of the smaller trust companies that issue GIC’s.

Perpetual preferred shares. Currently yielding around 5%. Hold or take the tax loss? This is an opportune time to take some losses and get them off the books because from a capital preservation standpoint, it is probably going to get worse before it gets better. The ones that are yielding lower are your better quality ones so wouldn’t necessarily target those. He would look at and target the ones that are yielding higher.

Markets. This market has gone up very strongly in the US and has been going up for 3-4 years and people are wondering if it isn’t almost over. If you look back historically, money flows in and out of certain markets. This is important because, where is the ammunition going to come from to keep this market going higher. Since 2008, people have been purchasing bonds and have basically been selling equities until the beginning of this year. This summer, the bond market finally rolled over and is starting to lose money. Extrapolating that forward, the bond market could lose money for a longer period of time if interest rates go up. The equity market has only just started. It is only 1 year out of 5 where we have actually started to have new money come into the equity markets on a cumulative basis. If interest rates went up. 3%-4% or even 2%-3%, then money might flow back into the bond market. There are always short-term political road bumps in the market.

Euro and the Cdn$. Feels that the euro will be more sideways than stronger and the Cdn$ is deemed to be a petro currency, so you have to look at the oil price for that. Feels horizontal drillings has added a headwind to the oil price.

REITs. Index for this is down about 13% year to date whereas the TSX is up 11%. A pretty diverse performance on these groups. REITs have had a number of years with very strong performance. A number of them are trading at discounts to NAV and there are some decent opportunities there. You need to be careful about what type, you are investing in and you want to be looking for those that have above average organic growth prospects.

Markets. Moving into year end, she is a little bit cautious. It seems that the market has had a good run here and wants to move higher but looking at Q3, earnings momentum was relatively muted and the top line strength was relatively muted. She is looking for stronger top line growth in order to continue to drive the market higher. You need to look forward to the 1^st quarter. You are going to get into the debt ceiling debate and the US budget debate and these have the ability to impact confidence, hiring and spending intentions out of the US compared to what we saw back in November.