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

Interest Rates. In spite of the fact that it is expected the Fed will start to taper in early 2014, she feels it will be some time before we start to see interest rates go up. There will be a gradual increase in 10 year bond yields over the next year but will be relatively modest. If you are focused on dividend stocks that have the ability to grow their dividends, she is most comfortable that most of the stocks will be able to grow their dividends at a rate that will more than offset that interest-rate sensitivity.

Banks. Still likes banks as a group. Had a pretty nice run over the last couple of months after been relatively stagnant from the 1^st part of the year. Bank multiples have gone up by about 10X forward earnings to about 11X, but still not bad in terms of the historical context. As a group, they have had relatively strong earnings growth. Expects next year will be a relatively tough retail environment but pressure on net interest margins will start to bottom and turn the other way. Interest rates going up is actually a positive for the banks.

Dividend Stocks. You have to look at the stocks individually. Some are fully valued and will have to grow into their valuation, which he is fairly confident they will. He looks for growth and earnings of 5%-10%, and in a year or two, he thinks they will grow back into valuation. Continues to be fully invested and is carrying about 2% cash. In Canada there are basically 3 groups that make up the market. Financials, energy and materials. Materials are having a tough time because commodity prices are low and don’t appear to be turning any time soon. Energy stocks are good value. Financials have done very well. For investors looking at dividend stocks, you want a current yield but you want to make sure it is going to rise. Don’t grab the ones with very high yields, because the likelihood, those yields are high for a reason. Look for yields of 4%-5% and build your portfolio on that and look for dividend growth of 5%-10%.

What are the key factors a company should look at when deciding what size of dividend to have and do those factors vary differently between companies in different economic sectors? Dividends definitely differ between sectors. If a sector such as banks, utilities or pipelines is less volatile, the likelihood is that the company can pay out a better percentage of their earnings in income. If they are looking for more growth or are in a more volatile sector, the likelihood of high payout is limited. The first thing he looks at is cash flow and if it is increasing. It is likely that if they have good increasing free cash flow, they will increase their dividend as well.

Markets. There is more uncertainty regarding interest rates and the sensitivity of REITs. Over the last few months, sectors like this have corrected a fair bit on reaction to what the fed is saying along with economic indicators. In September, when the Fed decided not to taper back its bond purchases, the REITs rallied. Since that time, we have sort of been in a position where investors are wondering exactly what the Fed is going to do, when they are going to taper back their bond purchases and the effect it is going to have on interest rates. More important to him is when the overnight rate is raised and he doesn’t anticipate this is going to occurs until 2015. Doesn’t think that the employment indicators or inflation are going to allow the Fed to increase interest rate anytime soon. Housing market is also on the FED’s mind and any material increase in interest-rate is going to affect the housing recovery in the US. He is focused on the sustainable capital structures and REITs that are going to be able to generate internally generated free cash flow growth going into the future without a reliance on the capital market.

Markets. The US market is more fairly valued. There are pockets that give her concern. Has been avoiding yield plays because they are overvalued. You have to be pretty focused and pick your spots. Concentrated, managed portfolios will allow investors to do better. It is a nice problem to have when some of your stocks are hitting their target. A lot of mutual funds have 60-100 holdings and she wonders how they can manage that many. She is a bottom up, value investor and can only focus attention on so many. Otherwise buy an ETF. She is 55% in US holdings right now.

Markets. A rising bullion tide will not raise all boats. There is seasonality from June till Dec. and this year it has gone down the whole time. He is nervous. Is the next leg down? You need to own a high quality investment. The shakeout from the last two years is that it is a really difficult business. It is being shaken out right now as to who really makes money in the gold business. Copper really hasn’t gone down. It is not in a bear market. The market is tight. There are a few projects coming on. Copper is the one place he would like to be. Demand will converge with supply in the next few years. Europe has bottomed so next year will be higher; China is growing at 7%, so for the first time we have synchronized global growth. Oil is first, copper is second to respond.

Markets. Feels this bull market is pretty long in the tooth. His models are telling him that it is about 30% overvalued from here. Has primarily been driven by low interest rates, central banks flooding the system with money and a forced movement into equities, based on where yields are and what bonds are paying. Until governments and banks stop doing this, you will see the market continue going forward. At a certain point people are going to say that there is a certain price that they will pay, but if valuations keep going this could impede them going forward. This bull market corrects a little, consolidates and then goes higher again. He takes advantage of these corrections.

Markets. S&P has been lagging compared to Dow. But what we have seen is small caps leading large caps. 2013 has been largely about multiple expansion and we have had that now. Thinks we will get a rotation into 2014 into the large caps. Canadian financials are on fire this morning. If we look back two years, we had a peak in 2008. We are still 10% below the peaks. The energy sector is not making new all time highs. Same for mining sector. When energy is rebounding beyond the next couple of years, the TSX will lead the world. And the commodity story is range bound. China needs major restructuring. They are easing up on the one child policy.

Gold. It is tough right now. In the next few years we should get a new rally. Tapering on tap for 2014 and that means less liquidity. There is not a case for gold. We need inflation. Gold will be a range trader. Big base patterns are building in the gold stocks. If gold gets above 1500 then it means the market is pricing in inflation.

Canadian banks. Looks at it by ETFs. ZEB is equally weighted. You aren`t early on the banks. 5% yield with some upside potential and upside protection from the covered call option. ZUB is US banks but 1.5% dividend. US Banks could be better over the long term.

Educational Segment. Excess reserves are bad for the economy. The Fed has been buying bonds and created excessive reserves in the system. 2.4 Trillion in excess reserves have accumulated. That money is not getting put into the system. GDP does not get created unless that money gets lent out. That is the velocity of money. The fed will stimulate the economy if they stop paying interest on the excess reserves. The current velocity of money is the lowest since world war two. This is the Fed`s last bullet. So they will stop buying more bonds and stop paying interest on the reserves. This could cause a shoot up in the markets, but that is artificial and not real.

Markets. Resources continue to underperform. This is a reflection of the general economy. Low interest rates should filter down to the resources and have a beneficial effect. Europe is coming back from a two year slow down. Was positive one quarter ago. It will bounce around here for a bit, but lowering of interest rates should bode well, so it has bottomed. $100 plus for oil one year plus.

Silver. Thinks it will be challenged here. Investment demand is the key driver of demand and it is declining. Industrial demand is picking up. Longer term it should go up to $22-24, however. Be careful in this space short term.

Markets. This is the most wonderful time of the year. Stocks tend to go higher from now until the end of the year. Over the 6.5 weeks that are left in the remaining of the year, the S&P 500 tends to go 2.4% higher on average over the past 35 years. TSX tends to go 3.3% higher.