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

Interest Rates. Have been bumping around lately and had been on a bit of a rise again. REITs will maintain their volatility and trade in line with interest rates for a little while longer. Expects volatility will continue into the new year. Right now we are testing the bottom. He has decided that this is a great time to be invested and has gone in and is picking up some great yields. He is finding REITs that are below the value of their properties and is getting a yield so he can wait until the turbulence is past. 2 ways to select what is a high quality REIT. 1.) You can go to larger cap stocks, the ones that are in the index. A lot of those are very safe investments. They are larger but also have a nice balanced diversified portfolio, low debt, good balance sheets and a low payout ratio. 2) There are also some nice opportunities in the bargain bin that has some very high quality properties, which gives you a good discount and a very juicy yield.

Markets. Yesterday there was fear that we would see tapering sooner rather than later but today the Dow and the S&P 500 hit all-time highs. This market wants to go up. With the employment numbers last week, the market did a bit of a flip. When employment numbers are good, he would have that that the market would have opened down, but it opened up. Hasn’t been anything for much of the year that resembles a correction, which is much longer than would be expected. For the time being, he feels there is every reason to be fully allocated to your equity portion and just let it reward you. He is not expecting the Fed to start tapering anytime soon.

Markets. There are not as many ‘deals’ as there was earlier in the year. We have had a good year in global equities. There are also places where there was not much conviction. Most global market indices are up 20-25% year to date. There are pockets of higher valuations such as technology and consumer discretionary. Commodities and resources on the other hand are not doing well and so the overall growth is at historical norms. 2014 will see the continued convalescence of the US consumer and the growth of the Chinese consumer class.

Markets. In the short term he sees the TSX outperforming and thinks it’s true on the long-term as well. There has been a huge move on the S&P 500 and historically, these tend to go in a similar direction. He is looking for earnings growth to be stronger in Canada than the US. You have to be selective in this market when choosing large caps. Cyclical areas have not been performing well over the last 2 years, which has dragged the TSX down. Certain sectors have gotten really cheap, such as the oil/gas, which is starting to come to life a little bit. Banks have caught fire for the last 3 months.

Canadian Banks. If you own, you are onto a good thing and continue to buy and hold them. They were disappointing performers for a while up until a few months ago but fundamentals, improved and the earnings for the group are probably going to be up 5%-6% this year. Average dividends of about 4%, so you are looking at 10% returns without any change in the PE multiple. PE multiple was down back in the summer by about 1.5. It has recovered about half a point, but there is still potentially more multiple expansion ahead of it.

What do you believe is the key quality that one should look for in executive leadership of a corporation. He finds this a very critical part of the investment process. Leadership would be a CEO that can enunciate clearly the strategy of the company and how they will get there over time. He is always interested over the next 3-5 years as circumstances in an industry can change.

Markets. FX Rates are pretty important to economic growth. The US dollar should be biased toward strengthening next year and this will benefit world economies. FX rates will be a main talking point for the next 6 months. 88 to 93 cents over the next year is the target for a US dollar in Canadian dollars. He thinks the strong US jobs numbers were choppy at best. They are just one data point, but a stronger number is better, obviously.

Income Funds. People look at them as they get older. There is no shortage of dividend-like products out there. People should consider this in their portfolio. Sometimes you have to look at total return. You have to be able to switch some of your focus from dividends to capital. XTR has a lot of income producing exposure, but next year with tapering, you could see some under performance.

US vs CDN telecom stocks. Prefers to play through ETFs even though Canada does not have a pure play. ZWU-T (6.5% yield) and IYZ-N. Growth from the last number of years probably won’t continue but the covered call overlay is good. With Tapering next year they won’t perform as well as growthier companies.

Should I move capital from one Telecom to another because of performance? No. Stay diversified. You can’t chase performance, but if you want to own both then take some profits in the better performer and put into the cheaper one from time to time.

Education Segment. Risk vs. Return. Prospect theory or loss aversion theory. If gains are up people are happy. A little more gain and there is little marginal happiness. But when we are losing money we get increasingly unhappy until we can’t sleep at night. Studies showed that 94% of top fund managers had periods of 3 years when they were at the bottom. When you go into an investment, can you hang on for 3 years if it does badly?

Markets. This is the time of year he gets into a buying mood. Nothing has happened yet but hopefully soon he will pick up a few companies and before the end of the year. He doesn’t buy anything he has not watched for 6 months. Companies must have been beaten down badly but have good balance sheets. There were 350 companies a couple of years ago but now it is less than half. He is concerned about the housing sector and connection to banks. Housing sector has been pretty hot. Banks keep raising dividends. Balance sheets are not necessarily great. Thinks banks should pay down debt and buy back preferred shares. Now is a great time for Canadian banks to pay down debt. In the ‘80s it was third world loans. They should take care of their own balance sheets. European telecoms and banks are of particular interest to him at the moment.

Markets. We are still in a secular bull market and he doesn’t think we have even passed the halfway mark yet. He would expect upside returns over the next 5-10 years. Over the past 150 years, the average return for an equity market is about 6%. Over the next 10 years, he expects to see 8%-12% on average. There will be bumper years like this one and there will be some that will be a little softer. Low points in stocks over the next year will be opportunities and if you time it right, you can get fantastic returns. He tends not to be a buyer of stocks that run hard, but waits for more fundamental valuations to come in.

Canadian Market. Canada is a funny market. 23% is banks, which have had a nice move. Doesn’t think this is completely done yet. Including dividends, you could still see an 8% return. Gold miners are a little suspect in the short term. Energy looks better to him, as long as we hold in with prices in and around here. Oil in the $90s is fine. They are cheap and there is growth. Thinks this will continue to be a stock pickers market.

What is your favourite company in the Canadian heavy oil space? Has been some problems at Cushing again, widespread out to a point where it only narrows again in the next month or 2 as this gets fixed. He likes Canadian Natural Resources (CNQ-T), which is partial to the oil. Of the seniors, the one that’s lagged because of a quarter or 2 of operational problems is Cenovus (CVE-T) and this would be his favourite in the short term. He thinks they fix it and the 4^th quarter will be better along with subsequent quarters. Should play some catch up. Probably about 10% behind.