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

Twitter IPO is coming on soon. What is your opinion? Is the same thing going to happen that happened to Facebook (FB-Q) or will it be dealt with a lot differently? It all comes down to valuation and whether you are pricing your IPO correctly. He does not buy IPOs. There tends to be less information in the public market off an IPO than if it’s a public traded company that has a history. Be patient and let it come public and be willing to pay a higher price for greater certainty.

Economics. The longer the US government shutdown exists, the bigger the issue is for economic implications. Thinks there have been 11 shutdowns since 1981. Most of them have only lasted a few days and we are right up against that limit now. If this drags on significantly longer, it ends up being a worry. Bond buying tapering has not happened and he thinks Washington can’t figure out what they are doing right now with the budget and the debt ceiling. It is hard to imagine that they are going to taper this year. He is expecting some disappointing earnings results in the next couple of weeks. As a result, many investors will have an opportunity to pick up some of their favourite names a little cheaper.

Corporate bonds in view of the pending rise in interest-rate? If you want bond exposure, he would be very cautious of investment grade of high-grade bonds. There is a tremendous amount of interest rate and duration risk out there so as rates rise, the prices of these bonds is going to fall significantly. Likes corporate bonds, but he would play in the high-yield space, but stay within 5 years for protection from a rising rate environment. One high-yield bond that really sticks out in the last couple of weeks is a big financing that occurred at Air Canada. These are very attractive bonds.

Markets. The fed won’t be easing or tapering any time soon. The Fed is worried about the incoming financial data. The tapering will be postponed until 2014. US equities will be more attractive. US dollar will take a hit and exports from the US will be more attractive. You will have to look at high yielding dividend paying stocks for income. The fear of interest rate hikes has receded quite a bit.

Markets. Feels the fed should have tapered because $10 billion going to $75 million wouldn’t have mattered. Liquidity, from the Federal Reserve point of view, is important and great when things are bad, but economies are growing globally and this is the time you have to take away some of the liquidity. This much liquidity in a global economy that is growing, probably tells you that stock markets are going to be much more robust than people think. We are in a low inflation environment for the next little while, which is great for stocks. Interest rates are not going to have a dramatic impact on the stock market as much as people think. If you can find good companies with good balance sheets that pays you a good dividend, those are things that are going to still happen.

US banks have pulled back off their highs and are just hanging in there. What does this tell us? Feels US financials are cheap and he is a big proponent of them. They don’t have high yields like Canadian banks but that will change over the next several years. He would be looking to Buy at these levels. (See Top Picks.)

How do you determine the portion of stocks versus bonds of your clients’ portfolios and what mix of bonds do you use? His company runs 2 separate portfolios, one for stocks and one for bonds. He is very interested in finding out his clients risk profiles and what they need their money for. That determines their asset allocation.

Markets. Thinks trying to time the market is a big mistake. There is always some kind of a crisis and we look for some excuse to Sell. All Bull markets since 1974 are quite long so basically the market has been going up more than it has been going down. The market goes up 85% of the time. To try and anticipate some magic event, you blow out half a portfolio which is foolish. If you latch on to a good investment, try not to time the market. Yes, use sector rotation when a sector becomes overbought with some sectors coming in that should be bought.

Banks. Banks are one reason he is so bullish on the market as no bull market can be sustained unless you have leadership from the financials. Most of the Canadian banks are above the financial crisis peaks. When this happens, it is just blue sky and you don’t know how high it is going to go. Rather than trying to stock pick, he would just go with an ETF. (See Top Picks.)

Markets. Thinks US government shutdown will create buying opportunities. Earnings expectations for Q3 have come down so he thinks the bar is a little bit lower. Manufacturing is starting to tick up globally. Stocks are not cheap anymore but they are certainly priced better than bonds. He is going to use this weakness to buy 2 sets of dividend stocks. 1.) Dividend stocks that are positioned to do well with global growth (banks, US banks, healthcare) and 2) the class of stocks that has got really brutally sold off, maybe oversold, as a result of higher interest rate bearers such as energy infrastructure, REITs, select REITs, etc. Thinks that Canada provides a wealth of opportunities so you can just stay here and get the job done pretty well. However, there are always opportunities outside that shouldn’t be ignored.

Markets. He is very constructive on the market. As the market was selling down, he was buying. Doesn’t believe that the US government problem really leads to anything. There has been a lot of sabre rattling over the last 3 years and this is about the 4^th time Congress has actually pulled something like this. He would get a little concerned if it lasted for longer than a week and it got into a debt ceiling with a potential default.

Economy. We have been in a period of wage deflation for over 10 years. That was going from an agricultural-based economy in China and Brazil and to some extent, Russia and then to an industrial sector. Had a tremendous effect on global wages. That is basically done now and for the most part, wages have stopped going down. Wage growth in China is something like 20%. Believes we are going into a reflation cycle. In 5-6 years is where the threat is going to be in portfolios. You want to be looking to invest now to stem that off. You want to be in industrials, technology, media, financials and everything that will improve in a higher monetary environment where liquidity is slowing down and there is potential for inflation to come back.

What percentage of profits have you made on your Long positions as well as on your Short positions? When he Shorts a position, which is usually 20%-40% of his NAV, he uses the proceeds from the Short to add to his long positions. Example; a 30 cent Short position allows him to invest $1.30 in his long position rather than just $1. That gives him more leverage.

Markets. The traditional seasonal way is that you Buy at the end of October but he thinks there is a little bit of a twist this year because of all the talk about a debt ceiling, etc. The Buy zone is going to be over the next 2 weeks or so. He expects to be deploying almost 100% of his cash in the next 2 to 3 weeks maximum based on the volatility. He currently is holding 45% in cash. Anywhere over the next 50-80 points on the S&P down, he would be a buyer. Generally speaking, he would rather be where the money is and that is in the US.

Do you use Bollinger Bands to determine entry or exit points? There are different ways of interpreting Bollinger Bands. The way he likes to use them is what he calls the Bollinger Band squeeze, i.e. when the 2 bands come together. Typically you will find this right around the time something is about to happen and it is very accurate.