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

Markets. For the debt ceiling on the 17^th of October, the problem is not that the government will get shut down. Investors will probably just wait and see what happens. We’ve seen this movie before. Fundamentals are the major driver in the markets but there is always something in the news that can provide some question. As long as governments are providing markets with liquidity we should be okay. Thinks, however, that the debt problems in the world are much more significant that strategists suggest. For now as long as earnings continue to grow the markets can be pretty stable.

Educational Segment. Emotional part of investing. Most major markets did not move in the last week. He wants to swap fixed income into equities in the near future. Gains in a portfolio don’t increase an investor’s happiness. Incremental losses do add up emotionally. The average return in a portfolio has been 7% over the last decade.

Markets. He is more concerned about the shutting down of the tapering than the debt ceiling and shutting down the government. Thinks the market sees though these events. What worries him is the global and US economies. There is a lot of debt in the system and it requires the stimulus in the system for growth. 12-36 months he is negative. Thinks we are due for a cyclical recession.

Markets. Markets don’t like uncertainty. Right now it is a “risk off” trade so people are leaving the equity market but haven’t really flooded into the fixed income market yet, so we’re kind of flat. Coming into the year, government bonds were at such low levels, but we got to the point in May where we were seeing positive growth and inflation was tame. That has all been reversed since May where the US government stated they were really dependent on the economic data, where they needed to see unemployment improve and inflation, come up a little bit. For the next 6-12 months we are sort of in a safe zone where he doesn’t expect rates will go much higher.

If the underlying equity is good quality, are convertible debentures a good way to get downside protection in a rising interest rate environment? In theory, this works great, but unfortunately there are a lot of convertibles that come out that are really weaker companies. In Canada, we don’t have that many convertible issues as there isn’t the market for them. Although it sounds good at the start by getting any percent coupon on a weak company, at times it works against you in a rising rate environment. You really have to be careful and know the companies you are buying.

What factors differ do you look at when deciding whether to buy bonds of a company versus its equity? With bond investors, you are playing a banker, not an owner. You are really asking yourself, will I get my money back. Credit ratings is a great starting point, whether it is investment grade are not, high-yield. You also have to understand the industry, management, etc.

Target bond ETFs. Is there any way of knowing the “face value” of a target bond ETF? A target bond is a fund that has very specific maturity dates and you can buy anything up to that maturity date. There isn’t really a face value or a price on a target bond, because it is a pool of bonds. This is a reasonable investment for an investor who has a specific event in their life that is going to come up, such as a child or grandchild that is going to university in 5 or 10 years.

Disabled and on pension. 70% of the portfolio is in GICs and 30% in REITs. When a GIC comes up he puts the REIT payment into GICs. Suggestions. Prudent but maybe a little too conservative. Usually GICs have exposure to only one sort of credit, the banks, and there is a lot more yield to pick up either on the yield curve by going out a little bit further than a GIC such as a corporate bond. Also, you could pick up a little more yield if you bought a utility, telecom or pipeline bond. Preferred shares could also offer a valuable tool.?

With the recent pullback in real return bonds, would you suggest stepping in, or waiting? These are inflation linked so you will get a bit of a coupon plus inflation. His outlook for inflation is that it is flat with very little chances of it going up. These bonds were really brought out for institutional investors, specifically pension funds, but needed something in their book of retirees that was indexed to inflation. He is not a big fan right now.

Markets. When the Federal Reserve decided not to taper on its quantitative easing, she didn’t think it meant much for equities. It is clearly just a delay. It doesn’t really matter. We have seen the bottom in interest rates. They have probably stabilized here until we see some tapering. For now, equities are the place to be. As people are making adjustments to their portfolio, they are abandoning bonds and moving to equities as they are expecting a slow recovery. Europe is looking a little better. She has been going to the industrial sector in Canada, even though it is a hodgepodge. Hasn’t gone to the resource sector yet.

Gold. Generally gold stocks have underperformed the gold price. It is all of their own making. Management teams have been terrible. They have made poor acquisitions, costs have been going up, etc.

Economy. Thinks the Fed has lost control of interest rates. The fact that they couldn’t taper with a 3% on a 10 year bond says that the economy is really weak, weaker than what they have been presenting. He is wondering how quickly bond rates will reverse and go back up to 3%. Next time they won’t be able to even cut, they are going to have to increase because, going forward is about controlling the rise of interest rates and they are the buyer of last resort. Also, US$ is extremely weak. In essence, we have massive financial lunacy going on right now because of the money printing and everything else that is going on. They are going to start to lose control. For now, he would be betting against the market going any higher.

Gold. The #1 insurance against financial lunacy is the least owned asset in North America. The Chinese love gold, India loves gold, all the rest of the world loves gold because they are feeling inflation. There has been manipulation in the market, only because you have a massive disconnect between the physical exit of North American gold that is going over to Asia.

US Inflation. How will this affect Canada? Thinks the US inflation will be more affected by the fact that they have to kill the currency. At some point they have to let the dollar go. We are living in the fiat currency system where the debt and currency are similar. In Canada, the bigger issue is that we export most of our goods to the US so he thinks we will track the US.

Markets. Doesn’t think Fed knows how to get out of QE. The Fed thinks there is much more trouble than most of think there is. The debt ceiling is coming up. It is one crisis and then another. You have to have some cash for sure. There is going to be some serious volatility. Don’t buy on the dips but buy on the craters.