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

Interest rates. Rates have nowhere to go but up. Has moved almost 85%-90% of his interest rate sensitive products out of bonds, bond funds and bond ETFs and into equity linked GICs. He thinks this summer, around June, we hit the absolute point where rates are not going back up and the 30 year bull market in interest rate sensitive products is over. We are now at a point where short-term rates haven’t moved yet, longer rates are already up and mortgage rates are coming up and have been for the past few months. That is likely to continue for the next 3 years, and maybe 5 years.

Caller has RRSPs and some grandchildren’s RESP’s held in bank held mutual funds with 2%-2.5% MER’s. Is there a mechanism that he can transfer mutual funds to low MER ETFs in a brokerage account? 1^st of all, whenever you transfer one product line fund to another product line in an RRSP or TFSA there are no tax implications whatsoever. However, the funds should not be withdrawn as that will trigger taxable implications, so this should be a straightforward transfer, not a withdrawal.

When mutual funds pay out distributions and highlight them as “return of capital”, what are the tax ramifications? A “return of capital” is tax-free. They are just giving you your own money back.

Markets. Fairly valued and certainly not cheap. We are 3 quarters into a full cycle here. Markets are pretty optimistic. Analysts’ forecasts have been consistently rising. Forward PE multiple is about 15 times for the S&P 500, which is about a historical average. A lot of appreciation in the market in the last year has actually been PE multiple expansion, not earnings expansion. Looking at earnings in the last quarter, on a year-over-year basis and taking out financials, earnings were actually down for the quarter. He exited a lot of his investments earlier and is doing a little bit of trimming. Finding it very hard to replace the investments that he sells. When he looks at likely valuation of companies he would like to own and put an average PE multiple on them, he is getting sub par returns. His equity fund is holding 45% cash.

How important is the retail investor to the market? His sense is that the retail investor has become less and less of a meaningful player in markets in general. Feels they are fed up and haven’t been served very well by the financial industry. Now they have choices of thousands and thousands of ETFs and don’t know which one to buy. Thinks the high-frequency traders are masking how much volume actually really ever existed. It’s a major problem that the capital market and stock exchanges should address but exchanges have become big businesses and their primary motivation is to have trading and trading volume and they don’t really care about investors.

Markets. The big thing for him is the interest-rate picture. A lot of people were surprised when the Fed basically said that higher rates were coming. That is a major shift for a lot of investors, especially if you are invested in things like dividend stocks. REITs in particular are at risk. But by and large, things are looking good. US economy seems to be ticking along okay. Not perfect, but you get more good news than bad news. Also, Europe, seems to be coming back a little bit. If you are confident, you want to look for companies that are economically sensitive and maybe have a little bit of debt, because that debt will give you a turbo charge return if you are right. With REITs, you have to be a little bit careful because they are not all the same. They have been so popular for the last several years and are priced for perfection. Some REITs did well simply by refinancing, which can mask a lot of ugliness. You have to figure out who’s a good manager and who is creating per unit earnings growth before interest payments are calculated into it.

Markets. Fears in the US housing market are largely overblown. Some weaker data is just a pause in the context of a longer term recovery. Interest rates for US mortgages went up slightly but they are really still very low and over the next few years you will see more and more housing starts. You can play by Home Depot of Bed, Bath and Beyond for conservative investments, or a more pure lumber play. Neutral on Canadian Banking sector. Favours US financials because of more upside. Canadian housing crash is over blown and banks are not going to crash. Should be a flat environment. He has been looking more closely at Energy recently.

Gold. A lot of volatility in gold recently. He doesn’t worry too much about short term day-to-day volatility. Over the long term he wants to have a holding and is now low at 3%. ETFs weight toward the large caps and that is the way to go. Trying to bet on one particular company is very difficult.

Markets. September, seasonally, is by far the worst time of the year. 60% of September months are negative and you are looking at an average return of negative .05 over the last 7 years and .07 over the last 20. In addition, there are tensions in the Middle East so there are bumps ahead. He has about 20% in cash at this time and is dipping into certain areas that look interesting. Favouring the US over Canada right now. Canadian index is filled with either interest rate sensitive stocks or resources. On resources, China is moving away from the infrastructure story to the consumption story.

What is the best way to play the housing recovery? Housing stocks or lumber stocks? Names like Louisiana Pacific (LPX-N) will be much, much higher beta than a Home Depot (HD-N). Between those 2 you are looking at homebuilders and those types of names. Another way to play it is to look at some ETFs such as iShares US Home Construction (ITB-N) or SPDR Homebuilders (XHB-N). The lumber stocks are going to be a lot more volatile.

Markets. The remaining months of 2013 are going to be fairly uncertain for investors. There is escalating conflict in the Middle East together with the apparent slow down of emerging economies (affecting Canadian commodities). In the US we have the debt ceiling and the change of guard at the Federal Reserve. All of this is uncertainty and investors do not like uncertainty. If you follow your discipline, you are going to be looking for those opportunities to jump in. Underpinning everything else, the US is seeing signs of a recovery, slow but progressing. Even though the emerging economies are slowing down, they are still growing at twice the rate of the developed economies and there will be more and more demand for commodities. You want to pay close attention to balance sheets because, for whatever reason the economy does falter, you want to have companies that can wade through a period of slower growth.

Markets. Looking at the overall global economy, things continue to progress forward. Not rapidly. A very slow recovery out of the recession of 2008-2009. We’re just starting to get back to the point where we were in 2007 before the downturn. Banks are doing all the right things in terms of easy money to keep the economy going forward. Especially if you look at the US, there is a lot more self-confidence in consumers. This coming year you are going to see the US lead the globe forward. We saw very slight pullbacks on “the end of quantitative easing” and when this happens, that will be an opportunity.

Markets. Very positive long-term and thinks the US economy is recovering very nicely and rising interest rates on bonds are telling him that. Feels Europe has now bottomed and is starting to come back and this will more than offset any potential weakness in China. However, he feels that China is in the process of going from more of an exporting market to developing their own internal, which is also long-term positive. We are going into a typically seasonally weak period. Historically September and October can be weak months. If you have money to invest, use this weakness to buy your stocks.

US or Canadian banks and which is your favourite? He would be buying US banks rather than Canadian. Canadian banks have headwinds going forward whereas US banks have a lot more upside potential because of the growing economy and real estate markets. A steepening yield curve is also very good for US banks. He would look at Bank United (BKU-N) and BB&T Corp (BBT-N). He prefers regional banks. (See Top Picks.)

Commodities. Thinks these are perfectly all right. They’ve had a deep correction. Gold is hanging in at these extraordinary levels. There has been a winnowing of funding of assets but the good ones are there.