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

Gold. Thinks that the “go forward” rates are signalling that somebody is almost running out. J.P. Morgan has 100,000 ounces left in its vault. The Comex is below 1 million. It was reported that the Bank of England had 500,000 ounces at the beginning of last year and are now down to 4300. There is more and more physical leaving and going to Asia. This is having massive strains on the physical. For every ounce on the Comex right now there are 50 paper contracts against them. We are pretty close to a massive problem in the physical gold market, which will be very bullish for the producers.

If the US Republicans should refuse to increase the US debt ceiling this autumn and put the country into default, what would the ramifications likely be for gold, silver, US and Cdn $’s? He doesn’t see any difference between the parties. To him it is all noise. The only thing the government can do is accelerate money printing so debts have to increase. Countries never default. All they do is print money. Killing the dollar is the only way you are going to pay back the debt. Feels this is also going to be solved if what is happening within the G 20 nations, which is looking to set up a new monetary system.

Markets. QE ending is one thing but what you have to focus on is how banks around the world are focused on keeping bond rates low. Don’t expect mortgage rates to spike higher. Europe is coming out of the recession. They are two years behind the US, who are not growing as fast as everyone expects them to do. This cycle could be 5-10 years. For energy stocks and most commodities, you need positive GDP growth and growing global demand. But the world is becoming more efficient at burning oil. A lot of the money he manages has a dividend mandate. He is not moving away from them. He has moved a little down market cap, though.

Interest rates. Wasn’t shocked that there was a shift out of interest-rate sensitive stocks but the effect on the shares was very significant. Thinks people have backed off that to some extent and the fed has come out mellower than they were with the 1^st statement. It is inevitable that rates are going to go up from a very low level. Even if they go up 100 basis points, the dividend yields are still very competitive versus 10 year Canada bonds. Thinks dividend stocks for his clients are #1 and expect them to earn 8%-10% longer-term. If he can have portfolios that produce a 4% yield and the yield gets compounded year after year plus dividend growth year after year, you can get half your performance just from dividend growth.

Markets. TSX is still in a trading range of $11,500-$13,500 and he doesn’t see what gets us out of this range. It’s a slow growth environment with low inflation. Corporate earnings are starting to slow because the top line is starting to slow. Most corporations have done the capital cost cuts that they can do, so they really need revenue growth to have earnings grow double digits.

What are some subtle signs that a company will both sustain and increase dividends? Basically he starts at the top line looking at revenue growth and then seeing how efficiently they can grow their revenue and keep the costs down. That goes into cash flow and cash flow goes into free cash flow and earnings, so if you can see a trend of earnings rising and free cash flow rising, he hopes that management will give it back to the shareholders

Economy. Was very excited when Europe just announced that they had finally gotten out of a recession after a 2 year slowdown. Also, US economy is motoring ahead both with housing sales at a five-year high and good auto sales. That bodes well for the global economy. China, on the other hand, has dictated to the market that it is more comfortable with a 7% to 8% growth, even though that is down from their high of 10% before. Therefore, world economies are doing well, which justifies the move there has been in the market.

Resources. It is time to take a bit of risk and dip your toes in. Economies are doing well and therefore this will require a lot more energy to run the economies and a lot more base metals to construct houses, manufacture autos, etc. The materials sector, year to date, is down a whopping 28%-30%. Energy sector is basically flat. He sees investors shifting into the more cyclical plays. Even in the past 2 weeks, the TSX has outperformed the Dow and S&P, which is a reflection that investors are looking at the energy sector and materials sector. Best opportunities are found in companies that have a global scale. For example, Mexico is looking to expand their oil/gas operations. Companies with a global platform are able to put their money’s into different countries to capitalize on the opportunities.

Markets. We have seen Europe come out of recession today and some good numbers coming out of China. The US seems to be moving along at good speed economically. Inside that big picture, you have all kinds of great little stories playing out. It’s a fun time to be an investor. Thinks that the tepid growth is going to be long and slow, but it is going to be growth just the same. Fundamentally, he thinks valuations in US are a little stretched and we may be better off owning some Canadian securities at this time. He is tapering out of the US and moving into Canada.

Uranium? He doesn’t own any. It is still a Japanese issue. We know that uranium is probably the power of the future, but right now it is dead. If you are going to buy a uranium stock, you have to buy Cameco (CCO-T).

Bonds. Yields have risen in the past several months, one of the biggest from early 1990s. Due to a surprising move by the Federal Reserve in April/May when they started talking about tapering off bond purchases. Didn’t seem to be the right time as the economy seemed to be growing at a relatively low rate of GDP growth relative to inflation was at the low end of the band. Also, there was a lot of money flowing into fixed income funds and everyone increasingly searching for yields and liquidity was not there. We are off about 100 basis points in the US 10 year right now and it is his belief that at somewhere around 2.5%-2.75%, we should settle in. This is a traders market in fixed income now, i.e., there is going to be an ebb and flow in the economic data and an ebb and flow policy comments from the Federal Reserve, ECB, Bank of England and somewhat from the bank of Canada. As opposed to the trend that we have seen over the last 3 years, we are entering into a traders’ market where, if bonds rally 25 to 50 basis points, you might want to lighten up. If bonds sell off, like they are today and corporate and government bonds are looking cheaper, that’s when you might want to replace what you sold earlier.

Corporate or provincial bond with a term of 5 to 7 years? Provincial bonds are quite safe. While you don’t have a direct call on the federal government, it is highly unlikely that there would be scenario where a province would default and have their debt restructure. At this moment, Ontario’s are probably relatively cheap and Alberta’s are relatively expensive. Québec and BC bonds are fair value. For corporate bonds, a bank bond is a pretty safe place to play. Also, you may want to look at what happens to the telecom space in the next month or two.

Relationship between long-term bond, fixed income and life annuity pricing? There is a significant correlation between the bond market, fixed income market, interest-rates and annuities. The lower the interest rate, the more expensive it is to buy an annuity. Central banks globally have taken extraordinary measures since Lehman Brothers failed in 2008. There was collateral damage with costs to what they had done, especially in the bond buying program which have forced yields lower.

Real Return Bonds. With the recent pullback, should I Buy or wait? Real Return Bonds were never intended for individual investors. They are a struggle to hedge. These are issued primarily by the federal government but are very, very long dated pieces of paper. They are meant to be inflation protected. If you are afraid of inflation, why buy a long-duration instrument?

Perpetual Preferred Banks? Canadian banks are well run and well-regulated so he has no real concern about the credit quality of them. Given where we are in the interest-rate cycle, he would suggest that on a near-term basis they are fine as they have been re-priced by this back up in interest rates over the last 3 months. On a 5 plus year view, he would be concerned about rates being higher in 5 years and putting pressure on perpetuals issued by the banks that are going to have below market coupons potentially.