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

Economy. We got better than expected export data out of Germany today and even the Chinese had more import/exports on the go. Those numbers of course get revised and can change from quarter to quarter very quickly. Thinks that a lot of corporate profits are growing on the backs of a deflationary environment where technology is helping them keep costs down, where they don’t have to pay full-time benefits and hiring a lot of part-time people. You are getting a lot of stickiness in the labour market. It is usually wage increases that really spike inflation so he doesn’t see a whole lot out there right now.

Proportion of a portfolio that should be in non-North American based companies? To what extent can one globally diversify through investing in North American corporations and what is the minimum of a person’s portfolio that ought to invest in non-North American corporations in order to have adequate global diversification? Because we live in Canada, if we decide to retire in Canada, we can’t be 100% foreign because we would be exposed to currency risks. He tries to have about 2/3 of a combination of “stocks and blends” that are in Cdn$ and the other 3^rd would be outside. In equity portfolios he has about ¼ in Cdn$, ½ in international and the rest would be in the US. Look at where the revenue stream is coming from, not where companies are domiciled. Most Canadian stocks on the TSX have almost 100% of their revenues in Canada and the US despite the fact that long-term returns of international stocks are about 2% higher, compounded annually over a 20 year timeframe.

Interest rates. The Fed has released so much money supply through buying the outstanding bonds and literally quantitative easing the whole situation. That was the last 3 years. Now that we are in healing mode and reaching normalization of the economy, you have to adjust for higher interest rates. The bond market has already adjusted for higher rates. With the employment numbers out last week, the Fed is going to take out its buying program of 30 year bonds.

Markets. This is still a buying opportunity. He is tired of the “tapering” talk and hopes that everyone else is too. The fed is going to be cautious and if there is any sign of an inflationary spike, he is sure they are going to be there and ready to be less aggressive on tapering. Unfortunately, job numbers were a little weak. Interest rates have to go up. A lot of bond guys like to hear that but maybe there’s a secular movement and negative rates in fixed income. If interest rates move up, that is very bullish for equities.

Investing. A big fan of value and he is finding value in technology and financials. Technology is always trading at a discount because you don’t know what the future is going to bring. Valuations are cheap and what you have to do is discount it back to today’s valuation and your expectations for the future, as this is where he is finding value. On the financial side, there were a number of opportunities this summer with Canadian banks and mortgage lenders. People worried about short-sellers coming in so he scooped them up. US names are still cheap as well. US banks are still trading at BV.

Real estate. CMHC has made a decision to pull in the reins on securitized mortgages on the banks. He doesn’t see the Canadian banks taking on the excess risk so it might slow down some of the marginal mortgage buyers which could result in another slowdown in the Canadian housing market. However, so far we haven’t seen any slowdown.

Gold Stocks. In the last 4 downturns, we have had 2 week or 3 week periods where the market just didn’t have a bid, particularly on the small caps. We haven’t seen this yet. In his experience, coming out of a bad market, the very best of the lower end of the juniors performs the best.

Do you believe that bullion banks globally are operating in concert and controlling the gold market? Thinks there is a vocational intervention in the market. The idea that there has been a thorough, ongoing conspiracy lasting for 20-25 years, by people who were not that intelligent, seems a little far-fetched.

Silver. He is a gold bug and he thinks the price of gold goes higher over the next 2, 3 or 4 years. Usually, when gold goes higher, silver goes higher still. This is an extremely volatile metal so don’t use money that you need for something important. Purely speculative money.

Economy. The economic paces that we are dealing with today means lower interest rates for a longer time. Most equities right now are discounting a 3%-3.5% 10 year bond yield, which makes a lot of companies compelling value at these levels. Expects the Fed might push back their tapering to Q4 and possibly to Q1 if we keep getting weak job numbers like we did today.

US Mortgage REITs. Dividends are not safe. As interest rates rise, hopefully the spread that they can invest in grows and the cash flow hopefully grows. The offsetting impact is that as interest rates rise, the BV of the offsetting assets that they own collapses. That is what has happened with a number of these mortgage REITs. He sold his holdings.

Relationship between the yield of 10 year Canadian government bonds and current REIT prices? Relationship between REITs and 10 year bond yields is inverse. As the 10 year bond yield goes up, REIT prices generally come down. He thinks the sector as a whole is pricing in 3% 10 year bond yield. The fact that we are at 2.4%-2.5% means that the sector has probably overcorrected.

Canadian Tech Stocks. As a whole, they have broken out of a 6 year pattern. Canadians who have been in smaller cap energy, mining, etc. stocks are now starting to look at technology companies. A lot of tech companies have been bought out over the last few years but a lot of them are free cash flow generators, which is a very positive kind of factor in that they are able to make money, reinvest money and ending up growing profits on a per share basis.

Markets. You wouldn’t know the spread in oil prices had narrowed from the Energy Stocks. The TSX is flat and yet companies are enjoying the robust oil prices. He does not expect a widening of the spread. There are changes in the delivery of crude oil that will keep the spread wide. There could be seasonal variations. Finally Canadian prices are playing catch-up – light and heavy crude. Keystone is not the only solution but in the east Irving is building bigger export terminals.

(Best and Worse Call)

Worst Call: Theme was 2005-6 small energy companies were overvalued. Raised money for private investment. He got it wrong. The Halloween massacre announced the taxing of income trusts. Private companies were decimated. Then there was the meltdown in ’08.

Best Call: About 2002 he made a call on income trusts. ’03 returns were 10% average when the market lost. ’04 was spectacular at 20%.