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

Markets. She is in a position where a lot of her holdings are hitting 52-week highs. She is fully invested. The one challenge is that some of the stocks are coming up to her valuation target and recycling into new names is a little bit challenging. In the general market she sees valuations more at a fair level. There are pockets where companies are overvalued and she is staying away from those. Those are more in the “yield type” side. Sees the most value in economically sensitive names.

(Best call ever made.) Citigroup (C-N) and General Motors (GM-N) about a year ago. There was so much uncertainty and so many questions in these stocks and you really had to trust the valuation. This happened with both of these. She still owns them.

REITs. There has been a correction but doesn’t think we have hit the bottom yet. Next little leg down will present some really unique opportunities. Bernanke to announce strategies today which will affect US markets and will affect REITs in that it affects borrowing costs. REITs are quite well-positioned to handle any of the new financing environments, however we still have to wait for the rent growth to commit and expenses on the debt side will be going up. Focus on REITs that have great balance sheets and that have the ability to generate same-store sales growth or that their existing property continues to improve as opposed to growth through acquisition. He is heavy in the US which is a great way to gain exposure to an improving US economy. After that you want names that are linking to the direct economy and less on the corporate side, so you want shorter leases, exposure to the apartment sector and industrials which will benefit from US growth. These will be good trades in the future.

Relationship between the value of REITs and 10 year Government of Canada bonds? Basically, the financing that REITs have to pay on their debt is going to be a spread of the risk free rate. As the risk free rate moves, the debt costs go up because properties are often 50% leveraged and they have to find more money to be able to pay for it. This puts pressure on the REITs creating volatility but in the end, you are still looking at a hard asset class that produces cash flow. This will create opportunities to pick up quality yield.

(Best call ever made.) He was very early on the home-builder trade in the US in the spring of 2012 and was able to more than double his money. Played a number of them. Has pulled off half of his holdings and put the money into US apartments.

Where does it make more sense to hold a REIT in a relatively high marginal tax rate? Registered or non-registered account? Any tax questions should be worked out with your financial advisor. However, REITs have a large proportion of their income that is return of capital so it makes more sense to put these in your taxable account.

Markets. Investors should be looking at high quality, best-of-breed companies on a global basis. For the first time in 35 years, he has more of his clients equity monies outside of Canada them inside. Not giving up on Canada but is seeing better names and better opportunities elsewhere. Canada’s market is a very narrow market. 75% of the TSX is resources, materials and financials. He looks for companies with strong balance sheets, mid-to large capitalization, with dividends and dividends that grow. Invests on a 3 to 5 year time horizon.

(Worst call ever made.) Campo (?) in 1988. Robert Campo was a very successful real estate developer and decided he wanted to get into the US department store business. Levered up the debt in order to acquire all kinds of department stores. Retail sales were weak and the companies couldn’t pay the interest.

Energy. There has been a remarkable narrowing of the differential between WTI, Brent, and even Western Canadian Select, as the loonie gets played into the factor. This is a dynamic that he has been talking about all year. Oil has done remarkably well. US bench price is up about 14% this year. As the US$ goes up against the loonie, it benefits oil producers. Every 1% change in the currency is, effectively, a 1% increase in top line revenue. When looking at the differential between the WTI and Brent, he had it around $19 for a light barrel and this is now narrowed to about $4 today. Expects it to widen just slightly. Going forward we are probably looking at a $5 differential between WTI and Brent. The US has been very active in building out their infrastructure network, both from pipeline and rail. There has been close to 1 million barrels a day of capacity built this year and there will be a further million constructed in 2014-2015. There is still a disconnect between the current price of oil and what oil stocks are discounting.

(Worst call ever made.) This would have been investing in pure exploration companies in oil/gas. When you buy a company that has no underlying production, you are paying forward for future success. If you have no drilling success or underlying production, the value of your company then comes into question.

Markets. As the market sets new highs, we are starting to see fewer and fewer companies that are setting new highs. We are just coming to the end of the 2^nd quarter earnings season in the US and they came in pretty good. 56% of the companies beat on the top line and 68% beat on the bottom line. The fact that more beat on the bottom line thousand and that it is not so much that the economy is doing really well but companies have been able to get some contraction in terms of costs. None of those things are particularly great for the economy as a whole longer-term. There is a real good chance that the Fed will start their quantitative easing by year end.

Interest rates. The market is going to price rates, perhaps a little higher. When Bernanke came out with his statement on tapering, the next day five-year fixed rates in Canada jumped by 40 basis points. There wasn’t a real big shift in the GIC rate that the banks were paying, so that is very positive for the banking sector. Although the Fed will still have its zero interest rate policy, he feels the market will start pricing in rates. If they pull back on their quantitative easing, there is a view that one of the first places that they will start cutting back on their purchases will be in the mortgage market. As they do that, he believes there is a chance that some of those rates will start to go up a little bit and you could probably look for another 20 to 30 basis points higher.

An ETF with a monthly income as a retirement supplement that is safe? BMO has 2 Covered Call funds that are very interesting and pay monthly. One is a Covered Call utility (ZWU-T) and the other is Covered Call banks (ZWB-T). Particularly likes the Canadian bank one. There are also ones that pay quarterly such as (CPD-T) which is essentially preferred shares were dividends are fixed.. (XDV-T) is also quarterly and is a good common share group of companies and common shares can raise their dividends. He would suggest a combination of these. Not real comfortable with bond ETFs right now because he thinks interest rates may actually go higher.

Married Puts? If using the strategy, do you place the puts? This is probably referring to US market, which is at an all-time high. Let’s argue that you think there will be a potential downturn and you own Spiders (SPY-N). Rather than selling and taking your money off the table, you could buy a Put to take out some of the downside risk that could occur for a short to medium term risk in the marketplace. This is a Married Put. The alternative to that strategy is to simply sell your shares and replace them with a Call option, which does exactly the same thing for you.

What is the difference between a Covered Call and a Put? A Covered Call is when you own the underlying stock and Sell a Call Option against the shares that you own. You are going to collect a premium for the sale, which is taxed as a capital gain. If the stock rises above the Call price, it will be called away. If the stock declines, the option will simply expire worthless and you keep the stock. You collect the dividend while you are holding it. Being “Covered” means that you own the underlying shares.

When you Buy a Put, this gives you the right to sell shares at a certain price. If they go down in value you profit. If they stay where you are, you lose. If they rise, the Put will lose money.

If you Sell a Put, which is the equivalent of the Covered Call, you are taking on the obligation to Buy shares at a specific price.By writing a Put, that says you will be willing to Buy a stock at a certain price and you collect a premium which is yours to keep. If the stock falls below the specific price, the Pur will be exercised and you Buy the shares at that specific price.

The returns on both stategies, the Covered Call and the Short Put, are identical in terms of risk and reward.