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

Canadian telcos. Do you like any of these after today’s pullback? He thinks there are more pullbacks to come and the competition from Verizon (VZ-N) will be severe even if the Canadian government allows current incumbents to buy more than one spectrum space.

Of the 5 pipeline related stocks, what would be your 1^st, 2^nd and 3^rd favourite? His 1^st choice would be Inter-Pipeline (IPL.UN-T). His 2^nd choice would be Pembina (PPL-T) and 3^rd would be Enbridge (ENB-T). (He owns all 3.) Once he sees what happens to Keystone and to the Canada East pipeline, he could go back into TransCanada (TRP-T). If the pipeline from the oil Sands to the West Coast ever gets approved, then it could be the Trans Mountain Pipeline (owned by Kindor Morgan).

Bonds. The bond market has not really got the headlines that it should. Feels the bond market is about to take over. This is all about debt and has nothing to do with anything else. What is happening today is exactly what happened in 1976 as interest rates started rising. The bond market is taking over. If you look at just the rise in interest rates over the last year using the 10 year bond, which is what sets the US mortgage rates, mortgages were at 1.1%, the 10 year bond was at 1% and they hit at 2.7% (?). What it means is that there has been a massive selloff in the bond market and going forward, as bond managers start to adjust interest rates, the Fed is going to start to lose control. They lost 230,000 full-time jobs but they created 350,000 part-time jobs but they are not going to create GDP. The bond market is starting to question that as the numbers just don’t make sense. Going forward, if you look at what happened in 1976, $85 billion was not enough to control interest rates and the market at the same time, so you are going to need much more money. In essence, QE has to accelerate. He is set up for stagflation. Looking at the bond market, it is 3 times bigger than the equity market and it just lost 10% of its value which is a 40% decline in the equity market. The people that are getting hit are the pensioners. When the bond market takes over, the Fed loses control and this is what is happening going forward.

Gold. This always follows 2 trends, 1^st the accumulation of the debts. After interest rates rise, gold follows. The question is how are going to pay for all is that and how are we going to and how are they going to control interest rates. If they don’t control interest rates and interest rates rise too quickly, we end up with hyperinflation.

Markets. Earnings season has been pretty good but he thinks there is a trend in the industry to set the bar fairly low. The markets are reflecting this, certainly on the Canadian side. Canadian stock growth is very helpful when they US pushes it higher. In the last week, the TSX has been outperforming the Dow which is pretty unusual. Looking for some quite interesting projections, particularly in the energy sector. Also looking for some very reasonable earnings reports, which in itself will give the market some incentive. 13,000 for the TSX is a reasonable objective.

Markets. Cyclical and growth stocks have underperformed. As long as global growth stays intact, there will be a trade back to these cyclicals. China is an issue still, but the second largest economy in the world ticking along like that is not bad. You add it all up and it is not a bad picture for the global economy. He is switching back to Canada because the US has had a good run. He is buying banks but avoiding interest sensitive’s like REITs. Doesn’t think there will be a big push for higher rates. Thinks it is likely that tapering off of the bond buying by the US will happen in September. If there is a weak number or something they will slow down the tapering.

Pipelines. Doesn’t worry about a cut in the dividend. You could get a better growth in Canadian Banks. But don’t sell.

Markets. Feels that the record highs in the US today are a continuation of a bull market that we are in this year and, as well, a disguised bull market in Canada. It is a brilliant market here as long as you don’t look too hard at the resources stocks. He has been enjoying this great market. Thinks there are a lot of small and medium caps that are going to get taken out.

Gold. He is doing some limited nibbling. The price of gold is pretty well borderline on the level of actual costs. Selectively, very good companies can be bought. You’ll have to be patient and even put up with a bit more decline. Indians have been stopped from their government from importing gold.

Bonds. Yields are normalizing, going back really as they should be. Still going to go higher from here but they reached levels they never should have reached. Bonds were ridiculously expensive but now are just a little bit expensive. By the end of this year he expects to see the 10 year bond rate benchmark, 10 year treasury at 3%. Expecting Bernanke will start easing sooner rather than later. He is optimistic that the US economy will pick up in the 2^nd half of the year and into next year. This all feeds on the housing market. The US consumer has recovered all the net worth that they lost, by virtue of the housing prices improving and the stock market improving so their net wealth is back so that means they are confident so retail sales will go up industrial production goes up. Nice virtuous circle when it starts.

Corporate bonds. When government yields rise, spreads compress even more so, they are relatively tight to the U.S. Treasury but still 1%-1.25% above treasuries and that compounds in your favour so it is hard to lose money in the corporate world.

Bank Rates. For anybody who wants to know when the Cdn bank rate is going to go up, there is an easy way of doing this. You follow the 2-year government of Canada yield which is currently at 1.08% (overnight rate is 1%). If the 2-year yield starts to rise, the market is telling you that the bank rate is going to rise. Doesn’t expect The Bank of Canada will raise their interest rates before the US Fed does theirs. Could be another 1.5 years before we see another hike in rates.

Is the Brascan Corp 5.95% bond, due June 14/35, safe? Believes this is now owned by Brookfield Asset Management (BAM.A-T). He doesn’t like long-term corporate bonds. There is so much that could happen in the next 22 years. If he owned, he would Sell because he doesn’t like the overall market. Would recommend that you go into 4 and 5-year industrial corporates. (See Top Picks.)

Real Return Bonds. With the recent pullback, would step in or wait? He would suggest that you think about this and then not buy any real return bonds. These have now been exposed for what they really are. With inflation expectations stable, these are nothing more than a long term low coupon bond so it has a very long-duration and a very high risk.

Fixed income strategy. Basic staggering of 1 to 3 years, GIC bonds equivalent. Should he go longer or put his money someplace else? This is another form of laddering and he is a strong proponent of that. 1 to 3 years is a little short in his experience. In the last several years, short-term GICs out to 5 years have yielded more than corporate bonds. He would encourage you to continue doing this but with yield curves so steep, it may not be a bad idea to throw in a 4-5 year one as well. Good strategy.