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

Laddered ETFs CBO-T and CTF-T. How can they pay their interest rates when the underlying bonds are paying less? Also if interest rates stay where they are for the next 2-3 or even 5 years, what happens to the value of these ETFs? Look at the difference between yields to maturity and the trailing payout. Many of the bonds that are about to mature, were issued in the past at higher yields so the current yield is higher than the yield to maturity. The yield to maturity and the current yield will gravitate towards each other if interest rates stay where they are. There is very little risk to your principal and you should get your money back. Unit values are very stable unless there is a massive spike in interest rates. If rates stabilize and go sideways for 2 years, then the yield to maturity and the current yield will be approximately the same.

(A Past Pick Aug 2/12. Up 0.25%.) Province of Ontario 3.15% bond, maturing 2022. Sold his holdings in the middle of November when he was getting bearish on the bond market.

Preferred shares as a general investment class as compared to bonds? Feels yields are somewhat higher and the marketplace is so much more transparent. Not a big fan of preferreds as they don’t have any ownership to them and they don’t have the seniority of bonds. You are correct in that they are more transparent than bonds and their after-tax yield is definitely superior. However, you need to be very careful which ones you buy. The rate resets by the banks are probably all going to be called in the next couple of years but the perpetual ones are vulnerable when interest rates rise at the long into the marketplace. Preferreds do have a role if you know what you are doing but it is a very complex market.

407 Highway bonds expiring in 2042. This is an annuity. The 407 is a semi-monopoly and they seem to be able to get rate increases through without any difficulty at all. He would hold these bonds for the credit rating side but these are very long-term and he worries about long-term rates rising so you might consider buying a shorter 407 bond, such as 5 to 7 years. The cash flow is there to service the debt.

Reliance LP 4.574% due March 15/17. (All 3 Top Picks are based on a strategy that will earn you something without endangering your principal. Yield curve is very steep so when buying a 4 year bond, in 3 years you are one year closer to maturity and obviously less price risk and the yield has fallen and you have a capital gain. Corporate spreads from governments are fan shaped so the longer you go the wider the spread. As you come down a curve, this will trade at a tighter spread as well as a lower yield so you get a double effect of the yield curve and the credit spread.) Likes the credit here. May be slightly undervalued. Trading at a slightly wider spread that he thinks it should trade at.

Markets. Likes mid-cap stocks because a lot of other people are not looking at them. Tends to favour stocks that are self funding because they don’t need to raise a lot of equity or debt so a lot of brokerage houses are not interested in them. They tend to be neglected on the market and often undervalued. He has tried to shy away from resource names in the last 18 months but has recently launched a new mid to small cap resource fund which he feels is a contrarian play.

Markets. Ben Bernanke is slated to testify before the Financial Services Committee tomorrow but the market has probably jumped ahead of what he is actually doing. The reality is that he is probably going to reiterate the same message. Rates have gone up close to 100 basis points in the last 6 weeks, which means that defensives are probably not the place to be and cyclical names are the place to be. He thinks the best place to be within that group are within the financials, both in Canada but, probably more important, in the US. A fantastic time to be an investor, particularly in the US because we have just seen this rotation start. June was the highest outflows of bond funds since 1990. Expecting a bit of a choppy earnings season this quarter. (See Top Picks.)

Resources. Expects this misery will continue for a couple of years. If you look at growth in China in particular, it has been very, very weak. The most recent data that came out was 7.5% growth, which isn’t very much. Europe isn’t helping very much. US has turned the corner economically but it isn’t going to move the needle for resources. There is still a fair bit of inventory around the world and that is going to impact on investments.

Markets. He thinks both Loblaws and Shoppers are sells. They are in a mature industry that doesn’t have a lot of growth. It is a good deal and there are synergies but don’t chase them. Food inflation is low right now and costs are ticking up.

Educational Segment. US Market is booming. We can see that earnings have come back on the S&P. Margins are the best they have been in history. Earnings growth is slowing. But markets are looking for stronger growth this year by year end. It’s tougher to grow earnings. When you back out financials, there is basically no earnings growth. Financials are strong. There is sluggish revenue growth. 10% earnings growth will be a tough target this year. The next few weeks of earnings will be very interesting.

How many stocks should you hold in your portfolio? When is it overweight and how much outside of Canada? He puts his money in his funds. He likes 45-50 names in that portfolio. He feels comfortable with proper diversification. It depends on your view and what you are trying to achieve.

Markets. Friday the model price was $60.54 for Shopper’s. Loblaw’s comes in and buys Shopper’s stock $67.50. He makes his predictions from a database of 200 names. The different sectors are treated differently. Today he was a dollar out with the Shopper’s example. He is a US bull, 3-5 years. Large caps have not done anything for 12 years. In 1992 when the bull market started, we are at that same valuation now. Stocks will fall, creating a buying opportunity as QE is tapered. Interest rates have to go to 2.71%. As interest rates go up, he feels it is really bullish for equities. Everything here is just math-driven. Terms used in his opinions are explained on his blog.

Markets. When the Cdn$ was above par, he was buying US stocks like crazy because the multiples were very good and the currency was helping him. Soon as the dollar slipped down below about $0.98, he became a little bit deterred but starting at about the end of May, Cdn stocks sold off very strongly, particularly the interest sensitive sectors and now he is finding real bargains again. To him, it is all about value.

Resources. Feels the bear market in resources has a ways to go. Right now he is about zero weighted in metal and very lightly weighted in energy.

Investment ethics. What are the fundamental ethical principles that an investor should pay most attention to in making investment decisions? For him it is pretty simple. When he is buying stocks for his clients, he thinks of himself as an owner of the company. He tells his clients and partners that unless they would be happy to have their names in big letters over the doors, probably they shouldn’t own the company. He is not going to buy a company that he thinks is doing things that he would not want to do under his name. He is not interested in tobacco, gambling or handgun manufacturing.