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

Markets. Expects the TSX to outperform the S&P 500, very much the reverse of what we have seen in the last year. A lot depends on some improvement in the cyclical sector of the market which has been a big drag. Although fundamentals in terms of commodity prices for oil/gas have been excellent, the stocks have underperformed and he feels this is where you will see the big catch up. A lot of the elevated levels of crude oil are due to Egypt and the turmoil. Thinks oil prices should stay between $90 and $100. His enthusiasm for Canadian banks has grown in the last 6 months or so. Have been discounting a fairly significant slowdown in Canadian economic growth and also very poor housing market. There have been very large Short positions from US hedge funds, betting on the housing crisis in Canada, similar to the US but doesn’t think that will happen. There has been a multiple contraction in Canadian banks as such that they are all below their average PEs, quite significantly.

Economy. Looks like short-term rates are not going to be going anywhere until at least the unemployment rate comes down to about 6.5%. If you look at Fed tapering and the $85 billion of bond buying, it looks like the equity investors, after the initial shock, are getting a little more accustomed to the eventuality that it is going to happen probably in the fall or so and consequently higher long-term rates. It is positive for investors that they are getting used to that idea but the fact that short-term rates are going to remain low longer is actually a positive as well.

Markets. He is considerably overweight the US versus Canada. Looking at Canada, commodity prices continue to struggle and have been for some time. The housing market is very different in Canada compared to the US. It is rather uncertain domestically, whereas in the US we are seeing a very clear recovery. The difference today versus even 6-12 months ago when you are looking at dividend stocks is that you want to look for companies that are not just paying dividends but they are also growing their dividends in a significant manner. Long-term rates will continue to move upwards.

Gold. Chart looks like a wedding ring rolling off the table. We may see a bit of a technical bounce but at this point he is not really bullish on gold. A lot of the catalysts for gold have really dissipated. Also, the fact that the US$ has moved up and not down, he doesn’t see the impetus for gold to move up or create a new bull market.

Economy. US economy is improving at a better pace than in Canada. Canada will eventually catch up. There are companies in the US that are much more diversified internationally. Seeing healthier growth particularly in emerging markets. We have to keep an eye on rising bond yields as rising rates will increase borrowing costs which will impact the US consumer. US bond yields are still historically low. The US government will be careful on the pace of the interest rate hikes.

Markets. Canadian banks have definitely lagged and this is an area she would be buying. And, as well, some of the interest sensitive stocks have over reacted on the downside, such as the pipeline stocks where there is good cash flow visibility and possible dividend increases.

Markets. This is the summer market and volatility has picked up, especially in the REIT sector. Volumes have dried up and will likely continue going into the fall. There has been a knee-jerk reaction to REITs in the last couple of months. Sector has traded down sharply on the basis that the Fed may taper back its bond purchases. When you look closely at what the Fed says, they have some key hurdles that they are going to look at before the tapering process or raising their benchmark rate. They will be looking at unemployment and inflation and we are in a little bit of an adjustment period here. People are going to get used to a new range on the 10 year bond yield and in that period of time you will likely see elevated volatility, but that creates opportunity. There has been a really strong correction in the REIT sector right now and valuations are trading at levels we have not seen in at least 3 years. We are trading at a 10% discount to NAV, multiples are approaching their historical average, but free cash flow growth from his perspective continues to look to be above average. He is finding more opportunities in the US than in Canada because as the economy improves they are more prone to seeing stronger free cash flow growth out of their businesses.

US Mortgage REITs. Mortgage REITs have probably been the hardest hit sector in the US when it comes to a reaction to the tapering back of bond purchases and a higher 10 year bond yield. Names have come off anywhere from 20% to 40% and this is predicated that people are concerned that the BV’s for mortgage REITs are going to fall over the next 6-12 months. Book Values have already fallen and are trading well below where their BV’s are. Doesn’t feel the volatility in this space is going away any time soon. Has substantially reduced his weighting over the last 12 months. Going forward, he doesn’t see massive dividend cuts in the sector but does see lower dividends than what we are sitting at today. Your risks are substantially lower buying the mortgage REITs today than it was 6 months ago but volatility will still be high.

REITs. The sector is at the healthiest point it has ever been historically. Leverage is at its lowest level. Market Cap is the highest it has ever been, meaning you have liquidity in the shares you are purchasing. As well, payout ratios have come down to under 90%, which means your yield is more stable. If you look at historical total returns for REITs, a large proportion of what you are going to get on return basis is going to come from yield. Going forward, if your yield is more stable and you continue to compound at that level and you start to see distribution increases, because payout ratios are more stable as well, you are going to compound at a very high level compared to historical norms. He believes that the 10 year bond yield is not going to go higher than 2.5%-3%. At that level, he feels that people will start to allocate capital to the sector once we operate in that range for a period of time. He would take this volatility as an opportunity to Buy high-quality names that have embedded free cash flow growth in their portfolio and that are going to provide distribution increases. (See Top Picks.)

Markets. Markets will be choppy this summer. German elections are going to be one of the key events of the next few months. He is not sure Germany will do everything they can to save Greece, Italy, Spain and Portugal. Nothing to worry about at this point but it should be a choppy summer. JNK is a high yield ETF but it should be 10-11%. Energy stocks are not performing and when the sector corrects these stocks will probably test their summer lows.

ETF and Bond Prices in Interest Sensitive Aras: It is about expectations. If markets believe nothing will happen, they price for the future. The market thinks the Fed will back off of buying bonds. Doesn’t believe fed will raise interest rates any time soon. Thinks QE is here for years and years to come.

Educational Segment. Howard Atkinson of Horizons was the Guest. Alpha ETF’s. It’s all about trying to beat the market. Horizons is the second biggest in the world. Number one in Canada. In a covered call strategy the markets have 4 outcomes – market goes down hard, goes sideways or up a little bit or they go up aggressively. In 3 of them the covered call strategy tends to outperform. Only in a raging bull do you underperform.

Markets. Slow and steady. Don’t get too spooked by the spike in the 10-year. We all knew it would happen. It is a good thing if QE eases here. It lets the private sector contribute to growth. What we should look at is that this is how investors will react to less QE. Friday there were strong jobs numbers, 3 months in a row close to 200k. Housing numbers up 2%. There is a slow and steady recovery so people should not be too spooked by a reduction in QE. We are in a long term unwinding of the bond bull market. It seems there is a lot of cash on the sidelines. Once bonds start to sell off we will see a shift into equities. The yield trade will continue as people still need income. Over the last month, equities that look cheap, cyclical with growing dividends are key.

Canadian Insurers. In last 12 months they look like they are on highs. You can see potential if you look at a long term chart. Insurance could see much stronger growth than in the banking sector. Likes SLF. Compound rising insurance rates with markets and it looks good for Insurance Companies.

P.F. Chang’s China Bistro Senior Note 10.25% 2020 Bond. (Top Pick Aug 28/12, Up 21.25%) Who doesn’t like Chinese food? Fantastic franchise. Renewing menu, introducing better food items and removing costs from the system. Generates a tremendous amount of cash flow. Will continue to be a great bond.