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

(A Top Pick Jan 20/12. Down 1.72%.) Sprott Gold Bullion Fund Series F – SPR 226. This has worked a lot better than gold stocks.

Markets. Lenovo would have to offer a premium for RIM. The risk is that they don’t buy it. It is a bad omen because they are the garbage collectors of high tech. If it doesn’t get taken over then he is very negative on the prospects of RIM. He is trying to find back door plays on a US housing recovery play where the price is not in the stock. Prefers US equities over Canadian but because he is not bullish on copper oil or gold. Thinks they will be done with Chinese infrastructure in 2016.

Markets. Both Canada and US will probably extend a little bit. Canada probably more than the US, where he likes oil services, energies and gold producers. S&P is capped at 15,500. When you are not in a secular bull market, sometimes breakout suck in some buyers but then don’t persist. So they are not a confirmation now. This is the third peak in a 10 year chart.

Reason for $15 discrepancy between world price oil and domestic? Who benefits? WTI is the crude selling out of the US, trades at a discount to Brent because we can’t get that out of the US fast enough to get the world prices. Brent is increasing in value because of the problems in the Middle East. The 3^rd dynamic is Canadian oil, which is land locked. Canadian exploration and production companies get hurt by this because they can’t realize high enough margins to compete.

Markets. Typically we see a rallying in Q1 and this year is no different than the last 4 years. A lot of RRSP money coming into Canada as well 41Ks in the US and both are moving into the markets. This will be followed by a slow down in May and then you have a bit of a run up towards the end of the year. Doesn’t think we’ll see a big drop off but doesn’t expect we will sustain this level of growth of the markets moving forward. US market will probably move higher slowly over time.

Global growth. Last year, Asia sold off quite significantly. There was a lot of concern around a slow down in China and that really proved not to be the case. There was some good value in the Asian markets. He would like to pick up some good quality European names but they have very elevated valuations from his perspective. Asia is probably the area for additional capital for him.

Ethiopia as a fertilizer producer? Will it become a potash producer? When you look at the supply chain dynamics, particularly in Africa, a lot of the mining that has gone on, gold mining in particular, when the companies pull out you have the infrastructure of roads. There are some tricky operators who have figured out how to take that negative of empty pits into something positive. China has invested $4.5 billion into the interior of Africa as a sort of a swap for some of the natural resources.

Agriculture. Not just about population demographics but things like population growth in consumption patterns and how they are changing. Between now and 2050, population is trending towards 9 billion people. Just to feed this we have to increase output by about 75%. Last year some US crop fields where impaired 35 to 40%. One of the single best ways to increase crop yields is through fertilizers. Fertilizer companies will not only benefit from short-term crop problems but also long-term changes in consumption patterns.

Timber. Still in early stages of US housing recovery. 2012 was about consumption. China’s engines were starting to idle a little bit faster. Hurricane Sandy had $50 billion of damage. Many homes had to be re-roofed. Insurance money is starting to show up and is pushing the economy. Looking at the lumber gap you can see things like Chinese orders, pulp, lumber and even log orders. Month to month, pulp orders are up 15%, lumber up 16%-17% and in the last 12 months up 48%. This is only the 2^nd inning of an 11 inning game for timber.

Markets. 3 things have happened.

1. China is turning the corner, which relieves us of one major worry.

2. Europe continues to bumble along. They’ve been able to talk about a single bank supervisor by the end of this year. Bond yields in Italy and other countries are declining.

3. US is a major worry but there seems to be a willingness to accept the idea that the Senate and the House will do something to avoid dealing with the serious issues. Longer-term it will be a potential disaster if they don’t.

Summary: Markets are overbought and they could pull back 3%-5% for any particular reason. He would use this correction to Buy.

Bonds. Expects to see a great rotation out of bonds and into stocks in a fairly big way. According to statistics, there were trillions flowing into bond funds over the past year or 2 or 3. This has worked out pretty well. However, he now thinks people are going to take a very good look at the possibility or likelihood that yields are going to rise and therefore will lose money and bond holdings will decline. The only choice you have is straight to the stocks.

Strategies. What happens if 2013 does not turn out to be as good as expected? You can do a number of things. He is fairly agile and can move to cash. In the past 3 years he has been as high as 40% in cash. He would pick stocks that were fully priced or ones that he’d lost faith in and raise cash with them. One obvious solution would be to Short but this is something he doesn’t do. Another possibility, which he has never done, is to Buy a reverse leveraged ETF which he perceives as one risk too far forward.

Banks. What % of a portfolio should be put in large Cnd banks? What % would you put in bank of Nova Scotia (BNS-T) versus others? Depends on your portfolio, outlook, objectives and risk tolerances. He is more bullish on the market than he has been in a while, which might cause him to purchase more cyclical stocks, growth oriented vehicles, etc. For his clients portfolios, he is getting roughly 3.5%-4.5% with capital gains of 4%-6% for a total anticipated return of 10%. If you’re looking to shoot the lights out, you shouldn’t be in banks. Scotia is not his favourite at the moment. (See Top Picks.)

What would be your hot pick in the water sector? He wouldn’t buy water utilities. He wants people that purify water, conserve water, recycle it, etc. Within that parameter, he has a Top Pick. There are also 2 others he may consider buying, Xylem (XYL-N) and Watts Water Technologies (WTS-N) but has probably gone past his point right now.

Educational Segment. There is a push for transparency on fees. ETFs are great that way. Nobody works for free. Front end load says you pay the fee upfront when buying a fund. A deferred sales charge charges the client when they get out. ‘F’ class is where the fee is charged outside of the funds.