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

Gold. It has always been said that gold is a hedge against inflation as well as a currency play. Charting this from a way back, gold has never kept pace with inflation. Gold has been said to be something we are going to go to in times of economic turmoil. We went through that in 2007-2008 and gold dropped along with everything else. Gold is a currency play and that is all it is.

Market. We have been in a bull market for quite a while. Central banks around the world want to drive assets up. Technically it looks fine. Just enjoy it. Just one caveat. Transports are not taking part.

Transportation. Dow has gone to a 52-week high, but transports have not followed. Just looking at the rails, they are also off. Thinks it is just a temporary aberration. Up trends are still intact so he is not too worried about it.

Gold. Chart has a very unusual pattern in a descending triangle but then it broke to the upside. Usually a descending triangle is bearish except for this time. The break to the upside fooled everybody. He would assume that gold is going quite a bit higher and will shoot towards $2000.

Markets: Perception is that markets are weak and so we continue to see weak volumes until people think that economic recovery is sustainable. Correction? Don't fight the fed. Just about every central bank is doing quantitative easing: Japan yesterday, plus UK. The other problem is the fiscal cliff that is expected in January, but he doesn't think that will happen. Raising the debt ceiling is a political issue. He takes a balanced approach. US$ is a good bargain and there is some downside risk of US dollar devaluing more but not a big one. Probably a good time to buy US valued assets.

Brazil: You don't need Canadian dollar hedging because emerging markets have undervalued currencies. When you hedge you are giving away some appreciation. He has some Brazil exposure for the long term.

Market. QE 3 surprised a lot of people. Basically committing a total of $85 billion a month to support this market so the floor is very much in place. It also creates some tail risks, an abnormal or unusual event happening and when you start to put that much money supply into the system, and basically open the wallet of the Fed into the future as much as it takes, it creates some issues of future inflation. You have to take this into account when investing. Always assume that the most likely direction of the market is going to be the one that it usually takes. Make sure your assets are protected and there is not going to be an unusual event that throws you so far off your plan that it affects your life.

Dividends. Getting a lot of questions from clients about where they should look for yield. Sees some things happening in the market that are a little disturbing and a little dangerous. People are stretching for yield because basically bond market is not giving them the yield that they want or need. Going into companies that are paying 4%-5%, which is great, but you have to look at what you are buying. If the capital is at risk then you don’t want to go there. You have to look at the company and ask is it trading in the range of multiple that it normally has in the past. For many of these companies it is trading well outside of that range and he thinks there is risk to capital. Also, the long end of the yield curve, the long bonds, is a dangerous place because when interest rates start to rise, there will be a world of hurt in the bond market. Some REITs are paying out 95% or over 100% of their free cash flow, which is dangerous. Look for good growth companies with possibly a 2.5%-3% yield. Pipelines are a good place to look.

Small Cap US Companies. These are riskier. Bernanke is basically forcing money into the market and it is going to move towards risk assets. He holds about 40 small cap companies so that almost every client has a portion of their asset in US small caps.

Corporate bonds. With the ECB announcing that they would be buying bonds from countries such as Italy and Spain and also the US Fed with QE 3, he could say riskier assets have performed very well and obviously high-yield had a very good ride. Short-term, he is taking profit right now. His long-term view is that you want to capture the credit spread that companies are paying vesters (?). Generally, corporations have strong balance sheets, good cash flows and they don’t have short-term maturities.

How can we expect a Canadian Bond Index Fund to perform looking out to 2015 with interest rates staying low? Bernanke stated he would keep interest rates at 0 for the next 3-4 years and that he would try to keep the curve flat so it is hard to see rates rising significantly. The place to be in this scenario would probably be in credit.

10-year bond ladders. Do you agree with this strategy? A laddered portfolio makes sense. The key is to have a diversified portfolio to spread the risks.

Oil. There has been almost a $9 drop in 3 days, which historically is a heck of a move. He is feeling pretty confident that $90 WTI is going to hold. Feels that Saudi Arabia is concerned about demand destruction from too high oil production. They want a high oil price but they don’t want to kill off demand and bring on substitutes. Thinks their comfort price is at around $120-$125 Brent.

Natural gas. We are in a shoulder season again. Historically gas dropped about 19% in shoulder season, which would imply about $2.65. Kind of irrelevant now and he is looking out to 2013. Demand was very, very high this summer because of the heat. At the same time, there was a lot of fuel switching from coal to natural gas. As gas has increased, that economic incentive is coming off the table. Looking out to 2013 he is looking for a recovery of around $3.50 Cdn (around $3.75-$4 US). As soon as gas approaches $4, he feels producer hedging will increase.

Oil/gas. He is seeing a move into the cyclicals, in particular into oil and gas names. Rotation happened in some of the large cap names first and as valuation multiples expanded, it tended to trickle down into some of the smaller names. Stocks were so oversold earlier this year that it was bound to happen at some point. Also, there is more enthusiasm that Europe is going to sort their problems out and the US Fed is willing to step in and support the recovery process of quantitative easing, which is good for commodity stocks in general. He was holding about 10% in cash and is now taking it down to get in this rally.