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

Oil. Oil price is not supported by the fundamentals of demand. It is more driven by geopolitics and the fear of supply disruptions, which is not a particularly healthy spot for the market to be in. If peace breaks out in the Middle East, we are in for some risks on the oil quote. If oil can hang out in this $100-$105 range, a lot of the oil companies can continue to put up good production per share growth and generate value for shareholders.

Markets. Over the last 12-16 months, there has been a constant tugging in 2 directions. Soggy economic conditions on one side, which has tended to drag the market down over periods of weeks at a time. On the other side there is a very determined set of world central bankers trying to push liquidity into the system. Consistently through the period, there are certain groups that have performed pretty well. That has been largely dividend growth with pretty predictable cash flows. And then you have had bouts of risk on and risk off. In the last few weeks money has rotated to riskier assets. You have to pick your spots. He has taken some tactical exposure in yield producing energy and in gold as well as consumer, as the big beneficiary of low long-term interest rates is housing.

Gold. In the last 6-8 weeks, gold producers have started to outperform the commodity. That tends to be a pretty good tell that there is a more significant move on the go. When the stocks are leading it tends to give you a little bit of a tell that you could see a more extended move.

North American rail sector and the effect of the Bakken on this? He has a pretty significant ownership in railway companies. Transports as a group are not behaving very well except for the railways. We have a boom in energy production but there is not enough infrastructure to move it, so the rails are the big beneficiary in the short and intermediate term. He owns Canadian National (CNR-T), Canadian Pacific (CP-T) and Union Pacific (UNP-N).

Markets:

Junk Bond ETFs. There has been massive growth in this area. Hedge funds use high yield bonds. E.g. JNK-N. The yield is historically low right now. It will add some volatility. There is a lot of money going into this sector because of the need for yield.

The French have been downgraded like the US. They are being counted on along with Germany to save the basket of European countries. Germany cannot save the whole Euro region on their own, so he is really watching France.

Hong Kong has massively unsustainable real estate pricing. There are real estate bubbles in a lot of places.

Markets and the Fiscal Cliff: Governments are choosing to monetize debt. They are trying to smooth out the 'bad'. QE is like a sugar high. Now the fed is looking out 3 years, not 6 months like before. This is good for gold. It will not go up in a straight line. We will go through periods where the economic numbers do improve. You have to be a trader. It's not as easy as buying and holding here.

Markets: He is skeptical that trades run out of gas. The dividend trade is still on. Weakness is a buying opportunity. There are some cyclical stocks that pay dividends and can increase them. Utilities or REITs that have been beaten up are opportunities. Likes real estate, energy including nat gas producers. Last year you had a warm winter that depressed prices and storage levels have come down and a lot of generation has changed from coal to nat. gas and if we have any kind of a winter it will be good for nat. gas. With the Telecom sector you are buying for the dividend. If you look at valuations, they are at the high end of the range so choose companies that can grow and increase dividends.

Economy. There have been some very positive developments including the German courts decision that participation in euro bonds was not unconstitutional, Netherlands voted in a party that was not anti-EU, and the US instituted QE 3. Not time to be popping the champagne corks yet. QE 3 realistically means that things have not recovered as quickly as they had hoped with QE1 and 2. The steps are in place to get over this hump but we’re certainly not out of it, particularly in Europe, and it is going to take a while.

Markets. He is looking more at the defensive sectors right now, including Covered Calls including some of the ones that are available from Bank of Montréal (BMO-T). (See Top Picks.)

Iron Condor options strategy? Basically means that each side of the Spread has 2 arms, so you are dealing with 4 positions. A combination of 2 vertical spreads where you are looking for something to happen between the various legs of the spread. He doesn’t like these strategies as they are not for the retail investor but are for the pro-traders. If you are a retail investor, you have 4 commissions in and 4 commissions out, the difference between the bid/ask spread 4 times over.

Bear Call Spread? Because it is a Bear, you are negative on the stock. Instead of just buying a Put, what you are trying to do is generate income. Example, stock is $50 and you sell a 50 Call, expecting the stock to go down, you’ll get possibly $2.50 for the Call. To protect yourself, you might buy the 55 Call which may cost you $.05 because it is a lot further away from the price of the underlying stock. He doesn’t use these because you have to watch them like a hawk.

Naked Puts. Perfectly good strategy, but you have to be prepared that there are risks. It is a directional trade and could go against you. His biggest concern is that they are supposed to be an equal risk to buying a stock and selling the call. The problem is the way people use them. Often they leverage these things and often 2 or 3 to 1.

Since the Options market is dominated by banks, and large firms with elite talent, should the average retail investor stay away? No! What you have to understand is “what do you want options” to do. He uses options for his clients, which are senior in age, and there’s nothing wrong with using them. You need to educate yourself and they can be an excellent tool.

Markets. Strong showing after the Fed dumped $40 billion additional stimulus into its economy. This was on the back of the German announcement earlier in the week, which was really required to bring some kind of stability to Europe. US activity really distorts the overall picture. If this hadn’t occurred, what you would see is a slow steady growth by European companies, reporting lower and lower earnings giving good buying opportunities. Whereas in the US, they are effectively saying they are going to fight their way out of trouble so anything that has an opportunity to respond positively to inflation will rally. High beta stocks are going to move, which we are now seeing. He is waiting to buy in Europe but the prices just aren’t there because of all the stimulus and all the money sloshing around the world. Making it very difficult for a value investor right now.

1)Since the US Feds telegraphed the buy of $40 billion a month, or half $1 trillion a year, won’t the Wall Street people just front run the mortgage backed securities? They’ve always done this and will continue to do so in the future. If Wall Street does not make a lot of money, then the engines in the US are now working appropriately.

2)Also, where does the $40 billion a month come from? For lack of a better term, the money is being printed. This tells you the US economy is going to inflate their way out of the situation. This worries him as it leads to inflation.