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

The pipeline sector is not cheap. There is no ETF, but ZJN-T and FCG-N are gas ETFs. Stay away from ETFs with direct commodity links. Pipelines are best played with ZWU-T although it also plays Telcos.

Markets. It has been 5 years of free money with QE. The markets have been complacent, but now the markets changed as we come to the end of the process. He thinks the Fed will be cautious and not raise the rates quickly. There is a potential for bonds to get out of control when interest rates start to rise. As interest rates rise, corporate spreads narrow. Higher yield bonds are as overvalued as any asset class and will get a double wammy when interest rates go up.

It has been a challenge for investors because of their age. 55+ investors should be invested heavily in fixed income, but the rates are not high enough to live on. They are being forced into the equity markets.

Government of Canada Interest Rates. The government auctions their bonds from time to time. The coupon is set to the current rate, but after the date of issue the price goes up or down according to interest rates.

What is the criteria for a bond to be high yield? A bond rated lower than triple ‘B’.

Educational Segment. Gauging Market Health. Spread Between Small and Large Cap Stocks. The US market is generally up about 7.5% The Russell 2000 is down 4% on the year. The divergence started about March. The global growth downgrade started to come out about that time. So right now small caps are screaming as much cheaper than large. We are seeing a decay in the Russell 300 index. We should get a short term bounce, but he thinks there is one more leg down by November. Small caps will be where you want to go for a good bounce.

Reset Preferreds. They are issued at $25 and trade in the market wherever the market has them. The reset is an answer for the perpetual preferreds that had infinite interest rate risk. Resets are only extended if it benefits the issuer. If interest rates rise then they get extended at an increased rate spread and if interest rates fall, they are called. You get paid only a fraction of what you should get for the risk you are taking.

A floating rate ETF has little return, although not much interest rate exposure. You would want to earn more than 1.25%.

Money Flows as investors return to bonds – where does it come from? It moved from bonds into equities over the last 12-18 months. A lot of money is sitting on the sidelines, however, waiting to get into equity markets.

Bond ETFs, bond mutual funds and bonds straight up have the same exposure to rising interest rates.

Is it now time to sell US$ ETFs and move them to CAD$ ETF equivalents? The Canadian economy is behind the US in terms of recovery and so Canadian interest rates will go higher more slowly than in the US. Thinks the government would be happy to have the dollar go down to $0.85.

Markets. Increased volatility is going to increase. A large part of it is the talk and discussion around the federal reserve raising rates. The dollar is going up, so there is a bit of a flight to safety. With that scrambling, comes the volatility. He is forecasting volatility to remain for at least the remainder of the year. His equity fund is about 55% invested in the US although there is some cash position in this. This started about 1.5 years ago for him and has done quite well. This is where his research is focused right now. You get the benefit of the US currency plus the diversification.

What US sector would you choose to put your money in other than pharmaceuticals and healthcare? He would select the Information Technology Sector. This is about 15% of his fund and is all US focused. This is basically where the future is going. Also, the balance sheets are usually in pretty good shape. He likes Apple (AAPL-Q) and their new products, which will be favourable along with the cash flow. Microsoft (MSFT-Q) is another one for the service side. Cisco (CSCO-Q) is a good one. There has been talk of a split. Pays a good dividend and has a super strong balance sheet. (See Top Picks.)

Markets. The lack of hot weather has been a disappointment for the gas bulls, but there has been more at play than the weather. There has been a perceived oversupply from all the shale plays in the US, and in Canada in the third quarter the price of Nat Gas was twice what it was last year. There is some cause for excitement going forward for the gas bulls. Light oil and heavy oil pricing is up year over year and you can’t say that about North Sea or Brent. There are dynamics working here. We export all our crude into the US. Lots of interesting catalysts in the future.

Markets. The jobs report out of the US was not perfect, but somewhat encouraging. Last month was revised up about 40k. Thinks there was some short covering in the US. The week after next is the US third quarter earnings and that will determine the short term direction of the market and we may stop the slide, get through October, and get part of the decline back by the end of the year. Thinks we are seeing an average 8% increase in US corporate earnings. The TSX has roughly 10% and better than the US for the year. The energy side seems oversold.