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

Markets. Has being fully invested for a while and has started to raise just a little bit of cash, to take some of the gains on his positions. He is seeing conflicting things in the market. On the macro economic data, some parts are looking great, but others are not looking so great. Tempering his enthusiasm a little as he had since the fall, in case there is some kind of reaction to potential talk of rising interest rates. While he doesn’t think that is going to actually happen soon, he is getting prepared for the volatility that might result if people think that is going to happen. He is of the view that this is a false alarm and that things could correct a little bit, but who knows where rates go as they have been backed up for a little while. Today was the first he had seen signs that interest sensitive names started to pull back a bit. Hedging is important for him. He is managing his portfolio as an absolute return generating vehicle. When he gets cautious, he looks at how he can protect the downside if something happens. The cheapest way to do that is through the long-term bond. It is extremely cheap to hedge with. He is expecting a good end to the year and is still 90% invested.

Markets. Most bull markets end with monetary tightening when the economy gets overheated, but there just isn’t signs of that happening. Share buybacks are helping and are partly due to low interest rates. They borrow to buy back stock. There is complacency out there so you have to be careful. Year 3 of the presidential cycle typically does well after a weak year 2 but year two was strong in this case. You see a 10% decline in markets once every 28 months and we are in month 34. You can wait a long time for a decline. The complacency level concerns him because investors become vulnerable to a shock. Margin levels are high again. This is one sign that you have to be careful.

Markets. He can see some choppiness going forward given geopolitical tensions that are happening, as well as negative seasonal tendencies typically this time of the year, when the volatility index normally jumps by about 15%-16% on average over Sept. and Oct. There are also concerns as to when interest rates will rise in the US in terms of Fed fund rate. Plus concerns over China’s economic recovery. Still believes there is a strengthening US economy. We’ll see a grind higher in equities. It’s just in the near term there could be time for a bit of a pause. You’ll need positive earnings trends to continue and corporate earnings to continue to do OK. If you apply an expected $130 earnings per share on the S&P over the next 12 months, and multiply that by the 17 multiple that we have right now, that gives you $2,210 on the S&P, about an 11% return. He is looking for a 4%-5% pull back. Doesn’t really see a correction in the stock market unless there is an earnings recession and he doesn’t see that at this point. He is sitting on 10%-12% cash at the moment.

Markets. A lot of people think the markets are high here, but he thinks not. You look at the S&P earnings and we are where we should be on a PE basis. There is no indication that interest rates will go up appreciably. He thinks we are going up another 10-15%, but there may be corrections in the next few days or weeks. He feels you get 7% in the market vs. treasury bonds at 2%. You have to do security selection and have cash on the sidelines. There is every indication that we keep going up slowly. The US recovery is fully in place. Things seem sluggish from a jobs perspective, but from a company perspective, they are profitable, expanding and have high export growth. The US housing recovery is also in place. Consumer debt levels have really come off from 100% to 70% and they have net savings of 4-5%. The US is a dynamic economy and they are growing at 3.5%. The harsh winter messed up the statistics.

Floating Rate Preferred Rate shares. The rate gets reset as interest rates rise. This is what you want. He referred to XFR-T to show one year performance of rates and preferred shares.

Economic Growth. This is a slow and steady progression out of the great recession of 2008-2009. The world economy has a lot of stuff going for it, but there is some stuff pulling it back, so instead of having a robust growth which we usually see out of a recession, there have been 2 steps forward and 1 step back. Thinks this is continuing. It is mostly the US that is really picking up, which is super important because it is the biggest economy globally. There are still problems in Europe. China is maybe a little bit slower than it used to be, but is still growing robustly.

Markets. We are in a secular bull market. When he looks at the signals, he tries to understand what the market is saying. In general, in a healthy market over time, a broader and broader number of securities should be participating in market strength. In the spring, the developed markets were leading the world, led by the US, followed up with Europe and some other developed markets. We have seen buying in equities spread beyond developed markets and into developing markets. China is certainly behaving better for the first time in 2 years. Latin American markets are behaving a little bit better. The breadth of buying in markets has been expanding, and does not look overcooked when looking at credit markets. Corporations are being able to borrow money at very low rates so the market is not concerned about business risks at this point.

Market. The market has been very good, but we are always vulnerable to a pullback. Everybody keeps talking about a 10% pullback, but we haven’t seen that yet. Given the strength of the market, it will be sensitive to any potential negative news. Economically the growth in the US is quite good. There have been very strong industrial manufacturing measurements in the last couple of weeks. The Fed will be finished tapering in November and they’ll probably start to increase interest rates at some point. If the US economy comes on too strong, she could see the market pull back. Thinks growth will be somewhat muted, but because of the strong manufacturing activities, we’ll see job growth accompanying that, which will be positive. Outside of the US, things are slowly improving, but it is very bumpy. The Ukraine/Russian situation is having an impact on the European economy, but we have seen the central banks there inject more liquidity into the system to keep everything going. As long as profits keep rising in the high single digits, she expects there is more upside.

What are your favourite REITs? Feels there is a place for having some REITs in your portfolio, whether you are an income or a growth investor. Maybe 5%-6%. High quality REITs do provide a quality cash flow stream and give you yields of 4%-5%. She owns Chartwell (CSH.UN-T) in seniors housing. She also owns H&R (HR.UN-T) which has a high quality, blue-chip portfolio list of tenants. Occupancy is very high. If there was a high spike in interest rates, REITs would probably not do very well.

Markets. In the Scottish referendum it looks like they want to separate. He remembers when Quebec had a referendum to separate. The British pound is reacting. If Scotland separates would they use the pound? They would have to assume part of the British Debt. Job figures are being criticized. The average error is 90k-100k. But this is the only information on jobs we have. It was not a bad number, but off the current pace. The US is doing well because interest rates are low and that is funding the recovery. If years from now the economy is booming and interest rates have risen then he will be a huge bull.

Oil and Gas. Oil prices have to go up because the cost of getting it out of the ground is going up, but that is over decades. There is some technical selling that is playing out right now. Crude oil will be in a trading range for the next 5 years because of new supply coming on line. The stocks are going to trade. Buying opportunity for stocks will be about 3 months for the next low.

Educational Segment. Financial Literacy. Seniors: Increasing bankruptcies. Larry’s guest is trying to develop a national financial literacy strategy. Seniors are entering their senior years with more debt and don’t have good financial literacy. In terms of low interest rates, it is a great time to pay down debt before interest rates start to go up again. The guest wants seniors to know what questions to ask about the products the advisor is suggesting they get into.

Markets. We had muddled growth since the last recession, but he still see some growth for the next couple of years. We are starting to see positive numbers out of manufacturing. 8% equity and 2% bond returns will be normal going forward. Brent oil fell below $100, could go lower than that still. Sees robust prices on oil, but not as high has previously. $80-$90. Oil demand is starting to flatten worldwide. Sees US production increasing. If Iran sanctions get lifted over the next couple of months we see even more supply. He is not long on any shale producers that have higher costs, but is long on oil with net backs of $30-$40. Canadian dollar at $0.90 is good also if it stays there. Nat Gas inventories will be at 3.4 Billion cu. Ft. this fall which is below where we were last year. There are seven states in the US with snow this week. Suspects Nat Gas will act well this winter. It should be driven higher.

Bonds. Bond performance this year has generally been terrific. Doesn’t think any bond manager in Canada thought that we would see a 6.5% return year-to-date or a 7.6% return year-over-year. We were coming up with such a bad year last year with a small negative performance on the overall bond index with an even bigger negative return on preferred shares. There was a lot of fear, but we are really having a terrific year. He starts top down with a macro view and then starts getting into sectors and countries. Obviously the US is doing very well. Canada a little softer. Europe is still in a kind of quagmire. We are in the 4^th quarter where we will eventually get into rate increases, which is usually danger for the bond market. It usually lasts only a short period of time, but it is the period of time that people remember and are most fearful of. Easy money has been made, so at this time you have to be really selective.

Good time to purchase a European bond? Which type? Corporate, high-yield or government? Europe is a good place, but you have to be careful. When you’re talking about corporate or high-yield, it is a very different environment there than what is in North America. Financing tends to be through banks so there are a lot of bank issues. It might be best to play this through an ETF or an index. Sometimes it is better to take your time, work through an advisor and look for opportunities that make sense for your portfolio.