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

Bonds make almost no sense for a taxable investor. You get your principle back with almost no return after tax.

Markets. ‘Sell in May and go away’ – you should have sold in February. He is cautious because the market continues to go higher. Economic data is good out there: jobs; housing to a certain disagree. The bond market is telling us a different story. Bond investors are saying ‘flock to safety’. There is not a lot of volume for the markets grinding higher. He is worried about the complacency in the markets. He is cautions that if you made some money, you should take some profits. But you should still have some equity exposure.

Solar Related Stock? Solar is not an area for him because it does not produce a consistent dividend. Think of dirty energy. Coal will give way to wind and solar. Likes Algonquin Power or Northland Power for solar exposure. This is playing solar in a more riskless manor.

Interest Rates. The most recent interest-rate move, downwards, continues to confound him. There was a run this time last year, when the feds started talking more aggressively about their exit strategy and economic indications were picking up. Doesn’t feel people believe in the slow growth economy yet. The 10 year bond level moved from 3% down to the low 2%’s. He continues to look at dividend paying stocks that are yielding about 4%, and feels they look very attractive. In 2008, a lot of pension funds were caught overweight in equities. Over the last couple of years, there has been a tremendous rise in equities, especially in the US. He has seen more disciplined profit taking coming out of some of those plans, and funnelling some of it back into bonds. Confident we will continue to see a rotation out of bonds, and into stocks longer-term. Looking at demographics and the baby boom population, there is a need for a combination of income, to fund current lifestyle and a little capital growth. The only place to get this combination of income and growth is in equities, specifically dividend paying equities. 5% dividend growth looks pretty good now, especially when 10 year bonds are less than half of that.

Markets. If you want to achieve double-digit returns, your best bet is to find and own companies that can grow their earnings per share at a 15%-20% annual growth rate, year after year after year. These kinds of stocks are typically more volatile and most investors do not like volatility. Advantage for a “do-it-yourself” investor who spends a lot of time to get to know a company and understand what it’s doing, is that if you know what you own, you can better tolerate the volatility and therefore have a better return potential.

US presidential cycle. If you break this 4-year cycle down, year 3, following the midterm elections, is by far the best year for the stock market. Quarter 6, which we are in right now, is the worst performing quarter and yet the market has actually been up. We have one more month to go and we’re out of the worst quarter of the 16 quarter period. The next quarter is historically pretty weak, but starting with quarter 8, 9 and 10 (the midterm elections this year) you have your strongest nine-month period for the market, which occurs every 4 years.

Markets. Volumes are down, down, down. Doesn’t think anything is going to change. Perhaps the market is tired, but he doesn’t really feel it is going into a massive correction. Part of the reason is that money on the sidelines is not being put to use. Doesn’t really know what is going on. A few months ago, some people got caught in some of the small caps and bio techs, which really took a hit after a huge run. Health, biotech’s and technology stocks have been the winners. The real growth is in the smaller companies. He has bought one or 2 mining stocks lately, and is optimistic that sometime in the future they will get ridiculous high-strengths again, as you do with everything.

Global Stocks. What has happened this year so far has been quite a surprise. At the beginning of the year a lot of people thought the bond market was not going to perform well. The 10 year yield in the US went from 3% down to 2.5%, but at the same time equities have done reasonably well. Global equities are up 4%-5%. Looking at the 2^nd half of this year, we might see a lot of that reversed. The 10 year yield is likely to turn upwards between now and the end of the year. Stocks will do well in that environment. This year, so far, all the businesses that benefit from falling rates have done well. The utilities is the easiest example which is the #1 performing sector in the US so far this year. From now to the end of the year the yield on the 10 year is likely to go up, which means those interest sensitive names, like the utilities, will do well. However, things like financials, industrials and cyclicals will do much better from now to the end of the year. Regionally he still likes Europe. In the past few years the US earnings recovery has been very significant. US earnings are 20% above where they were in 2007 so they have already recovered and then some, from a global financial crisis. European earnings are still 20% below their 2007 peak. Earnings growth for Europe this year and into next according to forecasts, are likely to be around the highest in the world. Thinks the pressure is on the ECB to cut rates, put rates negative or be more stimulative in some fashion to try and get the economy accelerated further.

Markets. Seeing a slow upward grind in equity markets, but there will be occasional pullbacks. Feels this market is profit driven. There were better than expected 1^st earnings quarters which came in at about 6% year-over-year. Going into earnings seasons there were expectations of flat or maybe 1%-2%, but we are actually seeing positive earnings upwards, which is good for markets. For the year, consensus expectations are that profit growth will be about 10%. We don’t need multiple expansion. The market is trading at about 16X forward earnings, which is reasonable in a low inflation environment. Even if those kinds of multiples are sustained, she can still see markets in a 10% range. We still have a very accommodative policy by all the global central banks, so that is keeping rates low.

Bonds. The performance, especially in the US, has surprised her. She was in the camp that thought rates would slowly start to increase, especially with the fed tapering. There was a rally in the US treasury from the 2.7%, but is now down around 2.5%. There was the weather impact that hampered US growth. There is also questionable Chinese recovery. Also, inflation has stayed quite low. Also, there were a lot of large pension flows that made a lot of healthy gains from equities and perhaps there was some rebalancing, and directed some of the cash flows to the bond market.

Markets. The ISM manufacturing number came in and then the government corrected it. Markets are reacting positively. France is going to be a weak spot for Europe for the next while. Bond yields should be significantly higher than they are, but the bond market is typically right on matters of the economy over the stock market. Inflation is not a big threat right now. High yield bonds are almost the lowest they have been in all of history.

Challenge with commodities in general is the underlying futures markets. But FCG-N and ZJN-T are ETFs that allow you to stay in them for a long time.

Educational Segment. Alternative ETF investments (smart indexing). RBC launched equity based ETFs this year. Focus on dividend leaders. Looks at long term financial risk of companies. Screens out value traps. Does not look at just dividend metrics. You want to make sure short interest is low to judge long term strength.

Markets. Expects a pickup over the second half of this year. Europe has clearly recovered, China has stabilized and for the US it was weather related issues. You have a global synchronous expansion that you have not seen in close to 20 years. It is good for earnings growth. Valuations in stocks are in the middle of the road, in line with historical averages. He is looking at industrials and cyclicals in particular. Not expecting any surprises at the Apple developers conference, no big announcements and in fact he has lightened a little. They are continuing to lose market share in the smart phone market.

Markets. His 1-year return for the Davis Rea Partner Funds was 134%, and over 2 years it was up 68%. Runs fairly concentrated portfolios, and is a high conviction investor. Got his Shorts right. Looked at areas in the US tech market that looked pretty extreme and extended, and started layering in his Shorts early. Got more aggressive as they got to really, really high valuations. On the Long side, his choice of energy investments, in Canada in particular, worked out really, really well. A perfect storm where you get both sides of the trade right. The Longs that he has continue to grow on the energy side particularly, at a phenomenal pace and is quite optimistic about oil/gas prices. The market place in general, particularly if you look at the S&P 500, is trading at about 16X forward earnings, which is about the average, but we are experiencing slower than average growth, but have lower than average interest rates. Things have stabilized from 2009-2010. Investors’ sentiment has normalized which has allowed for an expansion of the price we pay for earnings, so it is trading at a long-term average. For earnings to continue to increase, profit margins are already very high, economic growth globally is pretty modest, and businesses are going to have to continue to improve their profit margins. We are going to have to see continued revenue growth and a modest global growth environment.