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

Markets. There is a lack of breadth to underpin these lofty levels. He looks at the percentage of stocks that are making new highs versus lows while the S&P or TSX make new highs. This is what is going to tell him what the underlying strength looks like. He looks at the number of stocks in given indices that are above the 50 day moving average to see if it is a small amount compared to the S&P, which is at record levels. Last Friday, only 23 stocks on the S&P made new highs. There have been only 2 or 3 sectors leading the charge and that is a problem.

GOLD. There is a bit of a rhythm to gold and over the past couple of years, since 2011 when it peaked, it has been in a down trend. On a short term, for a trade, there is a little bit of a pattern where you can usually pick gold up at the end of June or early July. Silver is an even better trade. They tend to bottom and then move up into October.

S&P 500. Broke a little bit out of a base, but not enough to count in the grand scheme of things. On an intermediate term basis, there are a few divergences showing up, intermediate being a bit longer and short-term looks like it is reaccelerating. TSX is doing the same thing. It is that longer term that as we finish the short-term run, that is a bit more in question. If we match that over to some of the economic stuff, such as the GDP on the 1^st quarter coming in basically flat, this necessitates that for the next three quarters we print around 4% for the consensus of 3% full year, to come into play. In order for that to happen, the short-term run that we see, we need to see that change some of those things on the intermediate or the longer-term basis that are starting to show some divergences.

TSX. Looking at the makeup of the market right now, energy has been driving through the spring, sold off a bit, but for the last little bit it has been the financials. Energy should be the big driver, along with financials. You want to be in the right place. Index looks pretty good, but it is going to be driven by those areas.

Copper. When you look at what has happened, especially the Chinese using it as loans over the years, it has lost a little of that predictable quality. Chart shows a steady climb upwards since mid-March. We are going to run into a little bit of resistance at about $3.19, but if we get through there it should be another $.20. Copper is working right now, especially if there is little bit of gold with the companies involved in copper.

(A Top Pick June 6/13. Up 0.20%.) 10-year Government Canada Bond. The yield picture has not changed. We have this 30 year trend in bonds. Every time the rates go up, the bonds get bought. (As an asset allocator, he has to own fixed income.)

Silver. Any time where you have had battles where there have been no clear winners or losers, it’s a great place to go and put your line in the sand. If it just gets above the downward trend line at around the $20 range, it will bring in a lot of people.

US Economy. Feels the 2^nd half is going to be solid. Longer-term he feels the economy is going to be pretty good. The healthcare system they are putting in place, as bad as it is right now, in time will prove to be somewhat similar to what we have in Canada, which means costs certainty for a lot of corporations and a lot of people. That will be good for the economy. Also, something that has not been talked about nearly enough is energy independence, which they are talking about as early as 2015. This is huge for the US economy.

European Economy. The surprise will be if they do a major stimulus program and he thinks that they might. Negative interest rates are not going to help anything. Japan lived through that exercise for 20 years and it didn’t work. The stimulus that Japan put in last year helped, but was a temporary measure. Not a big fan of stimulus for stimulus sake, but this is probably where they are going to have to go in Europe. It would be nice if the ECB took that stand now rather than later. They are already about one year behind the US in terms of stimulating and doing what they need to do for the economy.

TSX. About 400 points away from its all-time high it hit in 2007-2008. If you look at the Canadian market and compare it to the S&P 500 and you overlay a chart, one against the other, the correlation between the 2 markets has been extremely tight for a long time. It drifted apart at the moment QE3 started and when the US market took off. Had thought Canada would play catch up this year. Canadian economy last year played off real economic activity, which was very positive. Thinks Canadian economy will go a long way to catching the US markets this year. Wouldn’t be surprised to see us at record highs sooner than later this year.

Covered writing. Using Goldcorp (G-T) as an example, it is trading at around $26 a share, which isn’t a bad price. You might buy the stock and then write a $20 Call 3 or 6 months out, depending on your time frame. You would get a premium for selling that option. The premium might be $1-$2 a share depending on the strike price and the distance to expiration. That is yours to keep no matter what happens. You still own the stock. If the stock rallies, which he doesn’t really see for any of the gold companies, or gold itself, you will be called away at $28 a share. You are giving up upside for immediate cash flow, that is really all that covered writing is. Taxed as a capital gains which is tax advantage strategy for Canadian investors.

Convertible debentures, 5-year term or less with an attractive interest rate? If these have an attractive interest rate, this is usually telling you that it is a higher risk company and you have to look at the credit quality of the company that is issuing the debentures. Putting that aside, he actually likes convertible debentures. They have been priced more efficiently in the last 20 years, since options have become so popular. If you really think about a convertible debenture, all it really is is a call option on the stock and the fixed income investment in the same company.

Covered call ETFs? This comes down to how much of this do you want to do yourself. Writing covered calls against ETFs is certainly a good strategy. You could buy the TSX 60 (XIU-T) which has a 15 basis point MER, virtually no cost to running it. You could write your own covered calls. You also might want to think about that when talking about Covered Calls ETFs which tend to be writing options against individual stocks within the ETF. Options on stocks tend to have a higher premium than options on an index because the index, by definition, is of less risk than individual stocks. The risk in this strategy is that if you have a diversified portfolio to start with and you start writing options against all of it, the good stocks are called away and you are left with the ones that didn’t do so well. When you rewrite, you are buying high and it doesn’t work very well.

Which is riskier; owning bonds, or owning bond ETFs? If you own bonds, they are going to mature at some point. That is the risk of one versus the other. It comes down to the durations of the ETF, the ETF will never mature, so psychologically there’s something about having a product that at some point you know exactly what you are going to get back. Bonds are emotionally easier to hold onto. An ETF is always going to have a rolling duration. That maturity factor gives comfort to a lot of people.

Energy. Thinks there is going to be energy independence in the US in 2015. Not a believer that energy is going to take off into the stratosphere. If anything, more supply coming on to the marketplace may actually suppress prices. Russia’s deal with China was interesting and feels that fact could also put somewhat of a cap on energy as we go forward.