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

In a TFSA, is it better to buy ETFs or common stocks? This is really a small component of a portfolio because you can only have $30,000 in an TFSA based on your contributions. He tends to buy common shares such as Bank of America (BAC-N) and Bank of Montréal (BMO-T). He is looking for growth.

Generating regular income using weekly options? Perhaps a Canada covered call? Weekly options have come into the marketplace and they expire every week, so you have an opportunity to write an option, see the stock get called away, and then write another one. In order to make that have any real sizzle to it, you have to look at companies that have a little bit of volatility to them, so that brings up names like Twitter (TWTR-N), Facebook (FB-Q). Somewhere down the line, you are going to have a stock go in the other direction and you’ll have an option expire without much downside protection. That is the risky play in this field.

Europe. They are talking about deflation more and more, which is interesting, because Germany is an inflation hawk at its core. The fact that they have come out starting to say that deflation is a much bigger risk, tells you that they are going to be easy on policy in Europe for quite a while. Recent statements were that we should expect the ECB to add some stimulus, maybe by outright bond purchases finally. It looks like the bond markets are already reflecting that. Many of the troubled economies in Europe, where 2 years ago the bond spreads were massively wide, are trading at lower yields than the US government bonds right now. A couple of weeks ago we saw the euro hit about 1.40. Looks to him like the euro can pull back to 1.30 or even a little lower. It really depends on the degree of stimulus that the ECB can step in with here and he thinks they are going to do something.

Emerging markets. In the very long run, he loves the emerging markets such as India, Indonesia and Malaysia but when you look at places like Thailand and Philippines, there is a lot of political unrest and they are going to have their growth issues. However, when you look at demographics as a factor of growth, the average age of the workforce in India is 28 compared to the developed markets which are very, very old. Japan is going to have over 50%-60% of their workforce within 20-30 years, over the age of 65. They will have significant funding problems in retirement. This is a problem for China also, which has a rapidly aging population.

Market correction? “Sell in may and go away” does not work every time by any means. If you look at the seasonality of the S&P 500 and go back to World War II, the high comes in June or even early July and is weaker down through September-October lows. US has had 31 months now without a 10% correction, 2^nd longest rally in history. What we have seen in this correction phase is not Large Cap stocks correcting. We have seen a big correction in small caps and people are speculating that was it is all we get. Earnings were okay this quarter. Still feels we are going to get a correction this summer but will only take us back to the lows we saw in February and will be higher by the end of the year than we are today. Markets are not terribly overvalued here and as long as earnings keep growing, the markets can keep grinding higher. Institutionally there is a huge underweight in equities as it relates market exposure, as compared to the past cycles. It seems that on every pullback, money is being put to work, which seems to be limiting the downside.

How is the price of an ETF determined? On the share prices of the underlying securities or on market demand of the ETF itself? In almost all cases, the ETF NAV is driven by the equities. In sectors that are more difficult to own, or occasionally you are going to trade with a little bit of premium to the underlying because it is the issue to trade the ETF than it is to buy the basket of the underlying stocks.

International REIT ETF. Just sold his holdings because it had a really good run and on a risk/reward basis, he can get the 4%-5% yield out of a lot of other places. If the ECB actually buying bonds, we will get one more squirt in terms of yield in Europe and that will be the peak for a while in terms of bond prices. That usually means an interest rate sensitive sector like the REITs will have a correction. Also didn’t like the currency exposure in international REITs.

Educational Segment. Smart Indexing or Smart Beta. Two ETFs he wants to focus on are First Asset MS Cda Value (FXM-T) and First Asset MS Cda Moment (WXM-). A value way to play the TSX and a momentum way to play the TSX. It’s nice to deliver an above average return but if the volatility is significantly higher to get that return, that’s not great. These 2 ETFs methodology is that volatility is equal or even slightly less in most cases and the returns are fantastic. The holy grail of that type of investment strategy is to deliver above market returns and below market volatility. They screen for very specific attributes in stocks and apply it on and unemotional basis to a portfolio of stocks.

Markets. A little bit cautious. We have had a pretty good run year to date, particularly in the Canadian market. Thinks there could be a little bit of a consolidation phase over the next couple of months. A lot of names she would normally invest in, valuations are looking relatively full. Things that are cheap tend to be cheap for a reason. Expects Q3 and Q4 will be pretty strong in the US. Year to date, the US market has been relatively flat and that is on the back of a really strong run in 2013 as well as somewhat weak numbers, in terms of the data coming out of the US. A lot of that seems to be weather dependent, but everyone is still waiting with bated breath to make sure it is only the weather. Does expect their economy to firm up in the 2^nd half of the year. As that happens, it should spill into the Canadian economy as well.

REITs. Dynamics of REITs has shifted a little. Very strong growth in 2008-2012, coming out of the financial crisis. Now that there has been a shift in psychology where people are expecting interest rates to climb up, REITs are going to be somewhat challenged to keep up with the growth that we would expect to see in the rest of the market. Growth is going to be somewhat more muted, probably in the 2%-3% area.

PrairieSky IPO. The pricing on this IPO is $28. The size and price of the deal have both been increased because of strong demand. Expected to start trading next Thursday. Unless you participated in the initial offering there is a chance that it will trade at something other than $28. There was huge demand for the deal.

Markets. The problem with “Sell in May and go away” is that it is too haphazard. It seems to indicate that you should just get rid of everything. In any portfolio, you should be looking at the different pieces of it and then decide what to do with that. He advocates “Don’t buy in May and go away”. It is better not to Buy as compared to just to Sell, but even with that, historically June, July and August generally are positive. You are better off to sit back, do your research, watch what is going on, be aware and look to Sell things eventually when they have reached your Sell target. Never Sell haphazardly.

At this point in time, a lot of people are still overly worried. Feels we have been in an incredibly stable period for the last couple of years. Inflation has been low. Commodities have been staying within range for the most part. Interest rates have been staying at one level for the most part. Stock markets have been good. The VIX has not been volatile lately. Feels people have been way too worried and have missed gains.

What do you focus on when you attend shareholders meetings? Shareholders meetings are a wonderful tool that investors should have in their toolkit. Going to meetings gives you a far better idea of what is going on in the company. He’ll often go to a meeting before he buys into a company. Sometimes he does not know management and this gives them a better feel for management. He often goes with specific questions in mind.

Insider buying/selling? He puts a lot of credence into this. His system is 1 point if they are doing quite a bit of buying and usually more than one person. If there is just one insider, there is less credence. Investors should always be looking at insider buying and selling. This gives you a clear indication of what is going on. A great place to go for this is The Increaser.

Markets. Somewhat cautious. We’ve seen a variety of things happening, especially over the last 3-4 months. There has been a significant selloff in some of the small caps and some social media momentum stocks that had risen so much. There are anecdotal stories of leveraged PE deals, where over 40% of Leveraged Buy Outs are being done at over 6X leverage to EBITDA. Those are levels last seen before the financial crisis. Also, the market has risen over the last 2-2.5 years with very little correction. Investors see that and continue to believe the trend will just continue and there will be no hiccups. We know from history that markets go through periods that frighten investors and we seem to be overdue for something like that. Valuations are not necessarily inexpensive. However, being on the sidelines has been a mistake in strategy. You need a low interest-rate environment and in this environment, where we have central banks propping up the market and a rising risk appetite and reasonable corporate results, you have a market that has been trending higher. You have to be cautious in your security selection. He tries to roll down to lower volatile stocks in companies where he has real good sense in what they can do in the next 3-5 years.