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

(ETFs versus equities in a TFSA?) He tends to buy dividend paying stocks for TFSA’s as he slowly builds a portfolio over time and these are securities that are going to be held for a long time. In a TFSA you want the maximum capital appreciation and the most income you can bring in from a dividend. Because of this, he tends to buy stocks. You can use ETFs. If he were buying ETFs, he would probably tend to buy dividend focused ones.

Markets. TSX is almost 400 points away from its all-time high set in 2008. This is certainly good. We have been recovering for a long time and he sees no reason why it can’t keep going. Market may consolidate here as it pushes through this level. Things remain quite supportive for the markets to continue higher. There are some divergences and rotation underneath the surface. Leaders from last year are selling off at the moment. Things that underperformed a bit last year are starting to outperform again. A lot of this has to do with what is happening in the interest-rate market and with yield. Yields shot up last year when Bernanke talked about eventually tapering, but they over did it in a short-term so we are now getting some of that back. Fixed income is less attractive. Valuations are in a fair range, certainly not overly cheap, but nowhere near bubble territory either.

Energy. Still seeing India and China as the net incremental buyers of energy and that is where growth is coming from. Developed markets are growing, albeit at a very small pace, because developed markets are more efficient in how we use energy, whether natural gas, oil, gasoline or hydro. Emerging markets are growing mostly through automotive needs through fuel. Thinks there is about a $10 premium in world oil markets. Brent oil is trading at $110 and should be trading at about $100. WTI is trading at $104+ and should be closer to $95 or so. Most of the $10 difference is due to supply constraints because of Libya, Sudan, Nigeria, Iraq and Iran. The noise around the Ukraine gives the traders something to talk about and trade around, but really we are seeing supply of the market from those political hotspots. Energy index this year is up about 12%-13%. The index could probably do 20% this year, so he still sees 5%-10% upside in energy stocks. Expects a little neutrality in the sector through the summer, but thinks the bull market in Canada will commence again in the fall to the end of the year.

Natural Gas. Bullish on natural gas. Inventories in North America are below a 5-year average. This poises the market for $4.50 gas, probably for most of this year. Looking at the capacity for natural gas in the US, it’s almost 4 trillion cubic feet of capacity. Currently we have about 850 billion cubic ft.³ in storage so we need to inject almost 3 trillion cubic feet until October, when things start to get cold again. Currently gas producers are using more than we are using from a demand standpoint, but the question is, will we inject enough gas through May-September to get us to full storage. He doesn’t think so.

Markets. The consensus estimates for the S&P 500, which is really the index that everybody should be talking about, is $120 a share in earnings. That would be looking for 13%-15% earnings growth this year, which seems a little bit buoyant and will probably come down over time. If that’s the case, and stocks follow earnings, we could have a pretty good year. He thinks the recovery on the stock market from 2009 is 100% based on earnings and was just catch up, getting us back to a more reasonable valuation multiple, which was somewhere between 15 and 17 times earnings. We have never been in an environment where interest rates have been this low and, once again, they have told us there is no threat of inflation or interest rates going up. That makes stocks worth more. Since 1961, when forward earnings of the S&P 500 were between 15 and 17 times, the next 5 years gives you almost a 10% compound return.

Stock Selection. To find bargains, he looks at the S&P 500 and screens for companies that are trading at less than 15X earnings. US banks keep coming up left and right. As a value investor, why pay high price for the future. The future is uncertain, so pay a cheap price for today’s earnings. Over time, all good companies revert back to the mean, which are 15-17 times earnings.

Markets. The flat market on the Dow and the S&P 500 is disguising an ongoing correction beneath the surface. There is a rotation out of the small caps. The Russell 2000 is breaking down. You are seeing highfliers being sold to some extent and generally moving into more conservative value oriented big caps. He sees any pullback we get as being fairly modest. Possibly a 4%-5% correction in Toronto, Dow and S&P 500. However, NASDAQ had a 6% correction from 4350 down to 4000 and has since recovered. If the stock markets perceive there is a sustainable increase in economic growth, then the rise in rates will not get impacted that much.

Inflation. He sees inflation edging up. Looking at the components of the US’s CPI, housing and related rents equivalents is 41% indicating housing is going up. Some indexes in the food area are up 9%-10% since the start of the year and they run about 14% of the CPI. Looking at the breakdown of the underlying components of the CPI, there are medical expenses which are 6% and moving up fairly rapidly.

Markets. Doesn’t feel valuations we are seeing are justified. There are prognosticators out there that say we are just in the middle of the beginning of the cycle, but the difficulty he has when screening the 4,000 stocks he looks at, is that a lot of companies are getting away with buying back shares to pump up their earnings and where organic growth on the revenue side is minimal at best. Similar to what GDP growth is, so-so in the US and nonexistent in Europe. Having to deal with foreign exchange headwinds because all the money that went into emerging markets last year and coming back to the US now have sent the US markets very high this year. But now we are starting to see the Russell 2000 beginning to correct and we are getting more losers than winners on a daily basis. This could be the beginning of a nice summertime correction.

Economy. Cautiously optimistic on the global economy. Looking for global growth of somewhere in the vicinity of 3.6%-3.8%, largely led from US, UK along with the euro zone doing a little better. Offsetting this he sees China slowing somewhat. Backdrop to this is that the US fiscal situation is better and the fiscal drag in 2013 was somewhere at about $300 billion-$325 billion, between 0.6% and 0.9% of GDP. We can automatically get that lift back in 2014 and if US growth was running at about 2% in 2013, he expects it will be about 2.6%-3% in 2014. Also, corporate America is in a better frame of mind. Corporate America, CapX and hiring are going to be stronger and as well, consumers are in a better frame of mind and government spending, particularly at the state and local level, are going to be a bit of a tailwind.

Markets. Generally, in a slow growth environment, you would favour sectors such as consumer discretionary and to some extent technology and possibly energy. He is downplaying the rate cyclical sectors such as utilities, consumer staples and somewhat telecoms.

Should profits be taken on Canadian bank holdings and Buy back later in the year? Earnings season is coming up and it will be a fairly mediocre. They are struggling a little with the extended Canadian consumer and housing. Retail banks will have some modest growth of around 5%-7%. Capital markets wealth will be quite strong. Thinks banks will be steady earners as we go forward. Doesn’t see anything to upset the apple cart so would continue holding.

Markets. Has been about 25% invested in the US for quite a while and he is sticking with this. This is really where the growth is coming from. Recovery seems very real. Doesn’t see any horrific clouds on the horizon and this is where he wants to be, more so than anywhere else. There are opportunities in Europe, but we have to keep in mind the geopolitics that are going on vis-à-vis Mr. Putin. He is more concerned about the Canadian market. Still likes the Canadian banks and the Canadian oil, but there has been a hollowing out of manufacturing.

Generation of regular income using weekly options? His 1^st recommendation would be not to do it. He doesn’t know anyone that is doing weekly options. Institutions do them on a monthly basis and he himself is doing them 4 to 6 months out. The problem you are going to have is that you have to deal with market makers and take a spread off of them. You also have transaction costs, etc.

Dividend harvesters. Usually the stock is in the money and it’s taken by the X date, but other stocks that have dividends don’t get taken. Why do people wait longer to exercise their options? Sometimes, as a trader, you get surprised that the option is not going to be exercised for a couple of months, and all of a sudden, somebody decides to exercise it. That can be because of dividend harvesting. You always have to make sure on these things that when you get to expiry dates, a lot of people, when they see that the option date and expiry date are very close to each other, but not likely to match up; can get surprised and find they have been exercised. He always closes out his position and doesn’t care about the extra transaction costs.