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

What is the principal purpose and reason for the existence of American Depository Receipts (ADRs)? What is the advantage of owning a depository receipt versus simply buying a stock directly? He does not buy the ADRs as he has access to markets around the world. ADRs are there to allow retail investors to participate in a non-US name in the US stock market. It adds to an investor’s ability to buy shares, where they don’t have access to Europe, Asia, etc.

Markets. His view is that we are overvalued in North America. Global equities are less and emerging markets are fairly inexpensive. Generally speaking it is the small to mid-cap stocks that are overvalued. Large caps are fair value, if not a little expensive. North America is definitely priced to perfection. S&P is overvalued by 20%, and this could continue for a while. Rates have hit the bottom and could be going up, but it is just a question of when. Stocks are cheap in emerging markets such as China, India somewhat, Japan, but there are potential headwinds there as well. If he had to pick a region, it would be the US, but he is very sector focused. Technology and healthcare in particular and, in Canada, the energy side would be favourites.

Markets. 2014 has been much better than 2013, when the market was focused on tapering. In 2014 fundamentals remain strong, occupancy and returns remain strong. Interest rates were supposed to go higher in 2014, but they pulled back which was good for REITs. This year any rise in rates won’t be a surprise. People try to direct you to economically sensitive lodging because they can grow cash flow rapidly, but all he looks for is free cash flow above average. Investors should be cautious. Returns will be more normalized for the balance of the year. The sector is no longer undervalued, but rather it is fairly valued. He doesn’t see the sector going lower.

Markets. He bets against the trend in stocks, but in terms of the market when it is really going gang busters, it is often best to just believe in what is happening, and try to profit from it. If he had the opportunity he would like to take some money off the table. Even though he is going to go with the trend, that doesn’t mean he is going to fall in love with the trend. Unfortunately, none of the stocks look like they are going to hit his initial Sell targets. It is going to be much harder for him to find contrarian plays. A few years ago, there were over 350 stocks on his Stock Watch list, and now there are only about 180, of which only about 24 are of real interest.

Tobacco stocks? Has decided that he won’t own tobacco stocks any more. He doesn’t want to own something that kills people. This is a personal choice.

Preferred bank shares in volatile times? The beauty of bank preferreds is that they pay better than cash. They got hit creating a pullback in March 2009, and he bought preferreds in 3 Canadian banks. If you own preferred shares, even if they go down in value, you are effectively clipping a coupon. He is a little down on Canadian banks as he feels they should be paying down their debt loads.

Markets. AA-N will kick off earnings season. For all companies, profit growth going forward is the most important. She thinks earnings will grow over 6%. Earnings should pick up going forward (10%). We are seeing stronger data out of the US, housing starts, manufacturing data. Global economy is stabilizing as well as China. PEs has expanded in the last couple of earnings. We are at the historical medium. She is pretty fully invested. We might get a 5% dip, but a geopolitical risk could push it lower. She is concerned about the middle east. If crude prices rise enough for a recession then it is not good. If inflation rises, then the Fed can’t be as accommodating.

Markets. The summer correction is when all the traders go on holidays July 1^st so it is like a buyers’ strike. Seasonality kicks in. It has felt rather weak over the last few days possibly for this reason. Everyone thinks there is going to be a correction which probably means there won’t be, yet we have had such a good run that we do need to have a correction. He expects a 5-7% pullback over the next 5-7 weeks. He is more fundamental and less technical, but it looks like the market is toppish and rolling over, even though company earnings are strong. Global growth is humming around 4% and North America is recovering nicely from the winter. Interest rates have hit the lows of the last 30 years. It’s hard to impress the bond market. The emergency lending has started to wrap up and rates should go up next spring. Rates will still remain relatively low, however, on a historical basis.

The US housing market is going sideways. There are supply issues. Banks would not lend to many consumers so it was people from other countries going into Florida and buying up properties for cash. Thinks it will go up 5-7% later in the year.

REIT Prospects. REITs got hurt when rates increased a while back. If rates go up again, REITs will certainly be hurt. However, their payout ratios are now lower and they are locking in all this long term funding. So interest rates are becoming less of an issue.

Markets. Target Date funds in the US. You buy a retirement package that matures late in your life. Dropped in 2008 even though it was designed not to. They don’t eliminate volatility, but over the long run they do well. The growth of this sector is fantastic and they are now coming to ETFs. You can buy target date ETFs. 17 basis points cost. A robo-advisor is a program on the Internet that spits out a portfolio when you put in your risk tolerance, etc. There will be a correction at some point. This is when you need your advisor.

REITs are interest rate sensitive. It looks like the Fed consensus is to raise the interest rates around mid-next year (March to June). The market knows this. The economy needs low interest rates right now. He thinks the rise in interest rates when it comes will be little.

Because volatility is right now at all time lows. The cheapest form of insurance is options. A put option on the S&P or TSX will hedge you against a 5%+ decline and cost about 5%. Buy put protection from the indexes. He thinks the correction will be 5-10%, but not 20%.

Markets. Rates: They are looking for lower for longer. The US economy should do better in the second half. Longer data rates should inch higher in the next year. As data from the markets comes in stronger, the Fed should be pushed a little. Jobs data coming out later this week should be mild. There should be no rate adjustment in Canada in the next while and the economy should lag the US in growth. Play a bit defensive, overweight good quality corporations. Get some US dollar exposure. Maintain a short duration portfolio.

Rising Interest Rates – how to play in the short term: You don’t want to get too bearish on bonds too soon. Own a fund that has the ability to own floating rate bonds, rather than own them directly, so they can manage them.