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

Markets. Europeans are worried about major deflation. The ECB was the buyer of last resort for EU bonds and they finally came in. It makes no sense that yields are lower than US treasury. There are major issues in Spain with youth unemployment. You want US exposure with a currency hedge. He does not want exposure to the Euro right now. Rails have earnings driving stock prices so they are not really too expensive. Oil by rail probably has a couple more years to go. Pipelines are what he thinks we need, however. He can’t buy new highs in rails here. The trend is probably not over, even if stretched, though.

Markets. Kind of a perfect storm. Sentiment is at its best in years. The greatest frustration was that fundamentals were sound, but we were in an environment where buyers didn’t give a damn, but now things have changed. We are seeing US and Canadians coming back. Falling Loonie, high Nat Gas price and best environment in 10 years, and narrowing in differential are all factors for the energy sector. Last winter was one of the coldest on record and we had one of the largest Nat Gas withdrawals ever. You would think production would be up, but it are actually down. If we have a very cool summer (Florida, Texas, etc.) that would be a risk to Nat Gas.

Educational Segment. Alternative ETFs – how to mitigate downside risk with lower volatility ETFs. Most money is in cap-weighted index ETFs. Cash flow or dividends impact weighting in Fundamental index ETFs. Minimum volatility indexing looks how stocks perform over time, how they react with other stocks in the same universe and puts them together to reduce risk. Charts of Fundamental Index, Minimum Volatility Index and Market Cap weighted Index ETFs by Black Rock. Each one performs best in different market phases. But people are putting them together now.

Developed economies/markets versus Emerging economies/markets. Continues to have a bias towards developed economies, where he feels growth is stabilized and where he expects to see growth accelerate, which should be beneficial for dividend paying stocks, in particular stocks in the financial sector. Favours, industrial stocks and even some of the consumer stocks. In developed markets, the deleveraging process has encompassed government, households and financial institutions. Consumer balance sheets in the US have never looked better. In Canada, we are still somewhat highly leveraged, so he favours US consumer oriented stocks, and likes having a little bit of US exposure in his Canadian funds, which gives it good diversification. Companies have done a great job of reducing corporate debt, so if you look at net debt compared to EBITDA, it has been cut in half in the last 3-4 years. This gives them a lot of room to buy back stocks and continue to increase dividends.

Europe. On stimulus, Europe is opening the taps even more while the US is scaling back. This continues to be an environment where they have a combinative monetary policy. We saw them step into a negative deposit rate, and they are contemplating doing asset backed security purchases, injecting more liquidity into the economy and trying to fund small to medium-sized enterprises, which are critical for the economies of countries like Italy and Spain. As a result, he thinks there is going to be an acceleration of GDP growth, but it is still going to remain somewhat lacklustre, probably 1.5% next year. As you pick up from 1%, he feels there is an opportunity to buy some good European dividend payers that will benefit from that improved growth.

Cdn Banks. Royal (RY-T) would be his top pick, but also likes Toronto Dominion (TD-T). Has a bias towards Canadian banks that have exposure outside of “just Canada”, so they are not solely reliant on domestic banking for revenue and earnings growth. However he really likes US banks versus Canadian. Feels the Canadian consumer remains high leveraged, meaning there will be a deceleration in personal loan growth, which negatively impairs a bank’s ability to sustain double-digit ROE’s going forward. Conversely, in the US, he feels there is going to be an acceleration of corporate and personal loan growth that will support ROE expansion, especially after going through several years of very onerous and stringent regulatory environment that has really focused them on managing their domestic banking franchises and expanding them profitably.

REITs. He likes the apartment sector better than the retail and office sectors. They have access to cheap financing so they are borrowing at very low rates. A lot of apartment REITs are well-capitalized, and is a coveted institutional asset class. If the economy tanks, demand for low income housing increases. Also, have shorter lease terms, which is a great way to capture inflation.

Markets. Euphoria in the market is not good for anyone, but he thinks there is enough worry and skepticism right now that this is not a problem. The memories of 2008-2009 are still unbelievably with investors. This whole move in the last 4-5 weeks has been greeted with a lot of skepticism, and people are looking for the next correction. Feels the retail investors are not fully invested, but institutional money is fully invested, as they have had to turn to the equity markets because of the rates they are getting in their pension funds, etc.

Markets. There is a global savings glut where more money is chasing fewer bonds, US slow down, Low EU inflation and many more factors contribute to this. We should see a re-acceleration in growth in the second half of this year. Invest in investment grade 4-5 year corporate bonds. Stick with quality. He was not banking on the US slowing earlier this year. US deficit has improved rapidly and now there is a net shortage of government bonds. People thought the commodity market would be flat this year, but it is up and holding its own.

Preferred perpetual in a rising interest rate environment. The features and options are in the hands of the issuer. They perform badly in a rising interest rate environment and you should not hold them. Prefers reset varieties.

Bond Ladder. Disciplined way to protect capital and earn a decent return. Staggered maturities. Divide into partials and invest in increasing maturity durations and then renew as each year matures.

Convertible bonds give you the right to convert into a common share at a pre-determined price, but pay interest until converted. You have to know the underlying company before you buy them. They are expensive now and often yield less than the underlying portfolio.

Laddered GICs: He is in favour of them if you have limited access to bonds. You don’t pay a premium to buy them like corporate bonds. They are safe to $120,000 up to 5 years due to insurance (so use 5 year ladders). They are for people who are not willing to put their capital at risk. It is a dangerous time to reach for yield right now with corporate bonds. You get the most principle risk.

GICs: Illiquid – you can’t trade them. It comes down to relative yield. Prefers 1 to 10 year ladder. There is a place for them and they are safe.

Reliance LP 4.574% maturing March 15/17. (Top Pick May 6/13, Up 4.41%)