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

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.

Bonds versus Bond ETFs? Most people are not buying bonds because there is a certain lack of transparency. If you are a bond investor and have $100,000 you want to put in bonds, and that $15,000-$16,000 per bond you are going to be paying 25 to 50 basis points to buy that. You can buy a bond ETF for 15 basis points and it is professionally managed. He would be much more inclined to use ETFs.

ETF to play the market in India? There are several including iShares (XID-T). You have to decide whether you want large or mid-caps.

Keeps a significant amount of US$ and Cdn$ in cash because he writes naked puts. Have used iShares 1-5 YR Ladder Corp Bond (CBO-T) & iShares S&P/TSX Preferred (CPD-T) in the past but now concerned about rising interest rates. The laddered bond portfolio has premium bonds embedded in it. It only has 5 bonds in each of 5 years giving it 25 bonds in total. To get the kind of yield they are getting off it, it is really showing 3%-4% and the only reason they’re getting these kinds of yields is because they have some bonds that they paid a premium price for and there is a capital loss built in. He got rid of almost all of his and switched into the iShares DEX Short Term Bond (XSB-T).

Where do you find the yield that ETFs pay? Go on to the website of the ETF providers. They are pretty up front with what the yields are. It’s just a matter of teaching yourself where to look.

Favourite REIT ETF that pays increasing dividends for the long-term? There is iShares S&P/TSX Capped REIT (XRE-T), BMO Equal Weight REITs Index (ZRE-T) and the Vanguard FTSE Cdn Capped REIT (VRE-T), which probably has lower fees. Really what you have to look at is how much you like RioCan (REI.UN-T) and how much of it you want.