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

Many bond picks cannot be purchased through my online broker. Are there other options for purchasing bonds from a retail investor? All of the major investor dealers maintain extensive inventories of bonds. They don’t make them all available to their retail divisions and online brokers because many of them are giant blocks of bonds which are sold to institutions. Talk to the help desk and see if they will look around the market for you or at least make your case a little stronger in order to buy that bond.

Future of Real Return Bonds? After outperforming everything, Real Return Bonds were the worst performing asset category in the fixed income world last year, losing over 13%. If Real Yields go to 2% at some point in time, these bonds are going down another $25 in price. If you buy these today at 1% real, you’ll get that if you hold until maturity. But at the end of the day they are long-term long-duration securities with low coupons. Very vulnerable to a rise in nominal bond yields. The breakeven inflation rate has been steady at 2%, so as nominal yields rise, the real yields rise. Would steer away from these until we have an inflationary environment.

(A Top Pick Oct 18/12. Up 2.4%.) 407 Intl. bonds. 3.87% maturing 11/24/2017. High-quality bonds. Really a utility.

On fixed income, once you pay to acquire these, your tax treatment on the income seems to wipe out most of your potential gain. Is this correct? You are 100% correct. For example, a Bank of Montréal bond would probably have to triple from here to match the after-tax dividend yield on their common shares.

Markets. We are going through a correction which is long overdue. Emerging markets creating this was a bit of an excuse. Doesn’t think this is a serious issue and that it will rectify itself, especially with respect to the US equity markets.

Markets. It will be tough to replicate the fantastic year that 2013 was. There will be fewer headwinds from government cuts or tax increases in both Europe and the US. This augurs well for another year of decent return for equities in 2014. It will be more of a stock picker’s market. There are pockets in the market where things are clearly priced for dramatic improvement. Since 2009, we’ve had one flat year in global equities, which was 2011. 5 out of 6 years have been up. In terms of this global bull market run, we are just in the 5^th or 6^th inning because there is so much slack in northern hemisphere economies. As these economies start off with a very low base to exhibit some growth, this augurs very, very well for confidence risk appetite. Europe had a bit of a bounce back last year but didn’t perform nearly as well as either the US or Japan in local currency terms. It is important never to confuse the outlook for Europe with the outlook for a particular European stock because so many of the better quality stocks in Europe, just as in the case in the US, draw a huge amount of their earnings from outside of their country.

Economy. The real impact on tapering will be the understanding that long-term interest rates in the US will rise. What has almost a perfectly inverse correlation with US long-term rates is emerging market long-term rates. As those rates have come off as well, that has really put a knock onto emerging market equities.

Gold. Right now he has zero exposure. If you are thinking of investing in gold, this is very much a faith based investment while investing in stocks is an unambiguous secular activity. For gold to work as an investment, it really needs the threat of a declining US$, which usually goes hand-in-hand with rising inflation. Right now you have the exact reverse of that.

Dow Theory. One aspect that he was paying attention to that gave a bit of a heads up on last week’s correction was divergence. The theory is that Dow Transport index and the Dow Industrial index should move in step, more or less. Transports kept moving up for the 1^st few weeks of January while Industrials were moving down. This is a divergence. Because they were not moving together, it can give you a sort of heads up that the breadth, total participation of the markets, was not in sync. This could indicate a bit of a correction. Recently the Dow has been moving in a fairly tight range and the 1^st level of support would come in at 1725, which was where it hit yesterday. If this decides to correct further it could go down to 1720 or so. So if 1775 doesn’t hold, he is looking for 1725. Either way, he thinks the correction is short-lived. This shallow pullback presents opportunity. He has raised a little bit of cash and is using it to purchase.

How do you take into account both fundamental and technical analysis when recognizing that some fundamental analysts will Buy a technically broken down stock because they think it’s good value or Sell a technically strong stock because they think it’s overvalued? He doesn’t buy a stock that is technically breaking down but has good fundamentals nor does he buy one that has bad fundamentals but has good technicals. He only buys a stock when they are both agreeing. His Sell bias is a lot more slanted towards the technical side. Basically he will Sell on technicals but will Buy only on both technical and fundamentals.

Markets. Have seen the market come off in the last couple of days. Almost nobody is bearish and this is when accidents can happen. In this environment he is concerned about what is going to go wrong. It is 14% bearish, which it never gets to. As he rolls off of valuations, he will just sit on cash. You can get an international something event and it hits all the markets – everybody hits the exit button at the same time. We had the world growing in 2008 at 5% and now it is at 2% rounding up to 3 to 3-1/2%. In terms of consumer commodities it seems like we will get a tightening.

How do we take advantage of the CAD$ going down? Canadian resource stocks just got a discount in their costs. Mid cap Canadian mining companies are good; and oil and gas just got 10% better. This applies to companies taking commodities out of Canadian soil.

Markets. He is anxious to cut the deficit earlier than he previously forecast to. It is a question of whether the economy will let him do it. We are not creating many jobs right now. Earnings season: 74% beat consensus but did not impact the market much. Companies that did well are buying shares back. The question is what is Apple going to do at the close today. Looks like the FOMC is going to reduce its stimulus by another $10 Billion.

Educational Segment. Why Oil and Platinum tend to do well this time of year. With seasonal trades you want to look at three things.

1. The time for the seasonality to occur. For energy it is from January until May. Works 85% of the time with average return 11%.

2. Technicals. Energy index just broke to a 2 year high last week.

3. The Reason: It is cold outside and winter is when most of the drilling occurs in oil exploration.

Markets. We seem to fear emerging markets every once in a while. Any time you have your complacency punctured, people get nervous and start looking over their shoulders. He is betting that the current conditions are a much needed correction. From the high, the S&P 500 was only down about 3.2% as of last Friday and the TSX was down only about 0.7%. Worst-case he sees is 10% to about $1,665.