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

Economy. Fed up with short-term thinking of quarter by quarter, week by week, what is the Fed going to do. They are fixated on the lack of inflation and he thinks they are looking the wrong way. We have had times in history, most recently the 1950s, when there was low inflation, low interest rates and P/E ratios for the stock market were quite low. We’ve had a great time for stocks from 1952 through to 1960. There have been 3 periods in history when you’ve had 70 years of price stability. First was during the Renaissance, second was the age of enlightenment and the Victorian era was the 3^rd. In between those periods, there were times of war, dislocation and government spending. This current wave started in 1980 with the collapse of inflation and the collapse of interest rates. If this turns out to be only a 50 year cycle, we have 16 years plus of stable prices and low inflation which drives the central bankers crazy. He is looking forward to this and is quite bullish.

Gold. Currently there is a great fear in China that there is going to be a financial collapse of some sort or another. Apparently one of the leading banks floated a fund that lent money to a coal company that was on the verge of bankruptcy. The bank told the fund holders that the bank will not honour the investment. However, there is a story today that China is going to bail out the fund. Secondly, India is going to change their import rules. They had slapped some fairly heavy restrictions on last year. He is bullish on gold.

Markets. A lower Cdn$ will ultimately help the manufacturing sector and hopefully get the economy going a little bit more as well as clear up some of the account deficits that we have. It should support more broadly, corporate profitability and equity markets. The US, being the largest economy in the world, will lead global growth. He’s held the view for the last 2 years that developed market growth would accelerate, while emerging market growth stabilized. This is why he biased most of his portfolios to North American equities, specifically US and Canadian. He is now starting to look outside of North America and focus a little bit on trying to find good, large multinational companies in Europe that have good balance sheets and also pay good dividends and are dividend growers. For the 1^st time in the last 4 years, we really have synchronized growth in developed markets. US, Japan and Europe growing at the same time hasn’t happened for quite a while. This will broadly support an acceleration of global GDP growth, which should support the secular bull market. Although the recovery will be somewhat moderate, looking at total growth, and will take a little more time, this is why you want to own dividend paying stocks.

US Mortgage REITs. Have dropped. Should I get rid of them? This is a tough one. He doesn’t own any of them. Always a little worried that because it was a highly leveraged business model, if there was a little bit of a hiccup they would have to cut dividends. These are REITs that borrow on the short end of the curve and invest in the long end in mortgage backed securities. They typically leverage up 6-7 times. When the spread starts to go against them, they start to lose money and they have to cut the dividends. Historically, the best time to get into these is when they are trading at about 85% of BV. That is about where we are now, so if you own them, you might have to take a little bit more of a haircut on your NAV, but the discount to BV implies that even if they are going to liquidate the whole portfolio, you get a 15%-20% bump on every dollar that you have put into the stock. Because of this, he would continue to Hold.

Markets. Regarding the action in the last couple of days, the catalyst is coming out of Asia with the shadow banking system which is all the borrowing that has been occurring. It is global, but much bigger in Asia. Creating a lot of risk and a lot of instability. What he likes is that it is forcing a lot of Short covering on the gold market so we are starting to see that reverse. US$ is strengthening because there is safety. Gold seems to be shining in here. This whole thing is concerning because it shows how weak the whole system is with regards to credit. The big problem in the whole system is that we have way too much debt. At some point the system has to be cleaned up. Interest rates have to go higher with some loss of control. Credit system is extremely weak and it is a bubble. We have to rebuild the monetary system. The US$ cannot continue to be the reserve currency of the world.

Markets. We are entering a secular bull market. A chart he brought showed 50s and 60s after which we entered a bull market until the tech bubble. We have now broken out of the 2008 financial crash and have now entered a new bull market. It is now about picking good stocks and staying long the market. He wanted to be US last year but now, there is a rotation. The TSE had a tough time last year. Often times if you think of the dips of the Dow theory where you buy last year’s dogs on the Dow you move to the mean. There may be a significant correction later in the year. We are not there yet.

Economies. Quite bullish on developed market equities. If there is something he has to watch, it is what is going on in Asia, specifically China. The biggest risk to the current good equity markets is some kind of credit problem blowing up. Has virtually no developing market exposure and very little commodity exposure. A lot of South American countries’ currencies are quite weak and there are some issues that will need to be addressed. He has been Short Chile, Brazil and Colombia. However, those same things are helpful to develop markets because disinflationary pressure coming from weaker commodity prices is good for the North American consumer and is certainly helping margins overall for businesses.

Markets. This is a great market if you are an active investor. It is the kind of market that by picking your stocks you can really add value, because for the last year, the degree to which stocks behaved the same has been coming down. There are some that are doing very well and some that are doing poorly. By picking your spots, you can really add value above the index. He has seen very clear leadership themes in financials, industrials, healthcare, technology and the consumer. If you have been in those spots over the last 12-14 months, the market has been very, very good. Thinks this continues. We are in a market where the themes have some longevity and we are no longer in the secular bear market that we went through from 2000 to 2012. Corrections are going to be shallower and be seen by people as an opportunity to add to positions.

Utilities. Doesn’t think you will see the same negative influence of interest rates on utilities this year as there was last year. We are probably in a new range of something like 2.8%-3% on a 10 year US bond. However, given the choice, he would prefer to look at pipelines as compared to the straight utilities. Within pipelines he would prefer the midstream energy companies as opposed to the pure pipelines. He likes Keyera (KEY-T), Pembina (PPL-T), Inter-Pipeline (IPL-T) and AltaGas (ALA-T) and he owns all of these. You are going to get more dividend growth from these than in the pure utilities.

Markets. He is constructive on the US. He looks at the macro data and over the last 6-9 months not much has changed. The economic improvements in the US should continue. Believes this is one of the best places in the world to invest. He is selectively interested in companies in Canada. Needs great management teams with international exposure and able to champion the businesses into other parts of the world. We also benefit from the weakness in the Canadian dollar. He is bullish on Canadian energy. He finds that there is an active energy patch with excellent management teams. He is cautious on emerging economies because data does not encourage him that growth will continue.

Canadian Dollar. There are lots of factors with currencies. His view has been very, very negative over the last 6 months. He continues to be bullish for the Canadian dollar relative to the US dollar. Over next 3 months, if Canadian interest rates go up it will cause another leg down with the Canadian dollar.

Markets. Thinks there is still a ways to go. He can see 2014 being as good as 2013 for Canadian investors. Heavens have sort of cleared in the last little while. We may run into some more heavy weather in the fall when the US November elections come, but in the meantime, things are okay. The lower Cdn$ is going to help a lot of our firms, certainly the oil companies, and it may stay down for a while. He is continuing to invest in the US. In his strategy, he is looking more to the growth side rather than the income side, but is still emphasizing the income side to keep those cash flows up.

Coal stocks? You have to recognize that coal was and still is in the US, one of the best sources of energy, particularly for the Hydro industry. We still have an excellent opportunity to ship coke and anthracite coal offshore. Coal itself is a difficult fuel to use, without creating all sorts of nasty side effects. It is a major pollution problem. This is what stands in the way of it continuing to be kind of a mainstay for fuel in the US and Canada. Natural gas is a much better fuel. On a long run basis, coal is probably not going to be in the same position as it was in the past. Long-term prospects are not bright for coal.

Gold. He is on the sidelines as far as gold is concerned. There has to be some sort of a catalyst that gets people interested in gold again. It has to be some kind of indication that we are coming into more inflation or there is some sort of a financial crisis lurking in the background. This has bounced off the bottom but there is no indication that there will be a sustained recovery.

(A Top Pick Jan 25/13. Down 19.09%.) Sprott Gold Bullion Fund Series F – SPR 226. Not totally negative on gold but has only 1% or 2% holdings in portfolios.