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

Economy. Expecting GDP growth in the US to be 3% plus this year. He is still into cyclical stocks, particularly US ones. Expecting to see some increase in consumer spending. However, retail results for the companies that have reported lately have not been very encouraging, but thinks this will pick up later in the year. His average equity allocation right now would be about 28% US and wouldn’t be surprised to see it go up to about 35% by year end. The very bad weather, both in Canada in the US certainly affected retail sales in the last 10 days of the year, which will affect quarterly results. However, for manufacturers and durables, they were pretty strong. Expect earnings will come in as expected.

Industrial sector stocks? This sector suffered greatly during the recession both in Canada and the US. We are now seeing a return to North American manufacturing. He is playing this through autos and auto parts such as General Motors (GM-N), Magna (MG-T), which he feels are industrial companies that can do pretty well. You have to recognize that the reason those manufacturing jobs were lost was because of low wage competition, chiefly from Asia, but also from Mexico. Most of those jobs will never come back. The glory days of North American manufacturing may never return.

Energy. Many people focus on West Texas Intermediate or Brent, but there are many other focuses we should be looking at in the Canadian oil/gas network that makes a big difference on big change for some of the companies involved. He likes to look at Canadian prices (Edmonton par price), which should be looked at carefully. On natural gas, we should be looking more carefully at Canadian AECO "C" prices. Within that, there are subsets of other prices in the whole complex. These setups are very interesting investable trends. This is one of the times when we have the most amount of freezing off of natural gas wells, so the supply has been taken down. Also, there is the weather demand coming at the same time. Both of these forces are driving natural gas to current levels. Looking out over the spring and summer, we are going to be driven more and more towards investable levels, rather than these peak levels.

Markets. US markets were incredible last year. Historically, when they go up that much, there is a 75%-80% probability they go up double digits again the following year. In Canada, it’s a different ballgame. Cdn$ has been getting hit again, real estate seems really high and banks are really high so we could be in for some skittish times. There have been warnings about an interest-rate increase. He has more of his portfolio in the US than he has ever had before. November/December are his major Buy times, but he only bought one stock last year, partially because most of the tax loss selling was done in the 2-3 previous years. January he is still ready to buy, and even into February, but after that it is pretty rare that he buys until the end of the year. His portfolio was up 49% last year, giving him a five-year annualized return of 33.5%. One caveat going forward. There are 20 stocks in the portfolio with 15 up and only 5 are down. If 5 were up and 15 were down, that would bode better for the future. His 10 year average return is 12%.

How do you recognize aggressive accounting? Sometimes there are rumours that a company is being overly aggressive. Sometimes he’ll look at financial statements and they’ll just be way too complex. When he finds that things are overly complex, that means it is easier to hide aggressive accounting. There is no clear cut rule.

Markets. The consensus is that we are overbought and waiting for a pullback. US was one of the strongest markets globally and Japan was the only market that was stronger. A 5%-8% pullback would not be surprising, but we have our season coming up now where money flows into equities. Earnings season coming up will be very important to see the views of corporations and if they moderate earnings guidance going forward. Has been fairly cautious, so she is not really expecting any big downward revision. Longer-term still bullish on equities and would use this as an opportunity to add exposure. Canadian market has lagged the US. It was only up 13% last year, versus the US at 32% plus. She wants to be exposed to the US market in 2014 and expects it may once again outperform the Canadian market marginally.

Markets. Earnings need to show us something in the next several weeks for markets to go higher. Some companies are seeing earnings contract and others are trying to over perform. E.g. Valiant Pharma went up 12% today after their investor day. Likes consumer discretionary more than staples. Also, late cyclicals: energy, industrials, tech, financials and healthcare. He goes to the US when you don’t have enough choice in a sector in Canada. Likes US banks more than Canadian.

Markets. Canada is independent of the US for interest rates, but Canada may need to raise rates. But he thinks BOC will sit on the side lines unless the economy really picks up or the FED in the US raises interest rates. The exchange rate is big. It raised your US return in the markets closer to 41%.

Educational Segment. Diversification. Who would have known last year that the S&P would have gone up 32%. Emerging markets didn’t do well last year. The US market did really well. High yield bonds had a good year. The total world, according to VT-N ETF was 21%. Canadian REITs were negative. We should consider more emerging market exposure and less US due to multiples in those markets.

Markets. Thinks rates can’t go higher than 3.25% (10 year US) and could even go down a little. The PE going higher on the S&P is not so good because return on the S&P are multiple expansion, rather than increase earnings. He would prefer better earnings and revenue. He is modestly bearish on the Loonie. Canadian economy is weaker than the US right now. We are more dependent on the global economic story.

Expects moderately higher 10 year rates. The majority of the near term rise has occurred. Fixed income is the anchor in your portfolio. It only takes 1 bad event in the middle east, oil shoots up and that hurts the US investor. Use the fixed income portion to protect the rest of the portfolio.

Amount of Fixed Income in Retirement. Typically in retirement you have more fixed income in your portfolio. You should constantly rebalance since your fixed income investments probably don’t have a lot of upside, unlike the equities. 70% fixed to 30% equities is common in retirement. Anything north of 80% would typically be too much.

Preferred Shares in a Financial Institution. They have a role to play. They are not all created equal. Perpetual bonds react badly to rising interest rates. Dividend tax credit enhances their returns so don’t put them in a registered account. Without that tax break, bonds would be better in the registered account.

If in early stages of retirement, for 2014, he would balance money more equally between fixed income and equities. Thinks equities will have a better year.

It is hard to get anything near par in the high yield bond market. Money is still accruing in bond funds. Really good deals get snapped up by institutional investors. You might look at REIT paper or the energy space.