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

Natural Gas. A little optimistic, but feels there is a very big overhang as a result of drilling for LNG exports. You have some big players that need to prove out a lot of natural gas to get their export licenses for LNG. Thinks there is going to be a big increase in production in Canada, which could put a lid on price increases.

Economy. This time last year, the US federal government said they were going to stop printing money because they were at $3 trillion and they were going to stop their QE. All year long we were expecting them to stop and it is now at $4 trillion. They are now saying that at this time next year they will be at $4.9 trillion. They are going to taper back a little bit of the siphoning of the bonds that they have been going through. They are trying to start the process which will create other issues, but if you really look at their balance sheet their assets are over $50 billion and are now sitting on over $4 trillion of debt. As they start to taper off, the value of that debt is going to devalue. They face a very tricky situation in terms of how do they unwind the process and then unwind all of those securities. He definitely expects we will have higher interest rates to prepare for that scenario. Economy seems to be improving a bit, but some of those numbers are negative/positive. They are going to have to stop buying. The Chinese have said they are not going to be buying any more treasuries and a lot of people are walking away from the treasury market. What concerns him is that they are pulling $5 billion a month off the mortgage backed securities, which will affect US municipal pension funds. The key risk is much higher interest rates and they might lose control of the situation at some point. Thinks this is still very bullish. Gold is being siphoned off to Asia and the Middle East, etc.

Markets. Feels you still have to keep an eye on the precious metals. Gold and silver have to be a component of the portfolio. He particularly likes utilities as well. Natural gas and oil prices are looking very good. All of these are inflationary pressures that are coming in. The setup for stagflation is still in place. The only caution would be on REITs because they are interest-rate sensitive.

Markets. People were looking for a reason for the market to continue because it had been strong. They are moving into the large cap because of more liquidity. Then it is trickling down the small caps. After a big run up like we have had it could be volatile over the next year. Watch that your picks don’t have a big PE. He is bottom up and finds there is good value is some technology companies. Dollar came down and so some lumber companies moved up.

Economy. There doesn’t seem to be any alternative to stocks. Will probably see higher interest rates, which will be very good for financial services. US is sitting with about $2.4 trillion in reserves in the banking system. Normally $1 in reserves is expected to generate about $70 of economic activity over time. Current reserves have been delivering roughly $1.4 of economic activity for every $1 in reserves. This means there is a huge amount of money if the economy starts to move and consumers start to get more confident. This could cause an almost tsunamic effect to the US economy in the longer-term, and maybe it will turn out that the US equity markets correctly predicted where things were going. If so, then Canada will be even better next year because they have to play catch-up to the US. He likes the financials because of this. The export sectors in Canada are going to look interesting. He is not as comfortable with the commodity base as there is no inflation in the system. Gold will be a tough one. Oil will be okay, but not great, and you will probably be better off in other sectors.

Option premiums. If we get more retail investors back in the market, the implied options volatility will start to pick up and option premiums will start to rise a little. They have been low for a long time and he wouldn’t be surprised to see that change next year. When premiums rise, that is when option writing strategies become particularly attractive, and he is looking at Index Options, specifically. This is the one trend he would look for next year.

Markets. The Investment industry has a tendency to analyze everything Ad nauseum. When an event does happen, it is basically a non-event because we have so many opinions of what is going to happen. Where we get hurt is the event that we don’t know what is coming. If the market weakens because of the Fed tapering, use this as a buying opportunity. He is very bullish on global economies.

Markets. We are in a new secular bull market. There is always room for a correction but that is a few months away (10-20% correction). There may be one in later 2014 or early 2015. A second year presidential year tends to be a little softer. In 2009 there was a trough and he finds they happen every 5 years, so that brings us to 2014. Then markets have room to run after that. Any correction will be a very good buying opportunity. He is a big believer in rotation. Some of the old leaders are just beginning to roll over. He is trying to buy into emerging leaders.

Markets. REIT Index has traded back down to September lows and that is an opportunity to get back in. We are in the last bit of the stretch of downturn in REITS. Great companies are trading at a large discount to NAV. He got into wines over the last year. He pairs investments with Wine selections.

Markets. People are buying into this Bull Market, but in somewhat of a cowardly fashion. You are seeing a lot of chasing of the low beta, high dividend. That was their first move into the market, and they became very comfortable. A lot of individual investors did well over the last 4 years but we were hit in May with the interest-rate scare. This created some disenchantment with some of their holdings. Historically the next phase will be a shift into the higher beta, more cyclical, more growth oriented and names that do not have dividends. Whenever possible, he is shifting out of the dividend stocks and deploying money into growthier names. As a bull market matures you start to see more dispersion so the S&P 500 will show that in years, 5, 6 and 7, the best performing stocks are quite substantially different than the bottom performing stocks. A passive strategy will still do well, but active portfolio managers, getting into the right leadership in the market, are going to prove very beneficial going forward.

How do you determine which part of your clients assets should be in individual stocks versus ETFs, both in terms of percentage in each within the equity portfolio and also with respect to your particular choices? First of all, it depends on the ETF. He sees a lot of portfolio managers that decide they like a certain sector and believe that sector is going to begin to show emerging leadership and want to be in it so a lot of portfolio managers will allocate money immediately to that sector. In absence of doing full homework on individual names, they’ll use that as a placeholder. When he has that placeholder, he’ll then dig down deeper on those that he wants to own. He’ll also use ETFs for things that he does not particularly have expertise on. Although he uses ETFs, he still prefers individual stocks.

Markets. 30% surveyed think that the Fed could taper this meeting, but he does not think so. Debt ceiling is still a mid-Jan to Feb event. They don’t want to shut down the government again. He thinks actually March is more likely when they talk tapering again. Copper is at a 6 week high but it’s not relatively high right now, considering long term. Not sure if it means anything. Doesn’t think China is taking off in any way. German numbers were good, France was weaker but Europe was better overall. 2014 will be interesting to see if interest rates can go up and the economy still recovers.

Doesn’t think the FED wants to raise rates, but they want to pull back on QE stimulus. Because of lack of buying of bonds the rates will tend to go up a bit.

Nat. Gas. Everybody’s timeframe should be geared to what they are trying to do. If you are a buy and holder, then look at the 3-5 year picture, but if you are short term, then you will be trading every few days.

REITs. XRE-T is the equally weighted ETF. He compares to others. Thinks there is 5% risk on REITs to the downside at the beginning of the year. He will add to his position when it comes back 5%.