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

Gold. Going back 4 or 5 decades, every $1 that a gold company invested, they got back about $105. In the year 2000, for the same $1 invested they got back $1. Every gold stock that you want to look at and you chart it against bullion over a 1, 3 or 5 year period, there is only one gold stock that has outperformed bullion. Buying gold stocks makes absolutely no sense.

REIT ETFs. Was the selloff overdone and is there a buying opportunity here? Absolutely. There are 2 REIT ETFs. iShares S&P/TSX Capped REIT (XRE-T) and BMO Equal Weight REITs Index (ZRE-T). He much prefers the equal weight ETFs. REITs had a bad rap. Governments have not been raising rates. The 10 year U.S. Treasury bumped up a little bit, which are every dividend paying stock in Canada. A rising rate tells us the economy is improving. Money is still really, really cheap. He would be a buyer of the ZRE-T for sure and it has a 5.3% distribution.

Markets. Doesn’t feel that there is a bubble other than perhaps social media stocks and the high flying ones. In over all terms, doesn’t think we have the conditions that you normally see with a bubble such as new entrants to the market and huge use of leverage. Valuation rates are still pretty reasonable. Expects there will be a pullback at some point, but isn’t going to try to anticipate it. He is going to stay invested and enjoy the benefits of the rising market as long as it lasts and be prepared for that pull back. Getting a little more difficult to find those 12-13 times earnings companies, but there are companies at 15-16 times that are growing better than the market, which he will continue holding.

Limited partnerships. Should they be held inside or outside of registered account? If you have funds, both in and outside of your RRSP that you are investing, you should be holding limited partnerships, particularly US ones, outside of the RRSP. They face a very hefty withholding tax of about 40%, which you lose if you are holding it within a registered vehicle, but you don’t lose if holding it within the non-registered vehicles as you reclaim it from the foreign tax credit.

Markets. Dividends will still grow but the multiple expansion will be hard to come by and earnings growth will not be double digit. Calling for a correction is difficult. Timing is tough. You need some trigger. It is anyone’s predictions going forward. In the US almost everything is up but earnings growth has been single digit. He is content but cautious. The market does not fall in uniform and some will fall in excess so in a correction he goes for those that fall more than average.

Markets. He is finding value in a lot of industrial, cyclical type names. His portfolio right now is trading at under 12X earnings. Finding good value in Canadian energy, small caps and stocks that are trading at under 10X earnings, much less than the TSX Composite multiple, which is around 14 or 15 times. He feels that is a fair value, so anything lower than that he is happy to have a look at. These are great businesses, ones that have a higher return on equity than the index with better growth projections than the index. There is still good value out there. Doesn’t see a reason not to be in equities at this point. There are very low bond yields, low interest rates and very little inflation in the short/medium term.

Markets. Iraq’s deal with Iran reminded him of the excitement of when they killed Bin Laden. The then market high was the high for the next year. You had some profit taking occur at that time. Don’t sell everything but you might want to think about it if today is a weak closing. Sometimes physiological numbers are important but normally it matters for a day or two. If you were looking for an excuse to take profits in something, this may be the day. TSX is up only 2% in US$ terms, vs. US indices up in the 20’s Money is going into the bigger, global, more diversified companies.

Educational Segment. Some of the banks say if you drop the amount paid on excess reserves, people could get charged for deposits. The Fed stimulated with Buying, Operation Twist and now they are Tapering that program in 2014. There is a close correlation between fed balance sheet and the equity markets. Thinks they will kick the can again on the debt ceiling early next year. Thinks there will be a 5-10% pullback around that time.

Markets. Market is frothy and a correction could be coming. There is no bubble. He has cash on the sidelines (<10%) to invest. The US is slowly recovering and Europe is coming off a bottom, Canada has muted growth.

Large US Banks. BAC, MS, Wells Fargo, which one? He prefers the regional banks in the US. The large banks have large capital market divisions and he is not interested in that because they make their money in the bond area. Prefers regional banks that benefit from loan growth especially in the Real Estate area. Likes Bank United BKU-N following their acquisition of a New York area bank. 2.6% yield. It is growing faster than the others ones and the dividend will grow more quickly too.

Federal Reserve. It appears that they want to end tapering. The problem is, as soon as that happens, there is a great shoot up of anticipation of higher bond yields. They really want to keep short-term rates for the next 2 years and possibly only to as far as 2017 as close to zero as possible. They want to keep the housing and automobile businesses going, both of which employ lots of blue collar workers.

Markets. Valuations on stocks relative to Price Earnings, if you look back from World War II to the high, excluding the blip in 2000, the range was 7 to 21 times. Last Friday we were about 14.5X forward earnings in Toronto and close to 15X in the S&P 500. Slightly overvalued, but not particularly excessively. Has reduced his cash to about 10%. There are some stocks he would like to buy, but they are at the top of their Bollinger band and he usually likes to buy them at the bottom.

Inflation. For now, inflation seems quite tame. If you take a look at the components of the CPI in the US, the service area runs about 2.4% with a few components running as high as 5%, mainly hospital care. On manufacturing, consumers’ goods side, you are running about 1.1%-1.2% negative year end, some components are lower. Inflation appears to be contained. Back in the 50s, you had inflation running at 1%-3%. After the Korean War, you had a PE ratio is low as 7. At the end of the decade, it rose to 21, but inflation stayed contained. You had the corporate earnings go up a bit in the mid-decade, but by the end it was back to where they were in 1952.

Gold. How do you buy Gold? Traditionally, he has gone through the Bank of Nova Scotia (BNS-T) or with people who want private deals of selling their gold bars. If you are going to buy bullion in an equity security, he would recommend Central Funds of Canada (CEF.A-T) which is roughly 50% gold bullion and 50% silver. With inflation being contained for a while and low interest rates, it is probably not going anywhere fast. Gold has been making a base and he is cautiously optimistic that it will be maintained. The best price he could see in the next 12 months is between $1300 and $1500. There is no reason to own it now.

Economy. Expects the tapering will be in the new year, most likely March, but maybe January. US tax revenues are growing and borrowing is becoming less. As the economy is showing signs of continuing improvement, $80 billion a month can be started to be pared back a little. Canada is weaker. We have been sitting for 2 years without an interest-rate hike so there will be one, but it is just a matter of when. He is expecting late 2014 or 2015. He is advising clients to pare back on their bonds and ETFs is he expects pressure to continue for the next 2 years.