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

Ville de Quebec. 2.3% bond due Dec 4/18. Municipal bonds are basically priced off, provincial bonds. They are much more balanced. You are getting .05% over what you would get with the province. Relatively cheap right now.

Real Return Bonds? Likes these as an asset class. This is actually an adjunct to holding fixed income. Even though there has been a big selloff this year, there is more to come over the next several years. Right now, the bond is yielding about .05% plus whatever inflation is. In the near-term, that is expensive, but looking over the last 50 years, that real return has been closer to 2%-2.5%. Even though there has been a big selloff this year, there is more to come over the next several years. Bond market and government have pushed real rates artificially low, and that is coming off. As tapering comes off, that real rate will continue to rise and these bonds are going to continue to get hammered.

Holding a sizable amount of cash for only 6 months? He would use cashable GIC’s and/or savings accounts as they pay more and there is no market risk and offer a better return. You can get some enhanced rates by going to some of the smaller trust companies that issue GIC’s.

Perpetual preferred shares. Currently yielding around 5%. Hold or take the tax loss? This is an opportune time to take some losses and get them off the books because from a capital preservation standpoint, it is probably going to get worse before it gets better. The ones that are yielding lower are your better quality ones so wouldn’t necessarily target those. He would look at and target the ones that are yielding higher.

Markets. This market has gone up very strongly in the US and has been going up for 3-4 years and people are wondering if it isn’t almost over. If you look back historically, money flows in and out of certain markets. This is important because, where is the ammunition going to come from to keep this market going higher. Since 2008, people have been purchasing bonds and have basically been selling equities until the beginning of this year. This summer, the bond market finally rolled over and is starting to lose money. Extrapolating that forward, the bond market could lose money for a longer period of time if interest rates go up. The equity market has only just started. It is only 1 year out of 5 where we have actually started to have new money come into the equity markets on a cumulative basis. If interest rates went up. 3%-4% or even 2%-3%, then money might flow back into the bond market. There are always short-term political road bumps in the market.

Euro and the Cdn$. Feels that the euro will be more sideways than stronger and the Cdn$ is deemed to be a petro currency, so you have to look at the oil price for that. Feels horizontal drillings has added a headwind to the oil price.

REITs. Index for this is down about 13% year to date whereas the TSX is up 11%. A pretty diverse performance on these groups. REITs have had a number of years with very strong performance. A number of them are trading at discounts to NAV and there are some decent opportunities there. You need to be careful about what type, you are investing in and you want to be looking for those that have above average organic growth prospects.

Markets. Moving into year end, she is a little bit cautious. It seems that the market has had a good run here and wants to move higher but looking at Q3, earnings momentum was relatively muted and the top line strength was relatively muted. She is looking for stronger top line growth in order to continue to drive the market higher. You need to look forward to the 1^st quarter. You are going to get into the debt ceiling debate and the US budget debate and these have the ability to impact confidence, hiring and spending intentions out of the US compared to what we saw back in November.

Interest Rates. In spite of the fact that it is expected the Fed will start to taper in early 2014, she feels it will be some time before we start to see interest rates go up. There will be a gradual increase in 10 year bond yields over the next year but will be relatively modest. If you are focused on dividend stocks that have the ability to grow their dividends, she is most comfortable that most of the stocks will be able to grow their dividends at a rate that will more than offset that interest-rate sensitivity.

Banks. Still likes banks as a group. Had a pretty nice run over the last couple of months after been relatively stagnant from the 1^st part of the year. Bank multiples have gone up by about 10X forward earnings to about 11X, but still not bad in terms of the historical context. As a group, they have had relatively strong earnings growth. Expects next year will be a relatively tough retail environment but pressure on net interest margins will start to bottom and turn the other way. Interest rates going up is actually a positive for the banks.

Dividend Stocks. You have to look at the stocks individually. Some are fully valued and will have to grow into their valuation, which he is fairly confident they will. He looks for growth and earnings of 5%-10%, and in a year or two, he thinks they will grow back into valuation. Continues to be fully invested and is carrying about 2% cash. In Canada there are basically 3 groups that make up the market. Financials, energy and materials. Materials are having a tough time because commodity prices are low and don’t appear to be turning any time soon. Energy stocks are good value. Financials have done very well. For investors looking at dividend stocks, you want a current yield but you want to make sure it is going to rise. Don’t grab the ones with very high yields, because the likelihood, those yields are high for a reason. Look for yields of 4%-5% and build your portfolio on that and look for dividend growth of 5%-10%.

What are the key factors a company should look at when deciding what size of dividend to have and do those factors vary differently between companies in different economic sectors? Dividends definitely differ between sectors. If a sector such as banks, utilities or pipelines is less volatile, the likelihood is that the company can pay out a better percentage of their earnings in income. If they are looking for more growth or are in a more volatile sector, the likelihood of high payout is limited. The first thing he looks at is cash flow and if it is increasing. It is likely that if they have good increasing free cash flow, they will increase their dividend as well.

Markets. There is more uncertainty regarding interest rates and the sensitivity of REITs. Over the last few months, sectors like this have corrected a fair bit on reaction to what the fed is saying along with economic indicators. In September, when the Fed decided not to taper back its bond purchases, the REITs rallied. Since that time, we have sort of been in a position where investors are wondering exactly what the Fed is going to do, when they are going to taper back their bond purchases and the effect it is going to have on interest rates. More important to him is when the overnight rate is raised and he doesn’t anticipate this is going to occurs until 2015. Doesn’t think that the employment indicators or inflation are going to allow the Fed to increase interest rate anytime soon. Housing market is also on the FED’s mind and any material increase in interest-rate is going to affect the housing recovery in the US. He is focused on the sustainable capital structures and REITs that are going to be able to generate internally generated free cash flow growth going into the future without a reliance on the capital market.

Markets. The US market is more fairly valued. There are pockets that give her concern. Has been avoiding yield plays because they are overvalued. You have to be pretty focused and pick your spots. Concentrated, managed portfolios will allow investors to do better. It is a nice problem to have when some of your stocks are hitting their target. A lot of mutual funds have 60-100 holdings and she wonders how they can manage that many. She is a bottom up, value investor and can only focus attention on so many. Otherwise buy an ETF. She is 55% in US holdings right now.

Markets. A rising bullion tide will not raise all boats. There is seasonality from June till Dec. and this year it has gone down the whole time. He is nervous. Is the next leg down? You need to own a high quality investment. The shakeout from the last two years is that it is a really difficult business. It is being shaken out right now as to who really makes money in the gold business. Copper really hasn’t gone down. It is not in a bear market. The market is tight. There are a few projects coming on. Copper is the one place he would like to be. Demand will converge with supply in the next few years. Europe has bottomed so next year will be higher; China is growing at 7%, so for the first time we have synchronized global growth. Oil is first, copper is second to respond.