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

Locking in Gains. On stocks that are really hitting your position and still have a ways to go, you can sell Calls on those. When people are as bullish as they are right now, the premiums are getting a whole lot better and you oblige yourself to Sell, maybe 4%-5% higher in the next few months, get a 2^nd stream of income like a dividend and keep doing that.

REITs. Despite the tough slogging they’ve had over the last little while, he thinks that the funds from operations per unit as a group grow by about 5.5% this quarter versus 2.7% for their historical average. Given fears of climbing yields and given how crowded the sector got, you want to be really selective on the names you buy. If you are going to buy a REIT right now, you want it to have a real low valuation, above average organic growth, real low leverage and a real low payout ratio so they can boost their dividend.

Markets. TSX appears to be undervalued compared to the S&P 500. It has been carried more by financials and some energy names, but certainly not by the broad swath you see in the Canadian market. You would think that if we had a robust global picture, the TSX should be back up and past its previous highs like the S&P was.

Gold. He is a bit more sanguine about whether this is interest-rate sensitive or not. Historically, it reacts much more to currency. He would tend to watch the US$ and other currencies. One thing that is interesting is that it hit a low this year at about $1200 and if it breaks that low, it will give you a lower low. You want to see it get above $1390. Feels the producers offer a bit better risk/reward upside.

Oil. You want it to hold at $90 to bring some buyers in. You would want to see, if there was some global growth going on, that we have some upside momentum and it is not just in a trading range. If it doesn’t hold $90, there are some issues there.

Markets. (Gauges global growth using the Global Purchasing Managers Index.) If global growth is picking up, then he feels a lot more comfortable in investing in certain sectors and getting exposure to certain companies. He is most constructive on the US economy and the gradual improvement seen in the last 3-4 years. This represents the best risk-adjusted returns for equity income investors. The Fed is saying that they are going to maintain a dual mandate of keeping interest rates relatively low, trying to engender an improvement in employment, while also keeping an eye on inflation. Feels that rates will gradually go up and the Fed will eventually taper. The timing while uncertain indicates the underlying economy is improving. This is generally a good sign for equity investors.

REITs. To the extent that the bond market tries to anticipate what is going to happen with longer-term yields, this will create some noise within the REIT sector. While the sector is deemed to be interest sensitive, a lot of these REITs carry a significant amount of debt on their balance sheets. Refinancing risk is relatively low and balance sheets have improved tremendously. This could present a pretty compelling buying opportunity. This is an excellent source of income. In some cases, you can get mid-to high single digit yields that you have a fairly high degree of confidence in looking out 3, 4, 5 years. Also, real estate usually appreciates in value, especially in an inflationary environment.

Which Canadian REIT would be affected the least by a rising interest rate environment? Generally, if rates are going up, it is a sign that you have inflation, so you want to gravitate towards REITs that have a shorter lease term. This is why he tends to like some of the multi residential/apartment REITs in Canada. A couple of his favourites would be Interent (?) or Boardwalk (BEI.UN-T) where you have the ability to increase rents substantially and about 35%-40% of your portfolio is turning over and you can get your cash back that much quicker. Also, there is Tricon Capital (TCN-T).

Interest Rates. Have been bumping around lately and had been on a bit of a rise again. REITs will maintain their volatility and trade in line with interest rates for a little while longer. Expects volatility will continue into the new year. Right now we are testing the bottom. He has decided that this is a great time to be invested and has gone in and is picking up some great yields. He is finding REITs that are below the value of their properties and is getting a yield so he can wait until the turbulence is past. 2 ways to select what is a high quality REIT. 1.) You can go to larger cap stocks, the ones that are in the index. A lot of those are very safe investments. They are larger but also have a nice balanced diversified portfolio, low debt, good balance sheets and a low payout ratio. 2) There are also some nice opportunities in the bargain bin that has some very high quality properties, which gives you a good discount and a very juicy yield.

Markets. Yesterday there was fear that we would see tapering sooner rather than later but today the Dow and the S&P 500 hit all-time highs. This market wants to go up. With the employment numbers last week, the market did a bit of a flip. When employment numbers are good, he would have that that the market would have opened down, but it opened up. Hasn’t been anything for much of the year that resembles a correction, which is much longer than would be expected. For the time being, he feels there is every reason to be fully allocated to your equity portion and just let it reward you. He is not expecting the Fed to start tapering anytime soon.

Markets. There are not as many ‘deals’ as there was earlier in the year. We have had a good year in global equities. There are also places where there was not much conviction. Most global market indices are up 20-25% year to date. There are pockets of higher valuations such as technology and consumer discretionary. Commodities and resources on the other hand are not doing well and so the overall growth is at historical norms. 2014 will see the continued convalescence of the US consumer and the growth of the Chinese consumer class.

Markets. In the short term he sees the TSX outperforming and thinks it’s true on the long-term as well. There has been a huge move on the S&P 500 and historically, these tend to go in a similar direction. He is looking for earnings growth to be stronger in Canada than the US. You have to be selective in this market when choosing large caps. Cyclical areas have not been performing well over the last 2 years, which has dragged the TSX down. Certain sectors have gotten really cheap, such as the oil/gas, which is starting to come to life a little bit. Banks have caught fire for the last 3 months.

Canadian Banks. If you own, you are onto a good thing and continue to buy and hold them. They were disappointing performers for a while up until a few months ago but fundamentals, improved and the earnings for the group are probably going to be up 5%-6% this year. Average dividends of about 4%, so you are looking at 10% returns without any change in the PE multiple. PE multiple was down back in the summer by about 1.5. It has recovered about half a point, but there is still potentially more multiple expansion ahead of it.

What do you believe is the key quality that one should look for in executive leadership of a corporation. He finds this a very critical part of the investment process. Leadership would be a CEO that can enunciate clearly the strategy of the company and how they will get there over time. He is always interested over the next 3-5 years as circumstances in an industry can change.

Markets. FX Rates are pretty important to economic growth. The US dollar should be biased toward strengthening next year and this will benefit world economies. FX rates will be a main talking point for the next 6 months. 88 to 93 cents over the next year is the target for a US dollar in Canadian dollars. He thinks the strong US jobs numbers were choppy at best. They are just one data point, but a stronger number is better, obviously.