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

Income Funds. People look at them as they get older. There is no shortage of dividend-like products out there. People should consider this in their portfolio. Sometimes you have to look at total return. You have to be able to switch some of your focus from dividends to capital. XTR has a lot of income producing exposure, but next year with tapering, you could see some under performance.

US vs CDN telecom stocks. Prefers to play through ETFs even though Canada does not have a pure play. ZWU-T (6.5% yield) and IYZ-N. Growth from the last number of years probably won’t continue but the covered call overlay is good. With Tapering next year they won’t perform as well as growthier companies.

Should I move capital from one Telecom to another because of performance? No. Stay diversified. You can’t chase performance, but if you want to own both then take some profits in the better performer and put into the cheaper one from time to time.

Education Segment. Risk vs. Return. Prospect theory or loss aversion theory. If gains are up people are happy. A little more gain and there is little marginal happiness. But when we are losing money we get increasingly unhappy until we can’t sleep at night. Studies showed that 94% of top fund managers had periods of 3 years when they were at the bottom. When you go into an investment, can you hang on for 3 years if it does badly?

Markets. This is the time of year he gets into a buying mood. Nothing has happened yet but hopefully soon he will pick up a few companies and before the end of the year. He doesn’t buy anything he has not watched for 6 months. Companies must have been beaten down badly but have good balance sheets. There were 350 companies a couple of years ago but now it is less than half. He is concerned about the housing sector and connection to banks. Housing sector has been pretty hot. Banks keep raising dividends. Balance sheets are not necessarily great. Thinks banks should pay down debt and buy back preferred shares. Now is a great time for Canadian banks to pay down debt. In the ‘80s it was third world loans. They should take care of their own balance sheets. European telecoms and banks are of particular interest to him at the moment.

Markets. We are still in a secular bull market and he doesn’t think we have even passed the halfway mark yet. He would expect upside returns over the next 5-10 years. Over the past 150 years, the average return for an equity market is about 6%. Over the next 10 years, he expects to see 8%-12% on average. There will be bumper years like this one and there will be some that will be a little softer. Low points in stocks over the next year will be opportunities and if you time it right, you can get fantastic returns. He tends not to be a buyer of stocks that run hard, but waits for more fundamental valuations to come in.

Canadian Market. Canada is a funny market. 23% is banks, which have had a nice move. Doesn’t think this is completely done yet. Including dividends, you could still see an 8% return. Gold miners are a little suspect in the short term. Energy looks better to him, as long as we hold in with prices in and around here. Oil in the $90s is fine. They are cheap and there is growth. Thinks this will continue to be a stock pickers market.

What is your favourite company in the Canadian heavy oil space? Has been some problems at Cushing again, widespread out to a point where it only narrows again in the next month or 2 as this gets fixed. He likes Canadian Natural Resources (CNQ-T), which is partial to the oil. Of the seniors, the one that’s lagged because of a quarter or 2 of operational problems is Cenovus (CVE-T) and this would be his favourite in the short term. He thinks they fix it and the 4^th quarter will be better along with subsequent quarters. Should play some catch up. Probably about 10% behind.

Why the drop in so many energy related stocks? All of these types of stocks are down on the interest rate related play and has nothing to do with operations. What you have to look for is a combination of growth and yield because you want to be able to grow through the fact that maybe yields have to be higher when rates are higher. TransCanada Pipeline (TRP-T) looks like it has pretty good growth and Enbridge (ENB-T) has 8%-10% earnings growth over the next 7-8 years.

Markets. Earnings growth has not been particularly impressive. You can call this a Bernanke rally. If earnings are not driving the market higher, then it is the ultra low interest rate environment that creates people to take more risks. We have had 5 years of pretty much up markets and getting close to what he feels is a top. Time to take a breath and reallocate your capital, relative to 5 years ago when it was easy. Geographically he is seeing a little bit of growth in the US, nothing in Europe so far and China is slowing down. Although emerging markets are growing at a little faster clip than North America, as interest rates grew in June, a lot of money came out of emerging markets in stocks, bonds and currency. It is now coming down to being a stock pickers market. He is still in the market with 5%-10% cash. He is just looking for the cash flow growth of dividends so he has some downside protection in the event of a correction in 2014. Don’t forget that the 2^nd year of the presidential cycle usually tends to be negative.

Non-resident tax on dividends through the New York Stock Exchange? This is where strategizing has to come into play. For non-Canadian companies, there will be withholding tax, depending on country. It can range all the way from 15% in the US to 30% in Italy. Those accounts should be in taxable accounts because then you can claim back the withholding tax. On US dividends in RRSP’s there is no withholding tax. Something to think about is to never let the tax tail wag the investment dog. To invest just in Canada and Canadian dividend paying stocks, is fine but you are not going to get the diversification.

Markets. Market environment looks really good and he is excited about it. Things are going to go quite a bit higher, especially in the US. Thinks the S&P will finish at about 1,950 next year. Multiple growth has driven it this far, but earnings growth driven by capital expenditure will be the future driver. Company earnings as a percentage of GDP have never been higher in the last 65 years than they are today. There is lots of money and eventually that is going to find its way into capital expenditure, which will drive organic growth and hence earnings. This is a cycle where companies are saying we have cash and we have to upgrade our IT systems. This is good for technology and good for manufacturing. Ultimately, when you have these high cash balances, eventually they have to be deployed.

Gold. He is fairly bearish on gold as a commodity. If gold is not going to work for you why do you need to be in this space? The 12 year run has been fantastic, but it has been over for a year or two and he thinks it will continue to slide. It is no longer considered a safe haven.

Markets. GDP number came out and was a little bit higher than expected. Doesn’t think the US Federal Reserve will start pulling back on its bond buying program sooner. The stimulus of the Federal Reserve and all the central banks globally really stabilize the economies and now you are going to see growth from that stimulus. US economy is growing nicely. Not huge inflation. Maybe growing at 2.5%-3%. Europe is starting to turn around a little. New Fed governor is not going to make any changes coming in.

Market. Cash and gold have really not done the job for a lot of people. That is principally where the hedge funds and a lot of the naysayers are putting a lot of their money and it just hasn’t been working. Expects cash will find its way into the market now. We are due for a correction, but we are currently in an emotionally driven market at the moment. Any kind of correction will happen stock by stock, but not on a broad basis. We are in a bit of a greed market that is starting to come out. US investor has been in a bunker for 12-13 years with no returns. It is finally getting interesting again.