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

Energy & Materials. - Falling Cdn$ is going to help because most energy producers’ costs are in Cdn$ but the commodity is priced in US$. Feels Materials is more of a sentiment play. Commodities have been beaten down globally and we are starting to see some more robust economic growth figures coming out of the US, as well as globally. Commodities are late cycle performers, so this space, with a 20% annualized generalized decline in the last 3 years, is bound to revert to the mean, and that definitely helps buoy the Canadian market.

Markets. US$ is not only going to have a good 2014, but he is seeing hopeful signs that we are in the early stages of a bull market in the US$ that should go for 5 to 7 years. We are only in the 1^st or 2^nd inning. Economics in the US are very, very strong, the top one being energy. His average client is at least 40% US denominated but he wouldn’t mind getting this to 50%. Feels all assets in the US will do really well, including real estate, equities. Anything with a US$ denominated should do well. Stocks that are showing up in his screen that are doing really well now are the Large Cap value, the top 100 of the S&P 500. There is a lot of value in that group. Suspects stocks will not only go to Fair Value but will get to an overvalued position.

Brian’s Model Prices. Uses an algorithm that is very robust. He can do companies from every industry, from banking to industrial companies. He takes earnings estimates and a few selected pieces of the balance sheet and comes up with Fair Market Value which is what he calls his Model Price. Goldcorp (G-T) made a bid for Osisko (OSK-T) at a little over $6 and when you look at his Facebook model price on Osisko, it is $8, which indicates to him that they are not paying Fair Market Value. It’ll be interesting later on as to what actual price the deal is consummated. This is a way of looking very, very quickly on Facebook of any FMV of any stock that you may have in your portfolio.

Markets. Everybody is wondering where the employment growth is and how come the commodity cycle is not turning. A lot of this can be explained by US housing starts. Housing used to be 1-1.5 million starts a year and then it became over supplied and dropped to probably a half-million a year. It is just coming back now. That is important because a 2100 ft.² house takes 60 to 90 days to build and takes 20 to 25 people to build it, 400 pounds plus of copper, 16,000 board feet of lumber and that is just on the direct building of the home. Feels this is a missing ingredient for global growth. What he expects to happen in 2014 is a housing acceleration. Also, auto sales are back to pre-crisis levels and this should continue as the average car on the road is still quite old.

Interest rates. Have been extraordinarily low. He is looking for around 4% this year and end up at 5%. Pretty gradual but central banks will keep short-term interest rates very low.

Portfolios. When you look at putting your portfolio together, you have to look at all asset classes. He puts about 30% of his clients’ money in fixed income and about 70% in equities. Of that 35% is in the US, 20% in Europe and international and about 15% in Canada. On his bonds, about half of it is in short-term bonds and on the balance there is high-yield still, with a little bit in preferred shares.

Pharmaceutical ETF? He doesn’t have any in this sector at the moment. The easiest one is the SPDR Health Care (XLV-N) but there is SPDR Pharma (XPH-N) which is just pharmaceuticals. In Canada. There is the BMO EqWt US HealthCare Hedged CAD (ZUH-T). However, you don’t want to be hedged at this point.

Should a US ETF be hedged or unhedged? You don’t want to be hedged at this time. Cdn$ looks oversold, but eventually it is going lower. His view on what made the Canadian and Australia dollars so strong over the last 2 or 3 years is that both countries had 2 advantages. We did not suffer a financial banking crisis and short-term interest rates in both countries were considerably higher than in the US. When you have high credit rating and higher short-term interest rates, a lot of money flowed into these countries from US money markets. We are now seeing that money flow back out.

A materials ETF to hold from now through May? He kind of likes the mining side and you can play at 1 of 2 ways on the Canadian side. XBM-T is an iShares base metal, which has all of the big metals companies in the world, but does not have gold in it. Also, CMW-T is an iShares, which has gold in it as well.

Preferred shares ETFs. He likes iShares S&P/TSX Preferred Fund (CPD-T), which is the key one. One that he has been using more and more is BMO S&P/TSX Laddered Preferred (ZPR-T). These had suffered as interest rates went up but the spreads between yields on preferred shares and yields on the 10 year bonds are actually pretty high, both in Canada and the US.

Gold. He likes the big gold mining stocks. People are fascinated with looking at gold from the standpoint of inflation or any kind of disaster scenario. We really should be looking at gold the same way you would be looking at copper. There are very few mining companies where cash costs are less than the price of gold. Gold mining companies used to trade at huge premiums to their net asset value and are now trading at massive discounts and everyone has basically thrown these things out. Very speculative. You could put a small part of your portfolio into XGD-T or GDX-N.

Covered call ETFs? Nothing wrong with these. The strategy of writing an option against an underlying position is a standard thing to do. He typically doesn’t like buying covered call or exotic ETFs. If you have a good broker and you buy something like XSN-T, your broker can write covered calls for you and probably at a price that is cheaper than what they are charging on the ETF.

Markets. 12% earnings increases on the S&P is probably optimistic. Analysts are forecasting companies they cover and are biased on companies they cover. In 2007 they were forecasting 8-10% earnings growth for 2008 and we know how that worked out. However, now there is no bearish catalyst to worry about. This is a 4.5-5% global earnings growth trajectory. The earnings are growing at a lower rate than they has in past cycles. The market should not grow at this high a rate. The market is at risk for some setbacks if upcoming company results don’t deliver. Markets could pull back 3-5% on debt ceiling market noise.

Fundamentally businesses are in good shape and the market pays a higher multiple for growth in the future. But he thinks once things normalize there could be problems again and potentially multiple contraction and that is where you get the big corrections. It doesn’t mean you can’t stay with a high multiple for a couple of years.

Educational Segment. Evolution of Investing. In the last decade we found that it is all about what people think about the investment decisions. A gold chart pattern shows a double bottom and a breakout on gold and shows it is a high probability trade:

1. Would you sell the security
2. Continue to hold because momentum is good in the gold sector.
3. Tighten your stop so you at least make some money.

There is no right or wrong answer, but rather how the individual approaches the trade. You have to understand how your mindset works and execute the trade accordingly. Your return to risk needs to be at least 2:1.