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

How do you recognize aggressive accounting? Sometimes there are rumours that a company is being overly aggressive. Sometimes he’ll look at financial statements and they’ll just be way too complex. When he finds that things are overly complex, that means it is easier to hide aggressive accounting. There is no clear cut rule.

Markets. The consensus is that we are overbought and waiting for a pullback. US was one of the strongest markets globally and Japan was the only market that was stronger. A 5%-8% pullback would not be surprising, but we have our season coming up now where money flows into equities. Earnings season coming up will be very important to see the views of corporations and if they moderate earnings guidance going forward. Has been fairly cautious, so she is not really expecting any big downward revision. Longer-term still bullish on equities and would use this as an opportunity to add exposure. Canadian market has lagged the US. It was only up 13% last year, versus the US at 32% plus. She wants to be exposed to the US market in 2014 and expects it may once again outperform the Canadian market marginally.

Markets. Earnings need to show us something in the next several weeks for markets to go higher. Some companies are seeing earnings contract and others are trying to over perform. E.g. Valiant Pharma went up 12% today after their investor day. Likes consumer discretionary more than staples. Also, late cyclicals: energy, industrials, tech, financials and healthcare. He goes to the US when you don’t have enough choice in a sector in Canada. Likes US banks more than Canadian.

Markets. Canada is independent of the US for interest rates, but Canada may need to raise rates. But he thinks BOC will sit on the side lines unless the economy really picks up or the FED in the US raises interest rates. The exchange rate is big. It raised your US return in the markets closer to 41%.

Educational Segment. Diversification. Who would have known last year that the S&P would have gone up 32%. Emerging markets didn’t do well last year. The US market did really well. High yield bonds had a good year. The total world, according to VT-N ETF was 21%. Canadian REITs were negative. We should consider more emerging market exposure and less US due to multiples in those markets.

Markets. Thinks rates can’t go higher than 3.25% (10 year US) and could even go down a little. The PE going higher on the S&P is not so good because return on the S&P are multiple expansion, rather than increase earnings. He would prefer better earnings and revenue. He is modestly bearish on the Loonie. Canadian economy is weaker than the US right now. We are more dependent on the global economic story.

Expects moderately higher 10 year rates. The majority of the near term rise has occurred. Fixed income is the anchor in your portfolio. It only takes 1 bad event in the middle east, oil shoots up and that hurts the US investor. Use the fixed income portion to protect the rest of the portfolio.

Amount of Fixed Income in Retirement. Typically in retirement you have more fixed income in your portfolio. You should constantly rebalance since your fixed income investments probably don’t have a lot of upside, unlike the equities. 70% fixed to 30% equities is common in retirement. Anything north of 80% would typically be too much.

Preferred Shares in a Financial Institution. They have a role to play. They are not all created equal. Perpetual bonds react badly to rising interest rates. Dividend tax credit enhances their returns so don’t put them in a registered account. Without that tax break, bonds would be better in the registered account.

If in early stages of retirement, for 2014, he would balance money more equally between fixed income and equities. Thinks equities will have a better year.

It is hard to get anything near par in the high yield bond market. Money is still accruing in bond funds. Really good deals get snapped up by institutional investors. You might look at REIT paper or the energy space.

REIT Bonds. Most REITs don’t have convertible bonds.

Residual strip bonds. They are a biproduct of an original bond. Usually created by a Canadian or provincial government bond. It generates no income but you buy it at a big discount and then it matures at par.

Closed End Bond Funds. Typically trades below par right out of the gate just because of the fees. He would own it in the secondary market, rather than the new issue. Tries to buy it at the largest possible discount to NAV. If looking to sell, some of these offer an opportunity to get out once a year at NAV.

River Cree Entertainment bond, 11%, due 1/20/2021. First issue done by aboriginal group in Canada for a for-profit business. Casino that allows smoking, which is known to have higher returns in gaming rooms (3 to 4 times higher). It is a complicated security because it has no assets. Have traded up since he first bought them.