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

Markets. If you look at the 3 major credit rating agencies, they are averaging AAA for the US but if it goes down below AAA then many pension funds can’t invest in US bonds. He would not be surprised if this debt ceiling thing is with us for the next 20 years. They are not doing enough for the unfunded liabilities. We are all aging and we cannot change that. 5 people are working for every one retired (3 in Japan) and that will go down as time goes on. There won’t be enough people working to fund retirement in future generations. Earnings season is coming up and that could be another fly in the ointment. Growth in many sectors is starting to turn negative now. Revenues on a year or year basis are peaking out.

Russia – corruption, overspending – is there an ETF to short? RSX-N is a long ETF on Russia. It is 41% oil and gas, 12% telecom, 11% banks and 9% mining. You are shorting oil and gas and not Russia if you short this one.

Educational Segment. In 7 weeks the portfolio has had a return over 1%, with the benchmark being up 0.4%. We ‘should’ get a pull back in October in equities. If stocks correct, junk bonds go down as well. ZCM has a 4.3% yield. Over the next two weeks he wants to roll out of ZCM, taking bond profit and roll it into the US stock market to get the next up leg there.

Markets. We have seen this movie before on the US debt ceiling. The market gets nervous but each time it gets less so. Everyone expects a resolution at the 11^th hour. But he would recommend buying on any good dips in the coming weeks. He thinks the bond buying tapering was a little pre-mature. We will be in a low interest rate environment for a very long time. Most stock markets have gone too far, too fast, however. You want to be cautious and defensive. You want to own high yield defensive stocks. World economic growth is very fragile. You have to be careful.

Is a stock cheap? It depends on the industry, each one of which has different metrics. Price to earnings, price to free cash flow, etc. See how they stack up to other companies in the industry.

Markets. US markets and, Canadian markets to some extent, are trading at very full valuations. There is not much value in North America. There is much more value in Europe, Japan and other parts of Asia.

US REITs. With the government shutting down, should he stay away with interest rates possibly going up? This is the 18^th shut down since 1976. They have all gotten settled before and he suspects that this one will too. Rising interest rates are negative for REITs and interest rates are certainly poised to go higher over the next couple of years. He would stay away from investing in REITs. Thinks there is more selling to come.

Markets. He is looking beyond the US government shutdown and debt ceiling and just looking at companies, balance sheets and earnings prospects. Companies perform in the environment they are given. They have no choice. His job is to find those companies that are going to do the best job and are best protected in that environment. Any future gains for the markets are going to have to come off earnings growth and not multiple revisions higher. He is looking for earnings growth and acceleration of profit margins, etc.

Twitter IPO is coming on soon. What is your opinion? Is the same thing going to happen that happened to Facebook (FB-Q) or will it be dealt with a lot differently? It all comes down to valuation and whether you are pricing your IPO correctly. He does not buy IPOs. There tends to be less information in the public market off an IPO than if it’s a public traded company that has a history. Be patient and let it come public and be willing to pay a higher price for greater certainty.

Economics. The longer the US government shutdown exists, the bigger the issue is for economic implications. Thinks there have been 11 shutdowns since 1981. Most of them have only lasted a few days and we are right up against that limit now. If this drags on significantly longer, it ends up being a worry. Bond buying tapering has not happened and he thinks Washington can’t figure out what they are doing right now with the budget and the debt ceiling. It is hard to imagine that they are going to taper this year. He is expecting some disappointing earnings results in the next couple of weeks. As a result, many investors will have an opportunity to pick up some of their favourite names a little cheaper.

Corporate bonds in view of the pending rise in interest-rate? If you want bond exposure, he would be very cautious of investment grade of high-grade bonds. There is a tremendous amount of interest rate and duration risk out there so as rates rise, the prices of these bonds is going to fall significantly. Likes corporate bonds, but he would play in the high-yield space, but stay within 5 years for protection from a rising rate environment. One high-yield bond that really sticks out in the last couple of weeks is a big financing that occurred at Air Canada. These are very attractive bonds.

Markets. The fed won’t be easing or tapering any time soon. The Fed is worried about the incoming financial data. The tapering will be postponed until 2014. US equities will be more attractive. US dollar will take a hit and exports from the US will be more attractive. You will have to look at high yielding dividend paying stocks for income. The fear of interest rate hikes has receded quite a bit.

Markets. Feels the fed should have tapered because $10 billion going to $75 million wouldn’t have mattered. Liquidity, from the Federal Reserve point of view, is important and great when things are bad, but economies are growing globally and this is the time you have to take away some of the liquidity. This much liquidity in a global economy that is growing, probably tells you that stock markets are going to be much more robust than people think. We are in a low inflation environment for the next little while, which is great for stocks. Interest rates are not going to have a dramatic impact on the stock market as much as people think. If you can find good companies with good balance sheets that pays you a good dividend, those are things that are going to still happen.

US banks have pulled back off their highs and are just hanging in there. What does this tell us? Feels US financials are cheap and he is a big proponent of them. They don’t have high yields like Canadian banks but that will change over the next several years. He would be looking to Buy at these levels. (See Top Picks.)

How do you determine the portion of stocks versus bonds of your clients’ portfolios and what mix of bonds do you use? His company runs 2 separate portfolios, one for stocks and one for bonds. He is very interested in finding out his clients risk profiles and what they need their money for. That determines their asset allocation.