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

Markets. Thinks trying to time the market is a big mistake. There is always some kind of a crisis and we look for some excuse to Sell. All Bull markets since 1974 are quite long so basically the market has been going up more than it has been going down. The market goes up 85% of the time. To try and anticipate some magic event, you blow out half a portfolio which is foolish. If you latch on to a good investment, try not to time the market. Yes, use sector rotation when a sector becomes overbought with some sectors coming in that should be bought.

Banks. Banks are one reason he is so bullish on the market as no bull market can be sustained unless you have leadership from the financials. Most of the Canadian banks are above the financial crisis peaks. When this happens, it is just blue sky and you don’t know how high it is going to go. Rather than trying to stock pick, he would just go with an ETF. (See Top Picks.)

Markets. Thinks US government shutdown will create buying opportunities. Earnings expectations for Q3 have come down so he thinks the bar is a little bit lower. Manufacturing is starting to tick up globally. Stocks are not cheap anymore but they are certainly priced better than bonds. He is going to use this weakness to buy 2 sets of dividend stocks. 1.) Dividend stocks that are positioned to do well with global growth (banks, US banks, healthcare) and 2) the class of stocks that has got really brutally sold off, maybe oversold, as a result of higher interest rate bearers such as energy infrastructure, REITs, select REITs, etc. Thinks that Canada provides a wealth of opportunities so you can just stay here and get the job done pretty well. However, there are always opportunities outside that shouldn’t be ignored.

Markets. He is very constructive on the market. As the market was selling down, he was buying. Doesn’t believe that the US government problem really leads to anything. There has been a lot of sabre rattling over the last 3 years and this is about the 4^th time Congress has actually pulled something like this. He would get a little concerned if it lasted for longer than a week and it got into a debt ceiling with a potential default.

Economy. We have been in a period of wage deflation for over 10 years. That was going from an agricultural-based economy in China and Brazil and to some extent, Russia and then to an industrial sector. Had a tremendous effect on global wages. That is basically done now and for the most part, wages have stopped going down. Wage growth in China is something like 20%. Believes we are going into a reflation cycle. In 5-6 years is where the threat is going to be in portfolios. You want to be looking to invest now to stem that off. You want to be in industrials, technology, media, financials and everything that will improve in a higher monetary environment where liquidity is slowing down and there is potential for inflation to come back.

What percentage of profits have you made on your Long positions as well as on your Short positions? When he Shorts a position, which is usually 20%-40% of his NAV, he uses the proceeds from the Short to add to his long positions. Example; a 30 cent Short position allows him to invest $1.30 in his long position rather than just $1. That gives him more leverage.

Markets. The traditional seasonal way is that you Buy at the end of October but he thinks there is a little bit of a twist this year because of all the talk about a debt ceiling, etc. The Buy zone is going to be over the next 2 weeks or so. He expects to be deploying almost 100% of his cash in the next 2 to 3 weeks maximum based on the volatility. He currently is holding 45% in cash. Anywhere over the next 50-80 points on the S&P down, he would be a buyer. Generally speaking, he would rather be where the money is and that is in the US.

Do you use Bollinger Bands to determine entry or exit points? There are different ways of interpreting Bollinger Bands. The way he likes to use them is what he calls the Bollinger Band squeeze, i.e. when the 2 bands come together. Typically you will find this right around the time something is about to happen and it is very accurate.

Markets. For the debt ceiling on the 17^th of October, the problem is not that the government will get shut down. Investors will probably just wait and see what happens. We’ve seen this movie before. Fundamentals are the major driver in the markets but there is always something in the news that can provide some question. As long as governments are providing markets with liquidity we should be okay. Thinks, however, that the debt problems in the world are much more significant that strategists suggest. For now as long as earnings continue to grow the markets can be pretty stable.

Educational Segment. Emotional part of investing. Most major markets did not move in the last week. He wants to swap fixed income into equities in the near future. Gains in a portfolio don’t increase an investor’s happiness. Incremental losses do add up emotionally. The average return in a portfolio has been 7% over the last decade.

Markets. He is more concerned about the shutting down of the tapering than the debt ceiling and shutting down the government. Thinks the market sees though these events. What worries him is the global and US economies. There is a lot of debt in the system and it requires the stimulus in the system for growth. 12-36 months he is negative. Thinks we are due for a cyclical recession.

Markets. Markets don’t like uncertainty. Right now it is a “risk off” trade so people are leaving the equity market but haven’t really flooded into the fixed income market yet, so we’re kind of flat. Coming into the year, government bonds were at such low levels, but we got to the point in May where we were seeing positive growth and inflation was tame. That has all been reversed since May where the US government stated they were really dependent on the economic data, where they needed to see unemployment improve and inflation, come up a little bit. For the next 6-12 months we are sort of in a safe zone where he doesn’t expect rates will go much higher.

If the underlying equity is good quality, are convertible debentures a good way to get downside protection in a rising interest rate environment? In theory, this works great, but unfortunately there are a lot of convertibles that come out that are really weaker companies. In Canada, we don’t have that many convertible issues as there isn’t the market for them. Although it sounds good at the start by getting any percent coupon on a weak company, at times it works against you in a rising rate environment. You really have to be careful and know the companies you are buying.

What factors differ do you look at when deciding whether to buy bonds of a company versus its equity? With bond investors, you are playing a banker, not an owner. You are really asking yourself, will I get my money back. Credit ratings is a great starting point, whether it is investment grade are not, high-yield. You also have to understand the industry, management, etc.

Target bond ETFs. Is there any way of knowing the “face value” of a target bond ETF? A target bond is a fund that has very specific maturity dates and you can buy anything up to that maturity date. There isn’t really a face value or a price on a target bond, because it is a pool of bonds. This is a reasonable investment for an investor who has a specific event in their life that is going to come up, such as a child or grandchild that is going to university in 5 or 10 years.