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

Resources. It is time to take a bit of risk and dip your toes in. Economies are doing well and therefore this will require a lot more energy to run the economies and a lot more base metals to construct houses, manufacture autos, etc. The materials sector, year to date, is down a whopping 28%-30%. Energy sector is basically flat. He sees investors shifting into the more cyclical plays. Even in the past 2 weeks, the TSX has outperformed the Dow and S&P, which is a reflection that investors are looking at the energy sector and materials sector. Best opportunities are found in companies that have a global scale. For example, Mexico is looking to expand their oil/gas operations. Companies with a global platform are able to put their money’s into different countries to capitalize on the opportunities.

Markets. We have seen Europe come out of recession today and some good numbers coming out of China. The US seems to be moving along at good speed economically. Inside that big picture, you have all kinds of great little stories playing out. It’s a fun time to be an investor. Thinks that the tepid growth is going to be long and slow, but it is going to be growth just the same. Fundamentally, he thinks valuations in US are a little stretched and we may be better off owning some Canadian securities at this time. He is tapering out of the US and moving into Canada.

Uranium? He doesn’t own any. It is still a Japanese issue. We know that uranium is probably the power of the future, but right now it is dead. If you are going to buy a uranium stock, you have to buy Cameco (CCO-T).

Bonds. Yields have risen in the past several months, one of the biggest from early 1990s. Due to a surprising move by the Federal Reserve in April/May when they started talking about tapering off bond purchases. Didn’t seem to be the right time as the economy seemed to be growing at a relatively low rate of GDP growth relative to inflation was at the low end of the band. Also, there was a lot of money flowing into fixed income funds and everyone increasingly searching for yields and liquidity was not there. We are off about 100 basis points in the US 10 year right now and it is his belief that at somewhere around 2.5%-2.75%, we should settle in. This is a traders market in fixed income now, i.e., there is going to be an ebb and flow in the economic data and an ebb and flow policy comments from the Federal Reserve, ECB, Bank of England and somewhat from the bank of Canada. As opposed to the trend that we have seen over the last 3 years, we are entering into a traders’ market where, if bonds rally 25 to 50 basis points, you might want to lighten up. If bonds sell off, like they are today and corporate and government bonds are looking cheaper, that’s when you might want to replace what you sold earlier.

Corporate or provincial bond with a term of 5 to 7 years? Provincial bonds are quite safe. While you don’t have a direct call on the federal government, it is highly unlikely that there would be scenario where a province would default and have their debt restructure. At this moment, Ontario’s are probably relatively cheap and Alberta’s are relatively expensive. Québec and BC bonds are fair value. For corporate bonds, a bank bond is a pretty safe place to play. Also, you may want to look at what happens to the telecom space in the next month or two.

Relationship between long-term bond, fixed income and life annuity pricing? There is a significant correlation between the bond market, fixed income market, interest-rates and annuities. The lower the interest rate, the more expensive it is to buy an annuity. Central banks globally have taken extraordinary measures since Lehman Brothers failed in 2008. There was collateral damage with costs to what they had done, especially in the bond buying program which have forced yields lower.

Real Return Bonds. With the recent pullback, should I Buy or wait? Real Return Bonds were never intended for individual investors. They are a struggle to hedge. These are issued primarily by the federal government but are very, very long dated pieces of paper. They are meant to be inflation protected. If you are afraid of inflation, why buy a long-duration instrument?

Perpetual Preferred Banks? Canadian banks are well run and well-regulated so he has no real concern about the credit quality of them. Given where we are in the interest-rate cycle, he would suggest that on a near-term basis they are fine as they have been re-priced by this back up in interest rates over the last 3 months. On a 5 plus year view, he would be concerned about rates being higher in 5 years and putting pressure on perpetuals issued by the banks that are going to have below market coupons potentially.

Market. The feds are going to talk about tapering until you are sick of hearing about it. Then, when you are sick of hearing about it, the market will have fully adjusted for the eventuality. Doesn’t think the economy is strong enough right now to do it. They just want to make sure that investors en masse are completely comfortable and it’s in the market already. Doesn’t think it is and if they did stop, we would have a bit of a correction. Doesn’t see rates going up real high anytime soon.

Markets. Sees a lot of dividend increases, which is great. Also is seeing a lot of stock buybacks. Valuations are not too bad. Corporations got in really good shape in terms of their balance sheets post-2008 so balance sheets are looking really, really good. What is really encouraging are the top line revenues starting to increase. The past 4-5 years, you’ve had great margins and great profits because everybody cut costs. Now if you can get that top line number up, you are going to get a margin expansion and some really fat profits. Thinks that small-and mid-cap stocks will become the place to go as investors become more confident that we are not going to fall off the cliff again. Risk/return is starting to look better. You probably need a couple of good quarters to get that confidence fully in place.

Markets. He continues to see range bound price action. Doesn’t see it breaking out well into next year. With ZEB-T, banks, he sees an attempt to breakout and it failed. It also is ranged bound. With Gold, there is a bottom developing. There is a 20-25% bounce potential. A few sectors may bounce and the rest could go down a little and the TSX will be flat. The US economy is probably the best economy in the world for the next couple of years. Japan and Europe are probably basket cases and China has some headwinds. Sept. 22 is a German election.

Nat Gas. Favourite way to play is not the commodity, but rather the names. FCG-N is broad basket of Nat Gas players. He likes Nat Gas. There will be slow conversions for the next 10-30 years. We have a lot of it. We will be range bound for the next few years. He owns ECA-T.

Educational Segment. Signposts in the market that are pointing in different directions. NYSE cumulative advance decline line. Mid-May line peaked. Market made new high in August but this line did not. You have less stocks participating in the advance of the market. Next chart - % stocks trending above 200 day moving average. In May 94% of stocks were above 200 day M.A. In August, there is a decay in the number of stocks that are trending above 200 day M.A. Recently we are seeing lots of stocks make 52 week highs but more and more are making 52 week lows. You have high sentiment and decay in the fundamentals. You need to use caution.

Markets. The timing is about right if BB-T wants to put itself up for sale. He owns little. It is a very competitive market and there are lots of players with lots of money. They cut themselves in a the beginning because they had some technology that allowed themselves to cut out a niche. There is a huge short position so it could be interesting. They did their best but now they are throwing in the towel to some extent.

AIM-T may involve the sale of half of Aeroplan from CM-T to TD-T.

Markets. The portfolios he manages are up about 25% so far this year and he has been trimming his positions. This is the time of year when he normally takes positions off of the table. His US stock watch list at the height of the recession had over 350 companies but is now down to about half. The Canadian side has not been cut that much. It is going to be harder for him to find things to buy in the US.