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

Markets. Expecting them to slowly grind higher. In the near-term, we might face a bit of weakness because we have had a pretty good run both in Canada and the US over the last month. Things are getting better. Employment is hanging in there. Fed is still very accommodative. Manufacturing and consumer numbers are good. For Canada to make up some of the ground we have lost against the US, it has to be the late cyclicals or the commodity stocks. This is really going to take a growth rebound in China which doesn’t look like it is in the cards at the moment.

Markets. Risk assets are in a tug of war. Doesn’t see this changing. The tiniest hint that monetary policy will be pulling back and the market reacts. Thinks they will want to see some pickup in the economic data before tapering. Thinks the economy is ‘hooked’ on the monetary stimulus. He doesn’t see a lot of value in equity markets except for gold.

Gold Stocks. Has a large long position in the gold sector. He looks for the ratio of stock performance relative to gold price. That ratio bottomed just a few weeks ago. This is a leading indicator for the sector going forward. Likes how well the markets reacted to Gold Corp’s bad news recently. Does not see what will take the sector down now but he would exit in October.

Global Markets. A lot of the investments he made, in the last couple of years, are really benefiting, particularly with US exposure and are starting to do quite well. A lot of the gains have really been currency driven. He runs an unhedged book so currency, particularly on the US side, has been very attractive to him. Also uses currency as a mechanism to get into a market. Euro is weak so this is where he is looking at the moment. Emerging markets are selling off so he would look to add some more there. About 30%-40% weighted to Canada. Any buying on his part would probably be resources.

What would be your preference for a railroad stock on the global market? Hasn’t initiated a position, but is looking at UMP (not listed). CSX Corp (CSX-N) is obviously pretty cheap because of the coal volumes. Internationally he likes MTR 66HK, basically the Hong Kong subway with international operations. Manages subways in China, Stockholm, Australia and the UK and pays a decent dividend. North America has the best of breed in terms of publicly listed companies.

To what extent do you assess corporate governance of global operations by comparing and contrasting with the model of corporate governance employed by Canadian big banks? To what extent do you weigh corporate governance as a factor when deciding between various global equities and asset allocation between them? Governance is very, very critical. He takes the view that he is going to invest alongside management and going to be entrusting your capital to them to manage your capital on your behalf. “Management, management, management” is really the play. Tends to invest in founder owned companies. These tend to make decisions for the long-term growth and sustainability of the dividend.

US Economy. Expects the US economic cycle to drive Canada but it is going to be slow and steady for the Americans. Given that the US is Canada’s largest trading partner, he thinks it will indirectly benefit many Canadian corporations and the Canadian economy more broadly. US growth is being driven by an improvement in employment and improvement in housing. Both of those things will gradually get better during the next 2-3 years but we are operating significantly below capacity if you look at things like the output gap where capacity utilization is in the US.

Interest rates. He focuses on dividend paying stocks, usually very high quality companies that are able to sustain and increase their dividends over time. A rising cost of capital, if it shot through the roof, would be very concerning but in the absence of a very quick increase and if rates gradually go up coincident with a rising economy, he doesn’t think it is the end of days for any of his dividend paying stocks and he is a Buyer at this time. This is encouraging news for REITs as well, as the US/Canada would not be raising interest rates if economies did not support it. Cash flow growth should partially mitigate, if not fully mitigate impact of higher interest rates.

Markets. He is very positive on the global equity markets. For his clients’ portfolios, he is at maximum equity and has been for a little while. For the remainder of the year, probably Canada and Europe will do better than the US. The US will probably take a bit of a breather here. Thinks that ultimately the S&P 500 by the end of next year will be in the 1900-2000 range.

Best ETF for gold miners? There are 2 or 3 ways to go. If you are interested in just bullion, you can buy gold bullion ETFs. If you want gold miners, you can have one of 2 things, depending on your preference. iShares S&P/TSX Global Gold (XGD-T) is the gold index and Market Vector Gold Miners (GDX-N) is almost exact index but is listed in New York.

Risks of a corporate bond (laddered) ETF? Is it volatile? Primary thing on corporate bonds is going to be credit worthiness. Laddered tends to get rid of the interest-rate risk. The problem at the moment in Canada is that the bond market in Canada is dominated by the banks. He has started to move from Canadian corporate bond indexes into just the straight preferred indexes. You get another point and it is the same credits that are in there.

Markets. Up until the last week or so, he felt that there might be a correction on the US market and we would get one too and, since we are not up that much, we didn’t deserve to get one. With the gold rebound yesterday, energy looking a lot better and differentials narrowing substantially, those stocks are cheap. So for the 1^st time, they could pull back and we might hang in better. If the US falls, we will fall but not as far.

Energy. We are entering a period of seasonal strength for energy. Implications for earnings is that the 3^rd quarter will be quite strong and some 2^nd quarter earnings will be strong as well. We have WTI narrowing to Brent. Brent is -2% for the year and WTI has basically just come up to it. Also,Western Canadian Select, which is what most of the Canadian guys get, was $47 at Christmas time but is now at $94. It has doubled. Stocks have not doubled, they are basically flat. Lastly, the light spread has narrowed. A lot of the guys have a lot going for them and it is not reflected in the stocks, until just recently we are starting to see them move. They could run a fair long way.

Oil. Price is north of $100 a barrel again but stocks have not moved commensurate with the oil prices and differentials so there is still room to move. Canadian players are sitting pretty but with a couple of caveats. Weather did not cooperate with a lot of Canadian producers and earnings for companies with down stream exposure will be muted by that. For the upstream players, Western Canadian Select is up in Cdn$ terms by about 50% from the beginning of the year and natural gas is down about 10%. We should see stronger cash flow profiles and reported earnings other the oilier companies.

Natural gas. Normally we would expect some disruptions on production because of hurricanes but, what we are seeing in the Canadian market right now is worrisome with respect to the difference between US benchmark prices and Canadian AECO prices, which has widened out to very wide levels. He is cautious on gas prices.