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

Technology. (including electronics) Has a period of seasonal strength from October 9 all the way to January 17, the Consumer Electronics Show. (CES in Vegas.) Right now we have good technology strength that is starting to outperform the market with higher highs and higher lows. Take advantage of the broad technology sector. There is generally a soft spot right around Christmas time.

Oil. If crude oil falls to about $80 US on WTI, that could have a significant impact on Canada. Right now differentials are pretty wide. His concern is that North American growth in supply for 2013 and again in 2014, is greater than the total world demand growth in 2013-2014 and OPEC is losing market share. OPEC has countries that are not producing as much as they can produce. Right now. OPEC has about 3.5 million of excess capacity. These countries need revenues. Not so much Saudi Arabia, but countries like Iraq, Nigeria, Venezuela, and Iran have large populations and a lot of subsidized food and energy, so they need revenues for day-to-day expenses. Libya, which is only producing 400,000, is losing $4 billion a month in revenue. If they bring up production, we will end up having a glut of oil. Right now, world demand is about 90 million. OPEC is producing 30-31 million. OPEC’s demand is about 29 million, so if they keep on producing more and then all this new capacity comes on, we could see prices retreat, maybe to the $70s, so people should be a bit cautious here. There is a 10% to 20% downside risk over the next couple of quarters.

The 1^st leg of the Keystone pipeline was to be opened in mid-December. Is this pipeline still a go and what effect will this have on North American oil prices? The pipeline that is coming from Cushing down to Texas is in the process of being completed and opening up which should knock differentials down. The politics of XL, the Canadian line going down to Cushing, is really the battle line. Obama is more to the environmentalists right now, so we’ll have to wait and see how that goes. In a worst-case scenario, he believes it will go through but it may take into the next administration in 2016.

Markets. He is expecting to see multiple expansion. Stocks are well supported here. Federal Reserve is in no rush to taper. Stocks are still trading cheaper than 10 year bonds. Money managers are tempted to chase performance. The overall macro picture tends to be bright in a staircase manner. Markets are not cheap, but are not expensive. The money world tends to follow the US, which is coming a lot closer to solving 2 of their long-term problems, energy independence in 2020 and healthcare costs. Interest rates are still incredibly low and the great rotation has not played out. The natural home for a lot of people that have been in cash or REITs or preferred shares is still the conservative dividend paying stocks.

Locking in Gains. On stocks that are really hitting your position and still have a ways to go, you can sell Calls on those. When people are as bullish as they are right now, the premiums are getting a whole lot better and you oblige yourself to Sell, maybe 4%-5% higher in the next few months, get a 2^nd stream of income like a dividend and keep doing that.

REITs. Despite the tough slogging they’ve had over the last little while, he thinks that the funds from operations per unit as a group grow by about 5.5% this quarter versus 2.7% for their historical average. Given fears of climbing yields and given how crowded the sector got, you want to be really selective on the names you buy. If you are going to buy a REIT right now, you want it to have a real low valuation, above average organic growth, real low leverage and a real low payout ratio so they can boost their dividend.

Markets. TSX appears to be undervalued compared to the S&P 500. It has been carried more by financials and some energy names, but certainly not by the broad swath you see in the Canadian market. You would think that if we had a robust global picture, the TSX should be back up and past its previous highs like the S&P was.

Gold. He is a bit more sanguine about whether this is interest-rate sensitive or not. Historically, it reacts much more to currency. He would tend to watch the US$ and other currencies. One thing that is interesting is that it hit a low this year at about $1200 and if it breaks that low, it will give you a lower low. You want to see it get above $1390. Feels the producers offer a bit better risk/reward upside.

Oil. You want it to hold at $90 to bring some buyers in. You would want to see, if there was some global growth going on, that we have some upside momentum and it is not just in a trading range. If it doesn’t hold $90, there are some issues there.

Markets. (Gauges global growth using the Global Purchasing Managers Index.) If global growth is picking up, then he feels a lot more comfortable in investing in certain sectors and getting exposure to certain companies. He is most constructive on the US economy and the gradual improvement seen in the last 3-4 years. This represents the best risk-adjusted returns for equity income investors. The Fed is saying that they are going to maintain a dual mandate of keeping interest rates relatively low, trying to engender an improvement in employment, while also keeping an eye on inflation. Feels that rates will gradually go up and the Fed will eventually taper. The timing while uncertain indicates the underlying economy is improving. This is generally a good sign for equity investors.

REITs. To the extent that the bond market tries to anticipate what is going to happen with longer-term yields, this will create some noise within the REIT sector. While the sector is deemed to be interest sensitive, a lot of these REITs carry a significant amount of debt on their balance sheets. Refinancing risk is relatively low and balance sheets have improved tremendously. This could present a pretty compelling buying opportunity. This is an excellent source of income. In some cases, you can get mid-to high single digit yields that you have a fairly high degree of confidence in looking out 3, 4, 5 years. Also, real estate usually appreciates in value, especially in an inflationary environment.

Which Canadian REIT would be affected the least by a rising interest rate environment? Generally, if rates are going up, it is a sign that you have inflation, so you want to gravitate towards REITs that have a shorter lease term. This is why he tends to like some of the multi residential/apartment REITs in Canada. A couple of his favourites would be Interent (?) or Boardwalk (BEI.UN-T) where you have the ability to increase rents substantially and about 35%-40% of your portfolio is turning over and you can get your cash back that much quicker. Also, there is Tricon Capital (TCN-T).

Interest Rates. Have been bumping around lately and had been on a bit of a rise again. REITs will maintain their volatility and trade in line with interest rates for a little while longer. Expects volatility will continue into the new year. Right now we are testing the bottom. He has decided that this is a great time to be invested and has gone in and is picking up some great yields. He is finding REITs that are below the value of their properties and is getting a yield so he can wait until the turbulence is past. 2 ways to select what is a high quality REIT. 1.) You can go to larger cap stocks, the ones that are in the index. A lot of those are very safe investments. They are larger but also have a nice balanced diversified portfolio, low debt, good balance sheets and a low payout ratio. 2) There are also some nice opportunities in the bargain bin that has some very high quality properties, which gives you a good discount and a very juicy yield.

Markets. Yesterday there was fear that we would see tapering sooner rather than later but today the Dow and the S&P 500 hit all-time highs. This market wants to go up. With the employment numbers last week, the market did a bit of a flip. When employment numbers are good, he would have that that the market would have opened down, but it opened up. Hasn’t been anything for much of the year that resembles a correction, which is much longer than would be expected. For the time being, he feels there is every reason to be fully allocated to your equity portion and just let it reward you. He is not expecting the Fed to start tapering anytime soon.

Markets. There are not as many ‘deals’ as there was earlier in the year. We have had a good year in global equities. There are also places where there was not much conviction. Most global market indices are up 20-25% year to date. There are pockets of higher valuations such as technology and consumer discretionary. Commodities and resources on the other hand are not doing well and so the overall growth is at historical norms. 2014 will see the continued convalescence of the US consumer and the growth of the Chinese consumer class.