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

Markets. Feels that the record highs in the US today are a continuation of a bull market that we are in this year and, as well, a disguised bull market in Canada. It is a brilliant market here as long as you don’t look too hard at the resources stocks. He has been enjoying this great market. Thinks there are a lot of small and medium caps that are going to get taken out.

Gold. He is doing some limited nibbling. The price of gold is pretty well borderline on the level of actual costs. Selectively, very good companies can be bought. You’ll have to be patient and even put up with a bit more decline. Indians have been stopped from their government from importing gold.

Bonds. Yields are normalizing, going back really as they should be. Still going to go higher from here but they reached levels they never should have reached. Bonds were ridiculously expensive but now are just a little bit expensive. By the end of this year he expects to see the 10 year bond rate benchmark, 10 year treasury at 3%. Expecting Bernanke will start easing sooner rather than later. He is optimistic that the US economy will pick up in the 2^nd half of the year and into next year. This all feeds on the housing market. The US consumer has recovered all the net worth that they lost, by virtue of the housing prices improving and the stock market improving so their net wealth is back so that means they are confident so retail sales will go up industrial production goes up. Nice virtuous circle when it starts.

Corporate bonds. When government yields rise, spreads compress even more so, they are relatively tight to the U.S. Treasury but still 1%-1.25% above treasuries and that compounds in your favour so it is hard to lose money in the corporate world.

Bank Rates. For anybody who wants to know when the Cdn bank rate is going to go up, there is an easy way of doing this. You follow the 2-year government of Canada yield which is currently at 1.08% (overnight rate is 1%). If the 2-year yield starts to rise, the market is telling you that the bank rate is going to rise. Doesn’t expect The Bank of Canada will raise their interest rates before the US Fed does theirs. Could be another 1.5 years before we see another hike in rates.

Is the Brascan Corp 5.95% bond, due June 14/35, safe? Believes this is now owned by Brookfield Asset Management (BAM.A-T). He doesn’t like long-term corporate bonds. There is so much that could happen in the next 22 years. If he owned, he would Sell because he doesn’t like the overall market. Would recommend that you go into 4 and 5-year industrial corporates. (See Top Picks.)

Real Return Bonds. With the recent pullback, would step in or wait? He would suggest that you think about this and then not buy any real return bonds. These have now been exposed for what they really are. With inflation expectations stable, these are nothing more than a long term low coupon bond so it has a very long-duration and a very high risk.

Fixed income strategy. Basic staggering of 1 to 3 years, GIC bonds equivalent. Should he go longer or put his money someplace else? This is another form of laddering and he is a strong proponent of that. 1 to 3 years is a little short in his experience. In the last several years, short-term GICs out to 5 years have yielded more than corporate bonds. He would encourage you to continue doing this but with yield curves so steep, it may not be a bad idea to throw in a 4-5 year one as well. Good strategy.

Laddered ETFs CBO-T and CTF-T. How can they pay their interest rates when the underlying bonds are paying less? Also if interest rates stay where they are for the next 2-3 or even 5 years, what happens to the value of these ETFs? Look at the difference between yields to maturity and the trailing payout. Many of the bonds that are about to mature, were issued in the past at higher yields so the current yield is higher than the yield to maturity. The yield to maturity and the current yield will gravitate towards each other if interest rates stay where they are. There is very little risk to your principal and you should get your money back. Unit values are very stable unless there is a massive spike in interest rates. If rates stabilize and go sideways for 2 years, then the yield to maturity and the current yield will be approximately the same.

(A Past Pick Aug 2/12. Up 0.25%.) Province of Ontario 3.15% bond, maturing 2022. Sold his holdings in the middle of November when he was getting bearish on the bond market.

Preferred shares as a general investment class as compared to bonds? Feels yields are somewhat higher and the marketplace is so much more transparent. Not a big fan of preferreds as they don’t have any ownership to them and they don’t have the seniority of bonds. You are correct in that they are more transparent than bonds and their after-tax yield is definitely superior. However, you need to be very careful which ones you buy. The rate resets by the banks are probably all going to be called in the next couple of years but the perpetual ones are vulnerable when interest rates rise at the long into the marketplace. Preferreds do have a role if you know what you are doing but it is a very complex market.

407 Highway bonds expiring in 2042. This is an annuity. The 407 is a semi-monopoly and they seem to be able to get rate increases through without any difficulty at all. He would hold these bonds for the credit rating side but these are very long-term and he worries about long-term rates rising so you might consider buying a shorter 407 bond, such as 5 to 7 years. The cash flow is there to service the debt.

Reliance LP 4.574% due March 15/17. (All 3 Top Picks are based on a strategy that will earn you something without endangering your principal. Yield curve is very steep so when buying a 4 year bond, in 3 years you are one year closer to maturity and obviously less price risk and the yield has fallen and you have a capital gain. Corporate spreads from governments are fan shaped so the longer you go the wider the spread. As you come down a curve, this will trade at a tighter spread as well as a lower yield so you get a double effect of the yield curve and the credit spread.) Likes the credit here. May be slightly undervalued. Trading at a slightly wider spread that he thinks it should trade at.

Markets. Likes mid-cap stocks because a lot of other people are not looking at them. Tends to favour stocks that are self funding because they don’t need to raise a lot of equity or debt so a lot of brokerage houses are not interested in them. They tend to be neglected on the market and often undervalued. He has tried to shy away from resource names in the last 18 months but has recently launched a new mid to small cap resource fund which he feels is a contrarian play.

Markets. Ben Bernanke is slated to testify before the Financial Services Committee tomorrow but the market has probably jumped ahead of what he is actually doing. The reality is that he is probably going to reiterate the same message. Rates have gone up close to 100 basis points in the last 6 weeks, which means that defensives are probably not the place to be and cyclical names are the place to be. He thinks the best place to be within that group are within the financials, both in Canada but, probably more important, in the US. A fantastic time to be an investor, particularly in the US because we have just seen this rotation start. June was the highest outflows of bond funds since 1990. Expecting a bit of a choppy earnings season this quarter. (See Top Picks.)