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

Markets. In the short term he sees the TSX outperforming and thinks it’s true on the long-term as well. There has been a huge move on the S&P 500 and historically, these tend to go in a similar direction. He is looking for earnings growth to be stronger in Canada than the US. You have to be selective in this market when choosing large caps. Cyclical areas have not been performing well over the last 2 years, which has dragged the TSX down. Certain sectors have gotten really cheap, such as the oil/gas, which is starting to come to life a little bit. Banks have caught fire for the last 3 months.

Canadian Banks. If you own, you are onto a good thing and continue to buy and hold them. They were disappointing performers for a while up until a few months ago but fundamentals, improved and the earnings for the group are probably going to be up 5%-6% this year. Average dividends of about 4%, so you are looking at 10% returns without any change in the PE multiple. PE multiple was down back in the summer by about 1.5. It has recovered about half a point, but there is still potentially more multiple expansion ahead of it.

What do you believe is the key quality that one should look for in executive leadership of a corporation. He finds this a very critical part of the investment process. Leadership would be a CEO that can enunciate clearly the strategy of the company and how they will get there over time. He is always interested over the next 3-5 years as circumstances in an industry can change.

Markets. FX Rates are pretty important to economic growth. The US dollar should be biased toward strengthening next year and this will benefit world economies. FX rates will be a main talking point for the next 6 months. 88 to 93 cents over the next year is the target for a US dollar in Canadian dollars. He thinks the strong US jobs numbers were choppy at best. They are just one data point, but a stronger number is better, obviously.

Income Funds. People look at them as they get older. There is no shortage of dividend-like products out there. People should consider this in their portfolio. Sometimes you have to look at total return. You have to be able to switch some of your focus from dividends to capital. XTR has a lot of income producing exposure, but next year with tapering, you could see some under performance.

US vs CDN telecom stocks. Prefers to play through ETFs even though Canada does not have a pure play. ZWU-T (6.5% yield) and IYZ-N. Growth from the last number of years probably won’t continue but the covered call overlay is good. With Tapering next year they won’t perform as well as growthier companies.

Should I move capital from one Telecom to another because of performance? No. Stay diversified. You can’t chase performance, but if you want to own both then take some profits in the better performer and put into the cheaper one from time to time.

Education Segment. Risk vs. Return. Prospect theory or loss aversion theory. If gains are up people are happy. A little more gain and there is little marginal happiness. But when we are losing money we get increasingly unhappy until we can’t sleep at night. Studies showed that 94% of top fund managers had periods of 3 years when they were at the bottom. When you go into an investment, can you hang on for 3 years if it does badly?

Markets. This is the time of year he gets into a buying mood. Nothing has happened yet but hopefully soon he will pick up a few companies and before the end of the year. He doesn’t buy anything he has not watched for 6 months. Companies must have been beaten down badly but have good balance sheets. There were 350 companies a couple of years ago but now it is less than half. He is concerned about the housing sector and connection to banks. Housing sector has been pretty hot. Banks keep raising dividends. Balance sheets are not necessarily great. Thinks banks should pay down debt and buy back preferred shares. Now is a great time for Canadian banks to pay down debt. In the ‘80s it was third world loans. They should take care of their own balance sheets. European telecoms and banks are of particular interest to him at the moment.

Markets. We are still in a secular bull market and he doesn’t think we have even passed the halfway mark yet. He would expect upside returns over the next 5-10 years. Over the past 150 years, the average return for an equity market is about 6%. Over the next 10 years, he expects to see 8%-12% on average. There will be bumper years like this one and there will be some that will be a little softer. Low points in stocks over the next year will be opportunities and if you time it right, you can get fantastic returns. He tends not to be a buyer of stocks that run hard, but waits for more fundamental valuations to come in.

Canadian Market. Canada is a funny market. 23% is banks, which have had a nice move. Doesn’t think this is completely done yet. Including dividends, you could still see an 8% return. Gold miners are a little suspect in the short term. Energy looks better to him, as long as we hold in with prices in and around here. Oil in the $90s is fine. They are cheap and there is growth. Thinks this will continue to be a stock pickers market.

What is your favourite company in the Canadian heavy oil space? Has been some problems at Cushing again, widespread out to a point where it only narrows again in the next month or 2 as this gets fixed. He likes Canadian Natural Resources (CNQ-T), which is partial to the oil. Of the seniors, the one that’s lagged because of a quarter or 2 of operational problems is Cenovus (CVE-T) and this would be his favourite in the short term. He thinks they fix it and the 4^th quarter will be better along with subsequent quarters. Should play some catch up. Probably about 10% behind.

Why the drop in so many energy related stocks? All of these types of stocks are down on the interest rate related play and has nothing to do with operations. What you have to look for is a combination of growth and yield because you want to be able to grow through the fact that maybe yields have to be higher when rates are higher. TransCanada Pipeline (TRP-T) looks like it has pretty good growth and Enbridge (ENB-T) has 8%-10% earnings growth over the next 7-8 years.

Markets. Earnings growth has not been particularly impressive. You can call this a Bernanke rally. If earnings are not driving the market higher, then it is the ultra low interest rate environment that creates people to take more risks. We have had 5 years of pretty much up markets and getting close to what he feels is a top. Time to take a breath and reallocate your capital, relative to 5 years ago when it was easy. Geographically he is seeing a little bit of growth in the US, nothing in Europe so far and China is slowing down. Although emerging markets are growing at a little faster clip than North America, as interest rates grew in June, a lot of money came out of emerging markets in stocks, bonds and currency. It is now coming down to being a stock pickers market. He is still in the market with 5%-10% cash. He is just looking for the cash flow growth of dividends so he has some downside protection in the event of a correction in 2014. Don’t forget that the 2^nd year of the presidential cycle usually tends to be negative.

Non-resident tax on dividends through the New York Stock Exchange? This is where strategizing has to come into play. For non-Canadian companies, there will be withholding tax, depending on country. It can range all the way from 15% in the US to 30% in Italy. Those accounts should be in taxable accounts because then you can claim back the withholding tax. On US dividends in RRSP’s there is no withholding tax. Something to think about is to never let the tax tail wag the investment dog. To invest just in Canada and Canadian dividend paying stocks, is fine but you are not going to get the diversification.