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

Markets. There are some really good values out there. He is looking for lower earnings and lower multiples – a GARP approach. Likes sound balance sheet so they don’t have to manage their debt. A lot of US investors left Canada as gold came down. There are specific companies that are doing very well. He looks at track record and past performance. He looks for previous execution by management. Energy was hit pretty hard in Canada and he thinks US managers are starting to come back in to nibble. You want to find companies that are growing rapidly and increasing reserves. He is a little bit surprised at the price of oil. It spiked higher than he predicted. Thinks oil is a little bit ahead of itself.

Small caps over the long run outperform. Greatest amount of alpha is through great stock picking. Russell 2000 is hitting new highs. Breadth of market is getting broader. Some small caps are acquired at very high multiples. We are at the point where money on the sidelines is being deployed and has worked through large and mid caps and is now going into small caps.

Market. The moment there is a whiff of higher long-term rates, you are going to get a sell-off against asset classes and corrections as people did some repositioning. Thinks that people are coming to the conclusion fairly quickly that just because we have had a backup in long yields, doesn’t mean that they are going from 1.5% to 5%. It may mean that we are in a new range. Today we are back putting money back to work. His core mandate is a cash flow generating mandate. He goes anywhere from government debt on one end of the spectrum to dividend paying equities on the other. Came into May with about 11% of the portfolio in fixed assets with all the rest being focused in equities. In the equities there are 2 components, one being more interest-rate sensitive, specifically yield focused, but the majority of the holdings are lower payouts but more dividend growth. The core theme continues to be dividend growth but with slow improvement in the housing market in the US and confidence getting a little bit better. 2 new equity themes have become much more dominant in the last 3-4 months: consumer discretionary, really focused in the US domestic market, and US financials.

Economy. Fear of financial strain seems to be less of a worry than in the previous cycle. This is particularly true in the US. US banking system is in a lot better shape than it was coming out of the financial crisis. Economy is showing some decent signs of growth. Financial strains still exist in Europe but less so than they were a year ago although he feels their banking system is well behind the advances that the US system has made.

Markets. Expects the TSX to outperform the S&P 500, very much the reverse of what we have seen in the last year. A lot depends on some improvement in the cyclical sector of the market which has been a big drag. Although fundamentals in terms of commodity prices for oil/gas have been excellent, the stocks have underperformed and he feels this is where you will see the big catch up. A lot of the elevated levels of crude oil are due to Egypt and the turmoil. Thinks oil prices should stay between $90 and $100. His enthusiasm for Canadian banks has grown in the last 6 months or so. Have been discounting a fairly significant slowdown in Canadian economic growth and also very poor housing market. There have been very large Short positions from US hedge funds, betting on the housing crisis in Canada, similar to the US but doesn’t think that will happen. There has been a multiple contraction in Canadian banks as such that they are all below their average PEs, quite significantly.

Economy. Looks like short-term rates are not going to be going anywhere until at least the unemployment rate comes down to about 6.5%. If you look at Fed tapering and the $85 billion of bond buying, it looks like the equity investors, after the initial shock, are getting a little more accustomed to the eventuality that it is going to happen probably in the fall or so and consequently higher long-term rates. It is positive for investors that they are getting used to that idea but the fact that short-term rates are going to remain low longer is actually a positive as well.

Markets. He is considerably overweight the US versus Canada. Looking at Canada, commodity prices continue to struggle and have been for some time. The housing market is very different in Canada compared to the US. It is rather uncertain domestically, whereas in the US we are seeing a very clear recovery. The difference today versus even 6-12 months ago when you are looking at dividend stocks is that you want to look for companies that are not just paying dividends but they are also growing their dividends in a significant manner. Long-term rates will continue to move upwards.

Gold. Chart looks like a wedding ring rolling off the table. We may see a bit of a technical bounce but at this point he is not really bullish on gold. A lot of the catalysts for gold have really dissipated. Also, the fact that the US$ has moved up and not down, he doesn’t see the impetus for gold to move up or create a new bull market.

Economy. US economy is improving at a better pace than in Canada. Canada will eventually catch up. There are companies in the US that are much more diversified internationally. Seeing healthier growth particularly in emerging markets. We have to keep an eye on rising bond yields as rising rates will increase borrowing costs which will impact the US consumer. US bond yields are still historically low. The US government will be careful on the pace of the interest rate hikes.

Markets. Canadian banks have definitely lagged and this is an area she would be buying. And, as well, some of the interest sensitive stocks have over reacted on the downside, such as the pipeline stocks where there is good cash flow visibility and possible dividend increases.

Markets. This is the summer market and volatility has picked up, especially in the REIT sector. Volumes have dried up and will likely continue going into the fall. There has been a knee-jerk reaction to REITs in the last couple of months. Sector has traded down sharply on the basis that the Fed may taper back its bond purchases. When you look closely at what the Fed says, they have some key hurdles that they are going to look at before the tapering process or raising their benchmark rate. They will be looking at unemployment and inflation and we are in a little bit of an adjustment period here. People are going to get used to a new range on the 10 year bond yield and in that period of time you will likely see elevated volatility, but that creates opportunity. There has been a really strong correction in the REIT sector right now and valuations are trading at levels we have not seen in at least 3 years. We are trading at a 10% discount to NAV, multiples are approaching their historical average, but free cash flow growth from his perspective continues to look to be above average. He is finding more opportunities in the US than in Canada because as the economy improves they are more prone to seeing stronger free cash flow growth out of their businesses.

US Mortgage REITs. Mortgage REITs have probably been the hardest hit sector in the US when it comes to a reaction to the tapering back of bond purchases and a higher 10 year bond yield. Names have come off anywhere from 20% to 40% and this is predicated that people are concerned that the BV’s for mortgage REITs are going to fall over the next 6-12 months. Book Values have already fallen and are trading well below where their BV’s are. Doesn’t feel the volatility in this space is going away any time soon. Has substantially reduced his weighting over the last 12 months. Going forward, he doesn’t see massive dividend cuts in the sector but does see lower dividends than what we are sitting at today. Your risks are substantially lower buying the mortgage REITs today than it was 6 months ago but volatility will still be high.

REITs. The sector is at the healthiest point it has ever been historically. Leverage is at its lowest level. Market Cap is the highest it has ever been, meaning you have liquidity in the shares you are purchasing. As well, payout ratios have come down to under 90%, which means your yield is more stable. If you look at historical total returns for REITs, a large proportion of what you are going to get on return basis is going to come from yield. Going forward, if your yield is more stable and you continue to compound at that level and you start to see distribution increases, because payout ratios are more stable as well, you are going to compound at a very high level compared to historical norms. He believes that the 10 year bond yield is not going to go higher than 2.5%-3%. At that level, he feels that people will start to allocate capital to the sector once we operate in that range for a period of time. He would take this volatility as an opportunity to Buy high-quality names that have embedded free cash flow growth in their portfolio and that are going to provide distribution increases. (See Top Picks.)

Markets. Markets will be choppy this summer. German elections are going to be one of the key events of the next few months. He is not sure Germany will do everything they can to save Greece, Italy, Spain and Portugal. Nothing to worry about at this point but it should be a choppy summer. JNK is a high yield ETF but it should be 10-11%. Energy stocks are not performing and when the sector corrects these stocks will probably test their summer lows.

ETF and Bond Prices in Interest Sensitive Aras: It is about expectations. If markets believe nothing will happen, they price for the future. The market thinks the Fed will back off of buying bonds. Doesn’t believe fed will raise interest rates any time soon. Thinks QE is here for years and years to come.