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

Educational Segment. Howard Atkinson of Horizons was the Guest. Alpha ETF’s. It’s all about trying to beat the market. Horizons is the second biggest in the world. Number one in Canada. In a covered call strategy the markets have 4 outcomes – market goes down hard, goes sideways or up a little bit or they go up aggressively. In 3 of them the covered call strategy tends to outperform. Only in a raging bull do you underperform.

Markets. Slow and steady. Don’t get too spooked by the spike in the 10-year. We all knew it would happen. It is a good thing if QE eases here. It lets the private sector contribute to growth. What we should look at is that this is how investors will react to less QE. Friday there were strong jobs numbers, 3 months in a row close to 200k. Housing numbers up 2%. There is a slow and steady recovery so people should not be too spooked by a reduction in QE. We are in a long term unwinding of the bond bull market. It seems there is a lot of cash on the sidelines. Once bonds start to sell off we will see a shift into equities. The yield trade will continue as people still need income. Over the last month, equities that look cheap, cyclical with growing dividends are key.

Canadian Insurers. In last 12 months they look like they are on highs. You can see potential if you look at a long term chart. Insurance could see much stronger growth than in the banking sector. Likes SLF. Compound rising insurance rates with markets and it looks good for Insurance Companies.

P.F. Chang’s China Bistro Senior Note 10.25% 2020 Bond. (Top Pick Aug 28/12, Up 21.25%) Who doesn’t like Chinese food? Fantastic franchise. Renewing menu, introducing better food items and removing costs from the system. Generates a tremendous amount of cash flow. Will continue to be a great bond.

Markets. This is an interesting junction as not only are we in the traditionally seasonally weak period of the summer, but the Fed has delivered a message that they are going to start tapering. Have a bit of a problem on their hands as they cannot do it too quickly because it will have an effect on peoples’ feeling of security based on the value of their portfolios so they have to taper slowly. Thinks the market is going to be fairly choppy over the next couple of months as the Fed eases us very gently out of the quantitative easing program. From a technical point of view, we cannot avoid the trend. He believes that we will return to the upswing part of the market September, October or November. He is about 40% in cash and will continue until the upswing.

REITs. Do these have a seasonal factor where one can invest in them? Of all the sectors, this sector has been the hardest hit and they are in danger. All of the interest sensitive stocks have been oversold and deserve a bounce and probably will. As far as the longer-term outlook, the trend has been broken and he is a little bit nervous for the longer trend. He is not familiar from a seasonal perspective on REITs but typically summer is a defensive time and these would “normally” be stronger, but this summer is different.

Gold. If you listen to the “seasonal” guys, they’ll tell you about a potential for gold to bottom, usually late July, and move up until the fall, Oct-Nov area. That may or may not happen this year. Chart shows gold is trying to base with the support level of around $1200. As any technical analysts will tell you, you wait for the breakout and for it to move out of that base before getting too excited.

US Markets. US had good solid numbers, enough to keep the economy rolling a little bit and enough to keep those earnings coming through. We know the Federal Reserve unwinding will be coming at some point, but until it actually comes, monetary conditions do remain favourable. Has been Short on the bond market for a number of years now.

US Economy. US job numbers today play into his theme that the US economy is getting better. Even though in some sectors, including government, they are letting people go. But in private industry, the payroll is really outperforming and doing very, very well. Truck sales are indicating that the economy is doing very well. Because of concerns about the US$ declining, he has been buying iShares S&P 500 Cdn Hedged (XSP-T) but for the last 6 months or so, he has been buying the Vanguard Small-Cap ETF (VB-T).

Europe. Looking to get into some Cdn ETFs and some non-North American holdings but the time is not quite right. There seems to be some fidgeting in Europe for the last few days. He would like to be looking at Europe, in the same way that he does in the US, that is, he doesn’t want to buy their economy but wants to buy good businesses. The problem with Europe is that you don’t have one federal bank or one Treasury Secretary, so there are competing and conflicting interests.

As an option becomes deeper in the money, it’s time value tends to decrease. Why? This is because options traders are not willing to pay as much for an option. The more it is in the money, it is not going to move exactly with the time value because time value is always decreasing.

Could you comment on how you handle the very wide variance between bid and ask prices on Montréal options? Do you just hit the bid when selling? It really depends on the liquidity of the option you are dealing with. He’ll often use options on the highly liquid XEG, XIU and the banks. A lot of the other options on ETFs are not terribly liquid. Yes, he will just hit the bid when selling but if you’re doing anything a little more complicated like that, a lot of people like to do various kinds of spreads but you have to be really careful.

Indices. If he wanted to purchase Calls and Puts, is there a sweet spot with regards to timeline and from a price aspect? Also, would you stay away from the triple witching months? What he really is looking at with options is the underlying volatility and what you want the strategy to achieve. As an option seller (he is almost never an option buyer) he likes to sell out 6 months in order to pick up better money in terms of time value and, therefore, more downside protection for the portfolio. If you are a purchaser, that time value can erode pretty quickly. If he were a trader in options, he would be looking at shorter terms. He is happy to have the longer-term people out there as it makes his Covered Calls look particularly attractive.

What is your opinion of the 4 iShares RAFI Fundamental ETFs (CRQ, CLU, CIE,CWO)? Do you use them? They seem to outperform the market even with a higher management fee. There is absolutely nothing wrong with these. They do have a slightly higher management fee. These are becoming more prevalent and he thinks it is a positive development.

Markets. Triple storm on the TSX: Interest rates have gone up; energy prices have been low and coal has been low; and then there were concerns about global growth. Dividend yield is comparatively still out of sight compared to a long bond. Our dividends in Canada are tax advantaged and people forget that 1 or 2% interest rates are historical anomalies. As interest rates normalize, dividends on bank stocks and so on should be okay.