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

Markets. This is still a buying opportunity. He is tired of the “tapering” talk and hopes that everyone else is too. The fed is going to be cautious and if there is any sign of an inflationary spike, he is sure they are going to be there and ready to be less aggressive on tapering. Unfortunately, job numbers were a little weak. Interest rates have to go up. A lot of bond guys like to hear that but maybe there’s a secular movement and negative rates in fixed income. If interest rates move up, that is very bullish for equities.

Investing. A big fan of value and he is finding value in technology and financials. Technology is always trading at a discount because you don’t know what the future is going to bring. Valuations are cheap and what you have to do is discount it back to today’s valuation and your expectations for the future, as this is where he is finding value. On the financial side, there were a number of opportunities this summer with Canadian banks and mortgage lenders. People worried about short-sellers coming in so he scooped them up. US names are still cheap as well. US banks are still trading at BV.

Real estate. CMHC has made a decision to pull in the reins on securitized mortgages on the banks. He doesn’t see the Canadian banks taking on the excess risk so it might slow down some of the marginal mortgage buyers which could result in another slowdown in the Canadian housing market. However, so far we haven’t seen any slowdown.

Gold Stocks. In the last 4 downturns, we have had 2 week or 3 week periods where the market just didn’t have a bid, particularly on the small caps. We haven’t seen this yet. In his experience, coming out of a bad market, the very best of the lower end of the juniors performs the best.

Do you believe that bullion banks globally are operating in concert and controlling the gold market? Thinks there is a vocational intervention in the market. The idea that there has been a thorough, ongoing conspiracy lasting for 20-25 years, by people who were not that intelligent, seems a little far-fetched.

Silver. He is a gold bug and he thinks the price of gold goes higher over the next 2, 3 or 4 years. Usually, when gold goes higher, silver goes higher still. This is an extremely volatile metal so don’t use money that you need for something important. Purely speculative money.

Economy. The economic paces that we are dealing with today means lower interest rates for a longer time. Most equities right now are discounting a 3%-3.5% 10 year bond yield, which makes a lot of companies compelling value at these levels. Expects the Fed might push back their tapering to Q4 and possibly to Q1 if we keep getting weak job numbers like we did today.

US Mortgage REITs. Dividends are not safe. As interest rates rise, hopefully the spread that they can invest in grows and the cash flow hopefully grows. The offsetting impact is that as interest rates rise, the BV of the offsetting assets that they own collapses. That is what has happened with a number of these mortgage REITs. He sold his holdings.

Relationship between the yield of 10 year Canadian government bonds and current REIT prices? Relationship between REITs and 10 year bond yields is inverse. As the 10 year bond yield goes up, REIT prices generally come down. He thinks the sector as a whole is pricing in 3% 10 year bond yield. The fact that we are at 2.4%-2.5% means that the sector has probably overcorrected.

Canadian Tech Stocks. As a whole, they have broken out of a 6 year pattern. Canadians who have been in smaller cap energy, mining, etc. stocks are now starting to look at technology companies. A lot of tech companies have been bought out over the last few years but a lot of them are free cash flow generators, which is a very positive kind of factor in that they are able to make money, reinvest money and ending up growing profits on a per share basis.

Markets. You wouldn’t know the spread in oil prices had narrowed from the Energy Stocks. The TSX is flat and yet companies are enjoying the robust oil prices. He does not expect a widening of the spread. There are changes in the delivery of crude oil that will keep the spread wide. There could be seasonal variations. Finally Canadian prices are playing catch-up – light and heavy crude. Keystone is not the only solution but in the east Irving is building bigger export terminals.

(Best and Worse Call)

Worst Call: Theme was 2005-6 small energy companies were overvalued. Raised money for private investment. He got it wrong. The Halloween massacre announced the taxing of income trusts. Private companies were decimated. Then there was the meltdown in ’08.

Best Call: About 2002 he made a call on income trusts. ’03 returns were 10% average when the market lost. ’04 was spectacular at 20%.

Markets. She is in a position where a lot of her holdings are hitting 52-week highs. She is fully invested. The one challenge is that some of the stocks are coming up to her valuation target and recycling into new names is a little bit challenging. In the general market she sees valuations more at a fair level. There are pockets where companies are overvalued and she is staying away from those. Those are more in the “yield type” side. Sees the most value in economically sensitive names.

(Best call ever made.) Citigroup (C-N) and General Motors (GM-N) about a year ago. There was so much uncertainty and so many questions in these stocks and you really had to trust the valuation. This happened with both of these. She still owns them.

REITs. There has been a correction but doesn’t think we have hit the bottom yet. Next little leg down will present some really unique opportunities. Bernanke to announce strategies today which will affect US markets and will affect REITs in that it affects borrowing costs. REITs are quite well-positioned to handle any of the new financing environments, however we still have to wait for the rent growth to commit and expenses on the debt side will be going up. Focus on REITs that have great balance sheets and that have the ability to generate same-store sales growth or that their existing property continues to improve as opposed to growth through acquisition. He is heavy in the US which is a great way to gain exposure to an improving US economy. After that you want names that are linking to the direct economy and less on the corporate side, so you want shorter leases, exposure to the apartment sector and industrials which will benefit from US growth. These will be good trades in the future.