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

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.

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.