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

US. There have been some positive economic surprises. Most of the regional PMI’s (Purchasing Managers Index) that have come out lately have been not just above expectations, but above the highest estimates. Regarding US economic growth, there was a sense for a little while that people would start to fear the Fed would start to take the punch bowl away but then we saw the market recover when people started to think that maybe it would not be that soon. If the economy is in a self-sustaining reasonable growth mode and rates go up only because of that, maybe it is not so terrible. When there is growth in the economy and things are going well, small and mid-cap companies do quite well. In a rising market they tend to outperform the broader indexes. He looks for growth, first and to him growth means revenue growth above and beyond the economy. Also, looks for strong economics in a business, so whatever that growth rate is, does it have high margins and high ROC and does the management team make allocation decisions that make sense to him. In a reasonably good economy, with the way things are going, especially in the US, he expects to see good things out of some of the industrials, some of the regional banks and technology companies.

Markets. Mostly, he has been looking to sell a few things. He rarely buys at this time of year. This is a good time to take some winners off, maybe some tax losers but he can’t remember the last time he bought in May, June or July because markets generally do not do well. Also, psychologically it gives him a break from the Buying process. At least 75% of his buying is in November and December because it is Tax Loss season. Research is ongoing all the time.

How do you handle the declining Cdn$ when dealing with US stocks? He has the highest weighting on the US side that he has ever had. It’s up about 70% because he wasn’t worried about the currency risks. He wasn’t predicting that the Cdn$ was going to come down but wasn’t worried about the US$. Since then the Cdn$ has come down so it has helped his portfolio. Thinks the US still has a way to go.

Gold. Doesn’t seem obvious to him which way it is going to go. Hasn’t done a screen on Canadian companies for a couple of months but will be doing this in the next couple of weeks. A number of gold, silver and commodity firms could come on his screen and he could then send to the company for information.

Tourism. This time of year stocks like West Jet (WJA-T) and Starwood Hotels (HOT-N) seem to be ascending (?). Is it better to invest in overseas companies like Cathay Pacific, etc. in the wintertime? Great question. He likes to look for annual patterns for stocks, when is the best time of year to buy and to sell. This kind of marketing timing is very, very important. In terms of tourism stocks, he has no idea but it’s something that he would love to know.

Markets. The majority of QE is behind us and not ahead. China – there is some uncertainty of what growth is ahead of them and that has affected copper. Some think the Fed will ultimately reverse course in tapering. But data points regarding the economy have been constructive. As they slow down in China it is not positive for base metals in Canada. It will crimp demand where China accounts for 40% of it. Inventories are at a 10 year high. If copper goes down, stocks will certainly correct further.

Markets. There was an overreaction to the message Bernanke was trying to send. It was very clear.” If things get bad, I’ll continue to do this. If things get better I’ll taper QE.” He said he was going to still keep short rates very low and will look at the numbers. The harder part for him will be to manoeuvre the environment the other way. He manoeuvred it down, now he has to manoeuvre it the other way, which is going to be much more difficult. People should get used to what is happening. Interest rates have to go back to some normalized levels. Expects the aggressive rise in bond yields is going to cool off and then you will see a more gradual thing in the future. This is a very healthy sign that the US economy is getting better. Also, in other parts of the world, even Europe, there are certain signs that things are getting better.

Gold. With prices dropping, is it a good time to buy and should they be looking for physical gold instead of paper gold? Gold has broken down to $1200, which is a real problem because the next level technically is $1000. It is in a very bearish kind of trend. You need to see it move sideways over the next little while. If you think that this is an important issue because of inflation, banks, etc. he would just own a gold ETF.

Markets. He is seeing a buying opportunity now for high-quality yield instruments. There has been a lot of speculation on the recent backup on yields and where it is going to go. This recent backup makes sense. Yields are artificially low levels, non-sustainable for the longer-term and he is looking forward to getting back to normalized levels. He has been looking at the pullback that some yields have, which have high quality management teams that can sustain their yields. Opportunistically he will buy some of these stocks. Has been quite negative on emerging markets for some time, especially with what we have seen recently in China. A slowdown was inevitable. He’s been constructive on the US consumer for quite some time.

Canadian Financials. Not all that constructive on this sector given the economic environment in Canada. Their ability to generate and grow their businesses is going to be challenged as a result of what we’re seeing on the housing side as well as the rate side. They do carry quite attractive yields (5%-6%) and he doesn’t think they will be cut but capital appreciation he feels, is going to be challenged. Prefers US financials that have the potential to get leveraged from the recovery in Europe, the stronger recovery in the US as well as the ability to raise dividends in the near to medium term. This allows you to not only get dividend growth but capital appreciation growth as well.

REITs. Not extremely positive on this space in Canada. Given the selloff, there are unique opportunities in this area for investors to play. Despite the selloff, these REITs are trading very expensively at well north of their NAV. He doesn’t like to play things that are expensive just for the yield. Names that he does like in this area are Choice Properties which pays 6.5% as well as Boardwalk REIT (BEI.UN-T) and Dundee Corp (DC.A-T).

Markets. He is long term, value driven, small, mid and large cap. He is very different than the index. Very low resource and financial sectors. He likes sectors that are underweight in the index. He likes telecom, renewable energy and energy infrastructure, industrials, consumer staples, and consumer discretionary as well as less liquid companies that are less followed by analysts. He is lower risk and lower volatility than the index. Investment decisions are guided by the fundamentals of the companies.

REITs. The sector has really got whacked. Very interest sensitive. Some were terribly expensive and others were cheap but they still went down. He owns three of the smaller ones. High yielders and solid in their space with great growth potential. Hold for the yield for now. They are oversold as a group.

Markets. A month ago he said it was going to be everything US for the next little while. Money is going back to the US, from the EU and BRIC countries. We now see the reversal of that. The impact it astonishing. We have been waiting for 5 years. Normal markets with normal supply and demand metrics. His model is about earnings and earnings estimates. Analysts are caught here because they don’t know where to go in terms of earnings. Public price is an independent variable. As markets come down he sees prices going through EBV lines. EBV is economic book value and comes from the balance sheet. The balance sheet should be more stable than the market value according to the markets.

Markets. We have seen a lot of volatility since the Fed’s comments over the last few weeks. What is important to him is the movement in the 10 year bond yield. He has been predicting this for a while, trying to back out of REITs and so on but didn’t think this would all happen in such a short time. He thinks this change is permanent. Likes health care, industrials, consumer discretionary. Resources are tough to understand right now. He sees too much risk there. Likes names with exposure to the US and aren’t so much energy and materials-driven. Tax loss selling season is going to be ugly in resources. Sometimes you have to bite the bullet and get out.