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

Gold. This always follows 2 trends, 1^st the accumulation of the debts. After interest rates rise, gold follows. The question is how are going to pay for all is that and how are we going to and how are they going to control interest rates. If they don’t control interest rates and interest rates rise too quickly, we end up with hyperinflation.

Markets. Earnings season has been pretty good but he thinks there is a trend in the industry to set the bar fairly low. The markets are reflecting this, certainly on the Canadian side. Canadian stock growth is very helpful when they US pushes it higher. In the last week, the TSX has been outperforming the Dow which is pretty unusual. Looking for some quite interesting projections, particularly in the energy sector. Also looking for some very reasonable earnings reports, which in itself will give the market some incentive. 13,000 for the TSX is a reasonable objective.

Markets. Cyclical and growth stocks have underperformed. As long as global growth stays intact, there will be a trade back to these cyclicals. China is an issue still, but the second largest economy in the world ticking along like that is not bad. You add it all up and it is not a bad picture for the global economy. He is switching back to Canada because the US has had a good run. He is buying banks but avoiding interest sensitive’s like REITs. Doesn’t think there will be a big push for higher rates. Thinks it is likely that tapering off of the bond buying by the US will happen in September. If there is a weak number or something they will slow down the tapering.

Pipelines. Doesn’t worry about a cut in the dividend. You could get a better growth in Canadian Banks. But don’t sell.

Markets. Feels that the record highs in the US today are a continuation of a bull market that we are in this year and, as well, a disguised bull market in Canada. It is a brilliant market here as long as you don’t look too hard at the resources stocks. He has been enjoying this great market. Thinks there are a lot of small and medium caps that are going to get taken out.

Gold. He is doing some limited nibbling. The price of gold is pretty well borderline on the level of actual costs. Selectively, very good companies can be bought. You’ll have to be patient and even put up with a bit more decline. Indians have been stopped from their government from importing gold.

Bonds. Yields are normalizing, going back really as they should be. Still going to go higher from here but they reached levels they never should have reached. Bonds were ridiculously expensive but now are just a little bit expensive. By the end of this year he expects to see the 10 year bond rate benchmark, 10 year treasury at 3%. Expecting Bernanke will start easing sooner rather than later. He is optimistic that the US economy will pick up in the 2^nd half of the year and into next year. This all feeds on the housing market. The US consumer has recovered all the net worth that they lost, by virtue of the housing prices improving and the stock market improving so their net wealth is back so that means they are confident so retail sales will go up industrial production goes up. Nice virtuous circle when it starts.

Corporate bonds. When government yields rise, spreads compress even more so, they are relatively tight to the U.S. Treasury but still 1%-1.25% above treasuries and that compounds in your favour so it is hard to lose money in the corporate world.

Bank Rates. For anybody who wants to know when the Cdn bank rate is going to go up, there is an easy way of doing this. You follow the 2-year government of Canada yield which is currently at 1.08% (overnight rate is 1%). If the 2-year yield starts to rise, the market is telling you that the bank rate is going to rise. Doesn’t expect The Bank of Canada will raise their interest rates before the US Fed does theirs. Could be another 1.5 years before we see another hike in rates.

Is the Brascan Corp 5.95% bond, due June 14/35, safe? Believes this is now owned by Brookfield Asset Management (BAM.A-T). He doesn’t like long-term corporate bonds. There is so much that could happen in the next 22 years. If he owned, he would Sell because he doesn’t like the overall market. Would recommend that you go into 4 and 5-year industrial corporates. (See Top Picks.)

Real Return Bonds. With the recent pullback, would step in or wait? He would suggest that you think about this and then not buy any real return bonds. These have now been exposed for what they really are. With inflation expectations stable, these are nothing more than a long term low coupon bond so it has a very long-duration and a very high risk.

Fixed income strategy. Basic staggering of 1 to 3 years, GIC bonds equivalent. Should he go longer or put his money someplace else? This is another form of laddering and he is a strong proponent of that. 1 to 3 years is a little short in his experience. In the last several years, short-term GICs out to 5 years have yielded more than corporate bonds. He would encourage you to continue doing this but with yield curves so steep, it may not be a bad idea to throw in a 4-5 year one as well. Good strategy.

Laddered ETFs CBO-T and CTF-T. How can they pay their interest rates when the underlying bonds are paying less? Also if interest rates stay where they are for the next 2-3 or even 5 years, what happens to the value of these ETFs? Look at the difference between yields to maturity and the trailing payout. Many of the bonds that are about to mature, were issued in the past at higher yields so the current yield is higher than the yield to maturity. The yield to maturity and the current yield will gravitate towards each other if interest rates stay where they are. There is very little risk to your principal and you should get your money back. Unit values are very stable unless there is a massive spike in interest rates. If rates stabilize and go sideways for 2 years, then the yield to maturity and the current yield will be approximately the same.

(A Past Pick Aug 2/12. Up 0.25%.) Province of Ontario 3.15% bond, maturing 2022. Sold his holdings in the middle of November when he was getting bearish on the bond market.

Preferred shares as a general investment class as compared to bonds? Feels yields are somewhat higher and the marketplace is so much more transparent. Not a big fan of preferreds as they don’t have any ownership to them and they don’t have the seniority of bonds. You are correct in that they are more transparent than bonds and their after-tax yield is definitely superior. However, you need to be very careful which ones you buy. The rate resets by the banks are probably all going to be called in the next couple of years but the perpetual ones are vulnerable when interest rates rise at the long into the marketplace. Preferreds do have a role if you know what you are doing but it is a very complex market.