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

Markets. A lot of commentators say the market is still cheap based on S&P maybe earning $105 and trading around $1500. That’s not outrageous but that is on peak margins. Historically net profit margins are in the 6% range and we are nearly double that now. If margins were to revert back to a historical mean, or what you typically get over a full cycle, then you would be looking at a very expensive stock market.

GOLD. Risk in the near-term is whether or not the US decides to pull the plug on QE 3 or scale it back. Relatively positive on the sector and it is so oversold and sentiment in the gold sector is so negative relative to such positive sentiment on equities in general. Going forward he feels gold will outperform broader equity markets. When underlying stocks tend to outperform the commodity, i.e. gold takes another leg down but underlying equities don’t fall, this will be his signal to get much longer. When this happens, this company will probably be his favourite vehicle to do so because it has such tremendous growth profile.

China. He is bearish on the global recession recovery in China. There has been a nice bounce in the sector but thinks it is going to be pretty short lived. The secular move within China, from an export driven economy to a domestic driven economy, is still the big push there. Demand for commodities out of China has flat lined and will continue to be so.

Markets. Thinks we are in the beginning stages of an upswing in the market that could last several years. People are finally getting the point that the risk of doing nothing, which they have been doing for a while, is now the risk that they have to do something and are starting to put their cash to work. There is a tremendous amount of cash sitting on the sidelines. Also, there is a lack of supply of equity issues. We haven’t seen good quality IPOs, and IPOs that are coming due are not being well received. Meanwhile there is a tremendous amount of stock buybacks from good quality companies. Finally, the valuations for equities are quite undemanding given that we have low interest rates, reasonable valuations and rising dividend yields.

Thoughts on share buybacks versus dividends? Dividend paying stocks have outperformed any other type of stock over the long term. Companies that pay increased dividends regularity, outperform companies that pay dividends. In theory, a dividend versus a share buyback is the exact same thing, in one the money is returned to you and in the other lowers the share count but markets seem to reward dividends.

Any undervalued forest product companies that you can recommend? He believes lumber prices will probably go higher and that the US housing market is under serviced and under built for many, many years which should be good for lumber prices. His 2 favourite ideas are Acadian Timber (AND-T) and Hardwoods Distribution (HWD-T). The latter is a pure play on distribution of lumber into the US. Very small so use caution.

Markets. We are not free and clear here. If we see a couple of data points like China manufacturing and so on, then we are in for a correction. Understands congress is not going to do anything. The debt ceiling is the result of the US putting their best people on the problem and failing. He is confident on the US corporations to drive the bottom line but not confident on US politics.

Gold. There is a risk (30%) that if the 15.25 support for gold breaks then it goes down. $14.25 could be a downside target.

Educational Segment. There are a couple of different ways to trade. You can get out or change your risk profile and still be in the market. ZEB-T shows how much the sector correction is (10%). Look at the preferreds. ETFs can play them. You get a lot of financials in the basket. The yield is a little higher. If you look at the ETF vs. the preferreds. The ETF has done better.

Markets. Italy is very concerning. Don’t know who will be running the show. It puts the Euro in a new light. This election has really put Italy back in the forefront. The fourth largest debtor in the world. The impact on the economy will not be as much as the payroll tax will be. Italy could be the trigger for a correction, or it could be upcoming earnings for first quarter. Focusing on technology and healthcare stocks but keeping cash on the side.

Markets. Complacency had seemed to be gripping investors to the point where they had taken any fear factor off the table. The decline in fertilizer stocks last week shook them up as well as the Italian election. Market had been overbought. He has taken advantage and bought a lot of stocks that he liked. There is a school of thought that says markets are not overvalued based on historic P/E ratios. Still has cash and is not chasing anything. If a position gets to 10% in his portfolios, he pares it back.

Pipelines. A lot of the fear about the XL pipeline, or even northern Gateway, not going through is already in the price of the shares. Feels there are some long-term alternatives. As far as going to Asia, you have the trans-mountain system and the pipeline is in operation. Also, it is a great idea if there was a reversal of the TransCanada pipe so you are shipping Western oil to Eastern Canada.

What is the difference between “averaging down” and buying on a pull back? Averaging down is when you own a stock and it starts to go down and you buy, hoping to catch it on the downside but you could run out of money and the stock keeps going down. Buying on a “pull back” is when you have things you would like to buy and you want them to pull back to the price you are interested in.

Markets. Has been pretty low volatility on the way up since mid-November, so any time you have that for a month and a half, you are right for a correction. US Fed coming out with their minutes got people a little bit worried that they were going to tighten sooner than people had thought. Little things like that can set it back. The whole dividend space is more richly valued than it was a year or so ago but in this type of environment it makes sense. We have a slow uneven economic growth and low interest rates so people are attracted to companies that are paying dividends.

Diversification. Asset allocation is what deals with your volatility. Everybody’s portfolio should match their risk spectrum and how much volatility they want to have. With the period we are going through now, people finally get to test their asset allocation exposure and how comfortable they are with the risk parameters. People tend to make emotional decisions rather than the right ones but having asset allocation in different sectors really helps.