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

Good ETF that tracks US blue-chip stocks? If you are looking for US dollars, the Diamonds (DIA) would be your “go to” name and the IA is the one that tracks the Dow Jones. In Canada you can buy the ZDJ which is a BMO Dow Jones Cdn$ which is also currency hedged. One of his favourite large caps is the iShares High Dividend Equity (HDV-N). The Canadian equivalent would be XHD.

Markets. Has been bullish for about 3 years but is now getting cautious because the market is getting long in the tooth. We now have a rebound bull. These bulls follow some type of a crash and this is the 2^nd recovery we have had since 2002 and we are now getting near the end of a rebound bull. The rebound from 2002 took about 50 months and we are currently in the rebound from 2009 at about 46 months. He is watching the financials to see when they peak because that is usually the sign.

Gold. The gold chart shows the mid-summer low and the current low which is at the same level, i.e. it has held. Technically the chart shows a descending triangle but that is due to the rally in the US dollar. Gold charts in most other currencies would show more of a symmetrical triangle. Gold is going to find support at its current level and that should get the gold stocks going. (See Top Picks.)

Markets. Valuations are at very reasonable levels. Although markets have hit all-time highs, corporate performance world in terms of earnings, revenues and cash flows, hit all-time highs some time ago. They are probably 20%-25% higher in terms of earnings than when we hit these levels in terms of index pricing. There is an abundance of worry out there which is always a good thing for the market. S&P 500 on a weighted basis will hit somewhere in the high 100’s, $109-$110 a share.

Tax Implications on US Investments. There was a period during the fiscal cliff when it was thought that US holdings would be taxed right from the 1^st $1. There was some relief but it does have implications for Canadians. Anyone who owns more than $60,000 of US property, including common stock, should pay attention to this. For more info check his website at e-articles and sign up for it. (www.goodreid.com)

Energy Stocks. Energy stocks in the US have performed okay but Canadian stocks are still painted with a negative brush. There is a lot of worldwide and US negative sentiment on Canada’s dirty oil from the bitumen. Thinks we have probably found the bottom here so it is time to look more positively on the Canadian energy sector. We are at the margin of starting to see a bit of a rotation into our oil stocks. Differentials were pretty wide at $35-$40 over the last 3 months but have now narrowed on the heavy oil side down to about $20. Edmonton light oil has narrowed from $10 down to almost par. This has all happened in the last couple of weeks. Hasn’t really caught on to media yet and no one is really talking about the narrowness of the differentials.

Short Pace Oil & Gas (PCE-T) and go Long AvenEx Energy (AVF-T) as a bet that the merger will fall apart? Guess that could be a trade. There is definitely a camp out there that is against the merger. The question is, is there another buyer for Pace as a stand-alone entity or does it get broken up? Not a trade he is putting on.

Markets. Feels that investors are shifting their focus a little bit further out the risk curve, looking for other sources of income like dividend growth. There is definitely an update for that. His big believe is to identify parts of the market that people care about or that fit the current environment. Over the last period of time, people have been willing to pay higher and higher prices for things that are predictable, where there is some catalyst leading to a positive change. For instance, the oil/gas boom in North America has not been so good for the producers but there is lots of new volume for energy infrastructure companies.

Stop-losses at 10% below the 20 day moving average. How current is this? Stop losses as a concept simply means that you should have a risk budget. We all make mistakes so you want to limit the downside. He uses point and figure charts, which are a little bit more complicated. You could use a moving average. For a shorter-term investor, you might use a 20 day smooth moving average. A little bit longer, you might use a 50 day or for very long you might use a 200 day moving average.

Markets. Rising dividends lead to increasing stock values so don’t focus on stock prices. He is watching for a correction but does not hold a lot of cash. He opportunistically reinvests dividends when there are pullbacks. Markets steadily rise over time so look at the beginning point and the end point and don’t worry about what happens in between. Average holding time is in excess of 10 years.

Markets. We are always wondering how the US will shrink the debt by $2 Trillion. Their policy is to monetize debt. The world is fixed and everything is ok if central banks can back away from their artificial support.

Education Segment. Evaluating Risk relative to Returns. People look at mutual funds and say ‘how much can I make’. ETF XME in the US averaged 14% a year over the last 10 years, but that holds the most volatile sector out there. It could go down 70% or up 100% in any given year. Canadian utilities, for example, have significantly less volatility yet good returns.

Interest Rates. Low rates, attractive looking dividends, etc. Nothing has really changed and looking forward it doesn’t look like it is about to change anytime soon. Whether it’s Bank of Canada, the Fed or Bank of England, it looks like rates in developed countries are pretty much on hold. This just increases the attractiveness of dividends and distribution paying companies. Challenge now is that it has become a stock picker’s market in that you really have to sift out those companies that have the ability to grow cash flow and subsequently growing dividends versus those that are just harvesting cash flow and are winding down.

Markets. Sees a lot of good value still in the Canadian equity space and he is building a portfolio of stocks that are trading at less than 10X earnings at an aggregate level and have a pretty healthy level of ROE as well at over 20%. Thinks the US is going to really pick up steam and you have to focus on US sectors that are exposed to that. Feels that energy and material stocks will continue to do poorly in the months ahead.

Market Call Tonight is a repeat of the previous program by John Stephenson.