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

Markets. For the first time, in a long time, we are starting to see underlying fundamentals that are encouraging for economic growth prospects in 2013 and beyond. Has been an improvement in the labour market and house prices, that will have a knock-on and wealth affect in terms of consumer spending. Corporate profitability should continue to improve and, hopefully, if corporations put all of the money they kept on their balance sheets to work, that should accelerate the growth a little further. Still going through a deleveraging process. Thinks Europe will eventually emerge out of a recession in mid to late 2014. Still good underlying growth from emerging markets as well.

Markets. Opportunities for value stocks are harder to come by but he is still finding a number of them, always looking for those that are out of favour with lots of upside. High-yield bond functioned really well in 2012 and totally focused on the corporate bond market. Spreads have come in, but are still well within the long-term averages. The risk is rising interest rates so prudence dictates a shorter term bond portfolio. Doesn’t touch emerging-market bonds at the present time.

Spreads on high-yield bonds. High-yield spreads are currently around 452 to 500 basis point range, which is well within long time averages. Defaults have been almost at historic lows over the last few years so there is still reasonable value in high yields, though certainly not as much as a year ago. Spreads have come in about 200 basis points in the last 12 months. Thinks spreads will continue to come in by about another 150 basis points in 2013 so it is still going to be a good market for high yields. However, if you hold a lot of long-term high-yield bonds, that is where the real risk is. If rates back up faster than anticipated, especially going out 5-10 years, those investors can get caught. His own portfolios average about 2 years.

Portfolio consists partly of long-term corporate bonds, 6-10 years, BBB high and better. What is the risk? Big risk is rising interest rates. We’ve been locked in this declining interest-rate world for the last 30 years and people are getting used to 10 year Canada bonds in the 2% range or so. That is not the way the world will remain for the next 5-10 years. Would be very cautious. He would be selling longer-term bonds and if you want high-quality bonds, live with a lower yield and hold shorter-term bonds.

Markets. Slightly more on the growthier side but still defensive. Still lots of REITs and dividend payers as well as some gold. Additions in the last couple of months have been growthier. Now he has less gold and more energy, US housing and a bit of the REITs. Consensus is that it will be a decent year, although not stellar and everyone is waiting for a pullback. If there was a dip he would be a little more aggressive.

Canadian Banks. Downgraded the other day. He doesn’t think it is a big deal. Still thinks it’s the best banking system in the world. 99% non-event. Holds all of the 5 but BMO.

Markets. Still has some shorts on Cdn housing but is long on US housing which he sees as a very interesting arbitrage situation where you had one country that had a big decline in sales and prices but is now back on the upswing while you have Canada that already has volumes falling dramatically which will ultimately lead to an inventory build and price correction.

Economy. There was a pickup in growth rates in the 2^nd half of last year so he anticipates, at least the 1^st half of this year, surprising improvement in economic growth. A little nervous as we have already had a pretty good move since last June. Fully invested, but is sticking very much with quality securities and emphasizing the dividend theme.

Banks. Is this a good time to Sell and do you see a dip in the foreseeable future, so they can be acquired again? Was very light on banks for about 18 months until last summer because of concerns about the rate of earnings growth slowing down, particularly because of the domestic Canadian personal and commercial operations. Earnings have slowed down somewhat but PE multiples have come down by 1.5-2 multiple points on average. Now views them as much better value so has started adding to them since summer. All the banks are reasonably priced now. Would definitely not sell banks at this point. (See Top Picks.)

Markets. In 2011 they got together and could not agree on how to deal with the debt ceiling. They have done a deal again. Their credit rating is on ‘outlook negative’. 1553 high in 2000 before collapse of tech bubble. In 2007 it went higher when rate did an emergency rate cut and then last Friday it went above 1550. Things are stable and markets can move higher when markets are stable, but he doesn’t think printing money is ok long-term. It may make sense to take a little bit off the table.

Educational Segment. How to Manage an ETF Portfolio. Maryanne Wiley is the Guest. Look at 2012. Record inflows into the category. ETFs worldwide passed the two $trillion mark last week. There is talk of investors not getting back into the markets but now they are getting back in and choosing to use some ETFs. Transparency is important as is access. They provide better ways to do so. Investors are becoming wiser, living longer and need more money to get through retirement. They can increase returns or reduce costs and ETFs do a little bit of both. There are lots of places you can learn more together about the products or how to put together a portfolio.

Diversified Income Portfolio:

Aggressive Portfolio (Approximately the weighting of the world, for someone who has a number of years to retirement):

Markets. Thinks this year will be better than last. His US fund is up 8% this year. A lot of good things are coming together but he is cautious. Likes US financials and few Euro financials. RIM looks good. It is due for a pause and would buy on a pullback at $15.11 if he didn’t own it. Sees over double in earnings. Not sure what it will do tomorrow.

Economy. US economy, housing market and a lot of the core industrial sectors are picking up and a lot of these are key drivers for the US. Equities, relative to government bonds, look very cheap. Thinks the rotation out of bonds and into stocks is happening but it won’t be happening quickly.

How do you mitigate upside risks for Short positions? He doesn’t buy Call Options against Shorts but keeps the position size modest as a percent of the overall portfolio. Also makes sure the stock has an active trading volume in order to make a quick decision if necessary. Tends to be cautious when there is an overly shorted stock when there is a high level of Short interest.

Commodities. 2013 looks like it is going to be a lot better than 2012. More optimistic on the economic front and expects commodities will stay better than what we have seen in the last year. Also, doesn’t expect them to break out, but very healthy levels for copper, oil and gas. Believes natural gas made an important bottom in 2012. We may have a retest to $2.20 in the shoulder season. Expects crude oil will stay in the very narrow range it is already in and is healthy around $80-$90.