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

Bonds. These are a terrible investment right now. Measuring them against inflation, the long-term performance indicates they should earn 2% more than inflation for government bonds and 3% for corporates. We are closer to zero. Also, the earnings yield on the S&P 500 should be about the same as U.S. Treasury bonds but the gulf is about 3%. After-tax bonds make no sense at all for a taxable investor, compared to the dividends on the underlying common of the same company.

Ontario Hydro bonds 10.125% do October 15/21 for $12,000. Currently worth $29,000. What should I do? You have to keep this one until maturity because at the time you bought it, the compound yield to maturity was a lot higher than yields are now.

What rules do I follow when dealing with long/short pair trades on bonds? Very difficult for an individual to short a bond as you would have to borrow them. Also, if you are going to short something, the bid/ask spread had better be pretty tight. Not for the average investor.

Owns an inflation protected fund with the thought of holding long-term and is up about 15% in 2 years. Stick to my original plan or take my profits? Real return bonds have done very well in the last 3-4 years. If you hold until maturity you’ll get that return over the CPI.

Real return bonds have been trending downwards. What is their future in the TSX marketplace? These are here to stay until the government decides it is too expensive to issue them. Real return bonds have a big role to play with most of the institutional investors.

(A Top Pick Aug 2/12. Up 4.71%.) Province of Ontario 3.15% bond maturing 2022. This is a little long for him and if he owned them he would trade them for a shorter-term corporate bond in order to get more defensive.

Target Bond ETF. Is there any way of knowing the face value at maturity? A Target Bond ETF would be one where a 2015 Target would only contain 2015 bonds. He doesn’t know what your face value was going to be but you are going to get your money back.

Canadian government bonds maturing in about 5 years. Pros and cons if sold now? If you sell now, the pros are that you will make a nice fat capital gains. The cons are if you sell too soon and the yield keeps falling. Feels you can find something else on the equity market that would be better than this.

Bank perpetual preferred shares? These are similar to long-term bonds. They have a very long duration so they are at great risk when yields are about to rise. We are in a period of time when we think interest rates “may” rise, not too much this year, but eventually they are going to rise. These preferreds will sell down in price at that time.

Brascan Bonds maturing in 2035. Is it safe? He doesn’t like long-term corporates. So many things can go wrong between now and 2035.

Reliance LP 4.574% maturing March 15/17. Have performed well and he thinks they will continue to produce positive returns.

Markets. Expects the volatility to continue. There is a lot of macro uncertainty, whether or not it is in Europe, the US or China. Feels the market is being driven by headline news, policy decisions and she feels this will continue. She is holding between 5% and 10% in cash that she’ll use for opportunities.

Markets. Smart Money confidence and Dumb Money confidence chart (Institutional investors vs. retail investors): When Dumb is high and smart is low, it is often a sign of a market top. The opposite is often true. Right now the smart money is becoming a little less confident. Commercial hedgers are actually shorting right now and the retail investors are pouring money in long. From looking at history, we could be looking at peaks in the market.

Gold. June contracts. Broke the $1550 level and down we went to the next level of support. It is bouncing off that. Seasonality is July to early or mid Oct. Thinks it has a chance to get back to the old neckline closer to the end of the summer. He is a little nervous about gold because it broke the support level.

Markets. When he looks at the Dow, he looks back to the 80s. You went a while before you got any consolidation. We have a good head of steam for the equity markets. He predicts a rest for the US markets before a return to the acceleration. But when it does, it will turn quickly, so you have to have some exposure now.