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

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.

Markets. Equities look very inexpensive especially in comparison to other asset classes. We are in a positive credit cycle. Commercial banks are now making loans in the US and money is now going to get put to work. We may go through a couple of quarters of scaling back of GDP growth. In a year or so we will see more signs of inflation and that will push up the curve. This could be the year that every waits for the correction that doesn’t come. He sees a long bull cycle.

Markets. Largely a liquidity driven market. Investors are sick and tired of not making money in bank deposits and US treasuries so are coming to stocks, especially dividend paying ones. We’ll probably see this going for quite a while but there might be some corrections here and there. Fundamentals of the economy have been pretty weak. Growth is positive which is good and he thinks it is going to get better. Gains we are seeing are more than what he expected. There are long-term challenges which we should not ignore. The market favours larger cap, growth oriented, blue chip dividend playing stocks and this is how he is positioning himself.

What is your view on US banks versus Canadian and do you have a favourite U.S. Bank? On valuations, clearly the US banks are a lot cheaper, but for good reasons. Our economy had performed better and regulations had been more stringent. Canadian banks continue to be good plays. However, for better upside, you probably want to be in some of the US banks. J.P. Morgan (JPM-N) and Wells Fargo (WFC-N) would be 2 of the names that he would go to.

Markets. Dow is moving to all time highs due to corporate earnings and Asian markets. We are seeing more flows into the equity markets. Rallies should continue and corporate earnings are higher now than when the highs were set two years ago. Can’t understand why the resource sector is not participating in this rally. China needs both energy and base metals. He cut back his gold projection from $2013 in 2013. He paired it back to the $1850 level. $1525 is the support and once it hits that it will trade up to $1850.

When do we see the turnaround for the juniors? Start first with the seniors. $60 billion in write downs and firing of 20 CEOs. There is pressure for companies as to carefully decide which projects they invest in. Short term there will be a cleansing of the juniors. Those that can generate cash flows will survive.

PDAC. Hubbub was about juniors’ inability to raise capital. They resorted to high yield debt, royalties, and joint ventures. TSX venture was down 50% from two years ago. They are hanging in.

Venture Stocks. Feels about 30% of these stocks will disappear and it will turn into a slaughter unless there is a major shift in sentiment. People are not putting money into this risky sector. About 70% of companies trading on the Venture Exchange have only $1 million or less in the bank. If they account for 30% of the total valuation of the venture exchange, which is $40 billion, companies with $1 million or less cannot survive very long. Right now, the opportunity exists to acquire some really quality companies, quality management and quality deposits at a discount to what they are worth. You have to be very, very careful and do your due diligence because there is no more dumb money to bail us out. As a potential investor, one of the first things he’d be looking for is, do they have enough money to not only survive but to do some meaningful work. Secondly he’d be looking at the projects that offer potential of a major economic deposit that would interest somebody else as an acquisition. Thirdly he would look at management. There are a lot of quality people in this industry. If you get these 3 things right, you will do fantastic in this market.

Is it true that market sentiment is not very positive towards the Yukon and, if so, why not? 2-3 years ago, the Yukon was the place to be. There was something like 160 companies that were picking up projects and doing stuff up there. Out of this, there was one discovery that kicked it off that was followed up by another major discovery. Yukon has too much gold, which is a problem. The geology is such that most of the gold that is being shed into streams is coming from small structures, small veins. Difficult to find a large deposit, and if you do you face the problem of infrastructure CapX costs to develop it.

Wouldn’t it be a more prudent use of money for companies to acquire companies than trying to grow by the drill bit? A lot of the majors did some big acquisitions over the past 5 years or so and paid way too much for things and are getting burned terribly. Management is scared and they’re pulling in. New fad is now cash flow and earnings. To do that they are going to tweak their mines which have already been tweaked and they are not going to get much profit or savings out of that. They’re going to add to their mines by drilling around existing mines but 9 out of 10 times the grade is lower and deeper so costs are not really going to go down. Also, there are not that many good deposits out there.

Rare Earths? This all comes down to metallurgy. They are combined in all sorts of odd ways. Very difficult to get the element that you want out. His understanding is that there are a lot of rare earths sitting in China and there is no shortage of them.

Resources. We are starting to see a washout, especially in Junior mining names. For the rest of 2013, he feels they are looking for survival. There was destruction in gas 3 years ago and now you have seen that flow into small-cap and mid-cap oil companies. It’s a lack of investment dollars. Big-cap dividend paying stocks that were felt to be expensive are still going up and the money is just washing out of the resource sector.

What are some of the constraints on opening mines in northern Canada? We have had the permitting issues as well as the native issues. Federal government has now said they are going to try to have one permitting process instead of a provincial as well as a federal permit, which should simplify things very much. Now the challenge is money.