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

Market: Triple whammy facing investors. Euro Debt. Economic data shows we are slowing and not in recovery, although in expansion mode. Inflation in commodities, wage inflation off shore, effecting import prices. All this leads to risks in the market. All the oil stocks are still making a ton of profit at $99 oil. Lots of good value in he US. Market doesn’t want to give them a good multiple.

Economy. There is going to have to be a restructuring of the European peripheral economies. This shouldn’t be a surprise to anyone. Most European banks are stuffed full of European debt which they still have at its book value. Can’t get out of these as it would blow a big hole in their balance sheets. No matter what they do there are going to be major losses, which is not good news for the market. Inflation is starting to creep back in which will eventually lead to higher interest rates.

Oil. Feels the $100 a barrel is here for the foreseeable future because of demand from the emerging markets. This means the Cdn$ will remain high and above parity for the foreseeable future.

Bank preferred shares. When Bank of Canada increases interest rates, what happens to them? Effectively preferreds are “bonds in drag”, i.e. dressed up as equities. If interest rates go up there is a capital loss. There are alternative preferreds that help mitigate the problem.

Economy. Bad things have happened in the 1st quarter including weather, events in Egypt, Libya and Japan. This has all conspired to slow recovery down but there is still a Global economic recovery going on. Growth could be 4% this year and next, but very uneven with less than 1% in Europe and Japan, 3% in North America and high single digits in emerging markets.

Fixed Income. Returns are very feeble right now. Not expecting a double dip coming so expects rates will rise from here, so you have to be very defensive in a fixed income portfolio but he’s been wrong for the last 3 months so has never abandoned the laddered concept.

24 Yr Gov Ontario bonds @4.6%? He would recommend a laddered approach rather than just one single bond. This is case of inflation and rising interest rates.

30 year Gov’t of Canada Bond 4% 6/1/2041. (A Top Pick Apr 27/10. Up 12.34%.) Turned bearish on the bond market in Sept so he sold.

Preferred shares? Rank senior to equity shares. Dividends must be paid before common share dividends. However, they rank junior to bonds and debentures. The advantage is the tax credit.

Real Return Bonds? Principal and interest payments are indexed to the CPI, every 6 months as the CPI comes out. Trade on the “after inflation” number. These are long duration securities and if yields rise, the price of these will fall dramatically. Not a good time to buy.

Top Short Short the US 10 Yr bonds @ 3.12%. There is a world recovery under way. Excessive stimulus that has been kept in place by the Federal Reserve Board has meant bond yields have stayed artificially low and inflation expectations are rising and with inflation at 2%-2.5%, these bonds should be 4.5%, not 3.5%.

Has been an interesting month because the things that made people money over the last 8-9 months really ran into a wall at the end of April, in Canada first and then other markets at the beginning of May. Has been a significant rotation away from mid-cap and small-cap to large cap that had a more stable earnings picture with a continuation of the theme around yield. Slowdown or something else?

Silver: There was a huge drop because of changing in margin requirements. Took a lot of speculation out of the market. It is a speculation and does not fit in with his portfolios.

Market: This year we had curve balls – floods, earthquake in Japan, Greece problem. Margin rules caused the commodity correction. Could have 4 or 5 % to go in the correction. We had another good quarter of results. Valuations are reasonable. There are a lot of good things going on behind the scenes. Unless we see a dramatic increase in rates when QE2 ends, he doesn’t see and end to the bull market yet. He is a GARP investor.