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

Canadian Banks? It has been a while since we have been able to say that Canadian banks have been at their 52 week high. He’s been underweight banks, and currently owns Bank of Nova Scotia (BNS-T) and the Royal (RY-T). At the end of the day, the 5 Canadian banks are in a horserace. CIBC (CM-T) and Bank of Montréal (BMO-T) tend to lag. Feels the US banks are much cheaper right now, but is not sure where we are going to see a catalyst.

Markets. We have just gone through the 1^st significant correction of a new bull market that started in 2013, when the S&P exceeded its all-time high. The US market has really chopped its way sideways since 2000. There are lots of people who have become very sceptical, nervous and bearish. A new bull market is always borne out of skepticism and a difficult environment. We have now made a new high. There is all kinds of money that is trapped on the sidelines, which is going to have to find its way back into the market. Not to mention that $200 billion that came out of equity mutual funds in the last 2 years, and chased things like bonds at 1000 year lows in interest rates. He has been fully invested since the 2^nd week in February. Markets look exceedingly good, and people will be very surprised at the next 2 years as the US economy slowly recovers.

REITs? There has been a focus on things that pay a predictable income. There is always a concern for any income investment that rates could go higher. However, looking at the history of REITs, when you had periods of months when rates went higher, they tended to do better than other sort of bond proxies. This is because of the possibility of rising rents and rising distributions. He would be more likely to focus on US REITs.

Markets. The Markets have been very calm in the light of the coup attempt in Turkey. The S&P sold off quite hard on the futures at first. People were making moves at first. There were more moves on the currency market, though. Country Specific ETFs: TUR is the ETF for Turkey. When you go into a country that is emerging, you have to ask if it makes sense on a risk adjusted basis. The currency risk defines much more of the risk than anything else. He thinks the Turkish currency will wipe out any country returns. The initial polls regarding the US election indicate Trump may not have made the best choice. The republican party is fracturing. For all the negative that Hillary has gone through, she is still fairly far ahead in the polling and that tells you that people really don’t like Trump. As long as the polls stay close it is a negative headwind for the markets.

Equity or Bond ETF for new money. Bond yields will probably stay low for possibly decades. He does not like what has happened to the long end of the yield curve. He would look at short term corporate bonds, and wait for a correction in the equity markets to get back in to equities.

Long Term Income ETF. It has to be diversified, have high yielding dividend stocks, and corporate bonds. FIE-T holds Canadian banks and preferred. It is somewhat diversified.

Educational Segment. Crisis for Savers. In Europe in asset classes, there will be negative real returns. They expect 4.3% in emerging markets. The buy and hold world is going to be challenged for the next number of years. Fixed income and treasuries are looking negative. Small caps are looking like zero returns. Higher volatility investments will have higher returns. Most returns come from the currency of the country.

Markets. With negative rates in some countries and zero % rates in North America, 3-4% income rates are attractive. In the developed world, there is little demographic growth. Without immigration in North America it would be half a percent. If the population is not growing then economic growth over the long run is impossible. Governments are pushing money into the economy, but taxes are going up, compliance is more expensive and these things inhibit growth. Lack of growth is why people are moving towards income. Interest rates will be low for a very long time. People will be looking for safe income plays for a long time.

Hunt Company Bond 9.625% due March 2021. (Top Pick Dec 3/15, Up 1.00% plus 9.625% interest) They have some exposure to Texas. They manage assets for investors who want exposure to real estate. This is a high yield bond, not investment grade. The balance sheet is very manageable. It is almost 10% yield and is up 1% on the capital.

Bank rate reset preferred share at 5.5%. These new products are capital that the banks issue and are more easily convertible. He owns a lot of these. They are higher up on the balance sheet. It will not reset into a yield substantially lower than 5%, regardless of where interest rates are. If interest rates rise, they should continue to have almost a 5% spread over rates.

Cott Beverages 5.375% 07/01/2022 USD. They have changed their business in the last few years so more than half of their revenue and earnings come from filtered water. It is a very good growth industry.

Markets. We are not seeing a lot of earnings growth and growth catalyst for share price appreciation. This uncertainty provides a buying opportunity. His concern is a lack of strong underlying fundamentals to justify continual rises in the markets. Feels the market is turning a blind eye too much to uncertainty, such as what is going on in Turkey and with BREXIT. In the short term, the earnings numbers we are going to get will not justify an immunity to bad news. Because of all the uncertainty in other areas in the world, the NA market, particularly the US, are by far the best versus what the alternative is. Money flow is continuing to flow into US markets because of the uncertainty. This is another reason why we could see another leg up. A lot of what we have seen has actually been less a flight to safety, but more of just the markets moving on the Fed and their language of them backing off on raising rates. In the short term the market pendulum is swinging too much, and we are a little too much on the optimism side, and not pricing in much of a rate increase. Eventually, at some point, that will come. His holdings is 2/3 US and 1/3 Canada. Starting to slowly move capital into some of the higher-quality energy names. He finds there is more to choose from in the US. Currently sitting at about 7.5% cash right now.

Risk management strategy? The name of the game is “managing the downside”. First of all, focus on high-quality names. Don’t try to hit home runs. Despite how many home runs you hit, when things blow up it wipes out all of the gains. Focus on safe geographies, developed markets, such as Canada, the US and Europe. Emerging-market capital markets lack regulation. Also, don’t bet big on any one name. He limits his exposure to only 5% on any one stock. Also, doesn’t have more than 5 names in any one sector.

DRIP program for a retiree? If you are withdrawing from your portfolio, you need to have liquidity. You generally don’t want to look at equities for liquidity, other than the dividend or the cash flow that is coming in. In other words, you never want to have to be in a situation where you have to sell shares in stocks to generate your monthly requirement. If the yield or dividend coming from your portfolio is sufficient to meet your monthly needs, then you are okay as long as you are willing to withstand the volatility. On a DRIP program there is a good and a bad. The good is that you are saving costs by not having to acquire shares in the open market with commissions attached. However, don’t let that steer you in a manner where you forgo having liquidity because all of your money is in stocks and you don’t have enough for your monthly requirement.

Adding high yield to the fixed income side of a portfolio? He is not a big fan. With interest rates being as low as they are, investors have been pushed to take more and more risks on the fixed income side of their portfolio to get any kind of reasonable rate of return. High-yield bonds carry a correlation, very similar to equities. In a bad market you can’t really rely on the high-yield bond side of your portfolio.