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

Canadian chartered bank’s new 5.5%-5-year rate reset preferred shares? Most retail investors get some fixed income through preferreds, but the preferred market is not a fixed income vehicle, it is a senior equity security. This can be very dangerous. They are complex instruments. They have been sold as fixed income because most investment advisors either don’t comprehend a more traditional fixed income, or just can’t get their hands on it. They also get paid a sizable commission. In this past year, rate resets got hammered because people thought rates were going to go up. For preferred shares, if the regulator decides there is a triggering event on that particular bank or issuer, those preferreds turn into common equity of the bank. All that risk then runs down to the common shareholder making it all more volatile.

Government of Canada Bond 3.5% maturing 12/1/2045.

Energy. There is a real risk that oil will go down to the February low. The positives right now are the talk of a freeze, and June is coming which is a positive. Also, this week EIA data showed production in the lower 48 fell by 19,000, so we have been getting 20,000, 30,000 weekly production declines in the shale oils. This week, we got the 1^st indication that natural gas liquids are now rolling over, and that the production of natural gas is rolling over, and we have had a decline of 61,000. Between the 2 we have had 80,000 barrels a day decrease in US liquids production in one week. The biggest number we have seen in 6 months. Also, there was the Kuwait strike which had been producing 2.8 million barrels. A chart showing OPEC market share versus the oil price, at the high was about 38%, and is now 32.5%. OPEC is desperate to get back into the 35%-36%, so they want to drive out non-OPEC production. The other problem is that inventories are at record highs in the US, 200 million barrels more than needed, and this week another 2.1 million barrel increase on EIA data. This needs to come down to the middle of the range, which means 200 million less. To be a bull, you need to see OPEC production fall by about another million barrels, and you need to see demand hold up. The wildcards now are the Kuwait problem and the potential of another freeze. On the other hand, Europe demand is falling off, Japan demand is falling off, and the US economy is not so strong. If this is the case, he thinks we go down to the low $30s in May-June.

Russian oil and gas stocks? Stocks globally are cheap, so the question is, do want to buy in Canada where you know the stories, the companies, the political risks; or do you want to go to stocks that may be a little bit cheaper, but in Russia where accounting rules are not the same and government control is a lot stiffer?

Markets. It’s the most significant bad news that happened over night that he focuses on first each morning. China has been frequently generating bad news. He has been 2/3rds US, 1/3^rd Canada in recent months. He can buy in on the US dollar and make money if it rallies. Don’t be too worried about the US/Canadian dollar at this point because the best part of the move has already happened. Defense's in Canada are some of the few that investors are revisiting because of a lack of alternatives. Companies don’t want to come to the markets with IPOs when there is uncertainty in the market.

Equity Portion Portfolio Construction. An ETF may not have diversification depending on where the bulk of the equity is. It might just be a small number of big names. A closed end fund can trade below net asset value where as an ETF would not. He thinks you should build a full portfolio of stocks, rather than rely on one ETF. If you own ETFs and stocks, then make sure you are aware of where your stocks may be held within your ETFs.

Dividend payout ratio over 100 – is it safe? It means they are laying out more than they make and it happens mostly via leverage. It is not a viable long term solution and should raise eyebrows. It has to be a unique situation that makes you buy when the payout ratio is over 100%. Choose something that is more defensive.

Capital losses can be carried forward indefinitely so this can be used to offset big gains. You should make investment decisions based on the investment merit, rather than the tax considerations. You have your money in something that performs.

For an RRIF you know you have mandatory withdraws on an annual basis. You want to make sure you have liquidity in that account. It is important to maintain balance between fixed and equities in each registered and non-registered account. Knowing there is a need to withdraw, holding dividend yielding stocks is essential. You don’t want to be forced to sell assets below what you paid for them for liquidity. Don’t be afraid to hold some cash in an RRIF. Don’t try to hit home runs in a TFSA. Keep it diversified.

Minimum Rate Preferred Shares. There are different types of preferred shares. They can look and feel like a bond. But you don’t see a lot of those. Perpetuals don’t have a maturity date. It will trade like a bond that is 30-40 years long and so be sensitive to interest rates. Fixed rate resets have a fixed term of maybe 5 years and at the end of the term the issuer can extend it for another 5 years if they want to, but they will be at the Gov’t rate for 5 years plus a small premium. He is cautious on perpertuals because we are at all time low rates.

Markets. There seems to be a lot of negative news around, but the market in the last 1 ½ months has been pretty darn good. It caught a lot of managers offside as a lot of them bought into the negative sentiment. You can’t make money being on the sidelines. Ever since the 2008-2009 downturn the negative attitude has really taken over. Any time there is a small pull back, everybody is expecting it to happen again. The reality is that things are not bad. We have that low, low interest rate environment that is good from a multiple aspect.

Markets. He is getting quite cautious. Not a lot has changed fundamentally, even from 8 weeks ago, but valuations have really come back. He saw some really good opportunities to add to core positions, but recently has been adding to his cash flow because the margin of safety has eroded in many cases. Doesn’t really care what the market does, but cares more about what the companies do.

Markets. Doesn’t have a strong general outlook for the stock market, but does find that governments globally are adding so much debt to their balance sheets that it is going to create problems. It is debt and leverage that creates major, major difficulty. This whole idea of negative interest rates is stupid. You are trying to force banks to make people borrow money, which doesn’t make sense. Effectively a lot of governments are adding risk to the system, in a system that is already highly leveraged. At some point, you can only kick the can down the road so far, and it is going to be a major problem. Debt levels in Canada are at an all-time high. At same time, there are also a lot of positives out there. He sees a lot of stability. You have slow growth which he doesn’t think it is necessarily bad. Oil prices are low, which are hurting certain parts of the economy, but is helping others. Gold prices are staying in a range. Inflation is low.

Markets. US corporate profits are likely to start turning up in the back half of the year, which is likely to juice the equity markets. Earnings year-over-year for the 1^st quarter will be down 7%-8% largely because of energy and currency headwinds, along with a moderate decline in the 2^nd quarter. The US$ seems to be finding a range here and she is not expecting the appreciation that we saw in prior years. Energy seems to be consolidating in the $40 range. Eventually energy prices will improve. Those 2 factors will be beneficial to US multinationals. The S&P 500 is trading at about 17.5X forward earnings, so we do need profit growth to come in order to keep equity markets moving forward, and thinks that will eventually come through. Wouldn’t be surprised at a bit of a pullback, but the earnings season is turning around now in the US. You have to watch the tone of what companies are saying in terms of their global growth. The “Sell in May” adage may not be as strong this year.

Gold? As an asset class this is pretty low on her portfolio. It has recently rallied. Gold tends to work in an environment where there is inflation and where the US$ is weak with a lot of volatility and uncertainty. For the last couple of years this has been a very low weight for her and we really haven’t reached the inflection point.