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

Would you buy bank stocks now, and if so what is your favourite? He has 3 favourites. Bank of Montréal (BMO-T), TD (TD-T) and Bank of Nova Scotia (BNS-T). He doesn’t think the banks are going to do that much and doesn’t think this is going to be an exciting quarter. They are long-term investments. Wait until there is a bit of a selloff and then Buy half a position.

My apologies. Yesterday's Top Pick for Swanzy Quarshie I had Tourmaline instead of Torc. Most of you won't have noticed, but our e-mail that goes out showing Top Picks was wrong.

Sorry

Bill

Markets. The global economy cannot accept a higher interest rate framework. Shorter term rates may rise, but longer term rates will probably not rise. Bond mutual funds will not return extraordinary amounts, but will not hurt you. We are swimming in oil. We are at full capacity in storage. But we need extraordinary amounts of CapX in spending to maintain these levels and if it does not happen, then oil prices will recover. Preferred shares: we are headed for an arbitrage in the industry. In 2016 we will see health double digit returns.

Hunt Company Bond 9.625% due March 2021. It is not warranted that the bond has come down recently. They are one of the largest owners of military housing space.

Markets. A lot of people got whipsawed today, especially the big institutional investors, when the European Central Bank disappointed investors by not adding as much stimulus as many had expected. That sent the euro higher and the US$ weaker. This speaks to the divergence and the monetary policy that is happening around the world, with the US ready to lift off in terms of interest rates and the ECB still doing quant easing, but extending it a little bit longer. These are all temporary types of things. We are a bit stretched in terms of valuations when we are looking at equity markets trading at 17 or 18 times forward earnings. We also need to take note of terrorist activity in the US as well. There is also falling commodity prices and weakening economic growth in China. The sentiment out there is rather fragile. You want to be very opportunistic and purchase the things that are coming off and taking advantage of pricing, and maybe leaving a little bit more in cash than what you are used to. You can lose capital appreciation if rates rise as some stocks tend to pull back in a rising interest rate environment. He tries to look for the companies that will keep up with rising interest rates, i.e., growth in their dividend profile. His portfolio holds 2/3 US equities and has done very well with the US$ moving higher. The US equity market will outperform Canada and the US$ will continue to rise higher. Still likes the cyclical areas, such as technology and industrial areas. In consumer discretionary, you want to be selective. There are some retailers and some consumer discretionary stocks that are doing very well, and some that are just not doing so well all of a sudden. Healthcare is starting to roll over a little, but the long-term prospects for healthcare are still there. He is zero weight energy and materials.

Biotech/Pharmas? The biotech area is interesting. Some of the larger cap names are still trading at very decent valuations when looking at the growth rates relative to their PE ratios. Some of the smaller ones may be trading at a bit more extended valuations. It depends on if you are looking at an ETF or at individual names. He owns Gilead Sciences (GILD-Q) and Celgene (CELG-Q) and continues to like them, although he does recognize that the sector looks like it is rolling over a little. Over the medium term there is still some value to be had as the earnings come out and as those drugs continue to do well. Keep an eye on the technicals because the sector has fallen below the 200 day moving average.

Buying US stocks as a long-term hold? His portfolios are holding two thirds US relative to one 3^rd Canadian. He’ll continue to do this for his new clients. When you look at fundamentals between the US$ and the Cdn$ and the economies and what has happened with the US market and US interest rates, the US$ will continue to advance against the Cdn$, especially if commodity prices continue to struggle. He doesn’t have a problem buying US dollars and US equities with Cdn$ today.

Energy. There is always a possibility that we get a pullback on oil before it starts moving up. There has been a lot of work to make sure we get back to a balanced situation on supply/demand. On the broader market basis, there is a lot of weakness with speculation on a potential US increase in interest rates, as well as what is going on in Europe and in Asia. Now is a good time to be invested in oil because there is a lot more upside than downside in the next year or so. Natural gas has been challenged for quite some time, and she expects that to remain. We have so much gas production on the continent, and very few places for that gas to go. She is a little cautious on LNG exports. There has been a big drop off from 15% down to 1% in natural gas demand growth from China.

Markets. The market has been unrelentingly bullish in the US for about 5 years, so he has been buying either the iShares S&P 500 Cdn$ Hedged (XSP-T) or the Vanguard Large Cap (VV-N), because both are very, very low cost. There are 14 ETF providers in Canada, so there is a huge amount of redundancy. Vanguard and Blackrock are the low cost traditional market cap benchmarked guys. Nobody is going to compete with them. There is also Smart Beta ETF’s that is really an ETF with a twist. It has a little bit of management in there, so they charge a little more, but it is not management like a mutual fund. They are all using different methodologies and claiming that one is better than the other. A lot of it is based on back testing. They are looking at Beta, being the S&P index, but then they are adding things such as price earnings ratio, price-to-book, dividend growth, sales, etc.

Covered Calls? Using CIBC (CM-T) at $100 as an example with a dividend of about 4%. With a covered call you are trying to extract income from this, so you are selling someone else the right to Buy that stock from you at $100. That person may be paying you $3-$4 for that right over a period of possibly 6 months. You sell them the option, and when you do this, you are giving up the upside, because they have the right to Buy it from you at $100. Also, you are getting the dividend. Usually you are running around 5%-6% in capital gains and dividends over a 6 month period. That is why it is very attractive.

If you buy equal amounts of a hedged and unhedged S&P 500 ETF, are you currency neutral? Probably close enough not to worry about it too much. But on the other hand you could see a dramatic spiking.

Your strategy for ETF’s with $500,000 for a risk averse holding? The problem is that he doesn’t know you and your circumstances. However, a core position would be the iShares S&P 500 (CAD Hedged) (XSP-T) and the iUnits S&P/TSX 60 (XIU-T) for the TSX and iShares DEX Short-Term Bond (XSB-T) for the bond portfolio. However, what proportions you should have is not something he would recommend at this time.

Markets. There has been an incredible drying up of liquidity in companies that are worth less than $1 billion. If you are going to be in this area, you better make sure that your company really does what it is supposed to do, because if it turns around and you need to get out of it, there might only be 5000 shares to trade. Because of this, he sees some really good deals, but doesn’t want too much exposure, so has limited his exposure to the overall portfolio at about 15% for companies that are under $1 billion.

Contrarian Investing. He looks at companies that are out of favour and have been around for at least 10 years, badly beaten up, and often trading at 52 week lows. Looking for a minimum 100% upside off of 200%, 300%, 400%. None of that is “pie-in-the-sky”, it is all based on where the stock has traded in the past. He is basically looking at a recovery to form, and at certain points it is easier than others. For example after 2008-2009, things got hit across the board. A lot of companies got hit that shouldn’t have been hit. However, at times like these, it is more sector specific than just looking helter-skelter. He looks very closely at financial statements, financial ratios, management, cash flow, is their dividend safe etc. He is also very debt adverse. If buying into a company that has low debt or no debt, it makes it a lot more difficult for the company to get into real trouble for the long-term. Sometimes he gets caught, but over the past 5 years, annualized returns were 28.9%. He buys companies that have been around for at least 10 years, and usually makes his purchases during tax loss selling season. Then he hopes for a Santa Claus rally, and that generally boosts him about .05% on the average every year.

Sector plays? Not crazy about health, but oil and gas are looking interesting. You have to watch what you buy so that you don’t get blown out and lose all your money. The commodity sector will recover, but he doesn’t know when. It is crazy how high the US$ has gone. A few years ago people hated it, and now it is the “go to” currency again. In a few years time, the pin will prick it to some degree, and when that happens commodities will go up because of it. Oil and gas will go up again. Those are areas that he would be looking at.