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

3 market sectors that give the least volatility over a 3-5 year period? Banks, utilities and usually pipelines. However, be selective with your pipelines because there’s all this political nonsense going on. He likes Fortis (FTS-T) and Enbridge (ENB-T). With the banks he would go as basic as possible with CIBC (CM-T), the closest thing to what a bank used to be.

Markets. When you look at retail sales and growth rates over the last 15 years, they have gone down, but China is still growing at a tremendous rate. No one on the planet believes that it is 7%. Most think it is 6.0-6.6%. It is the second biggest economy in the world. This is actually China’s second big spike and fall, the last being around ’08. The world oil demand is still going out and with Iran coming back on stream next year, there are some issues to be debated. The US has seen the boom in fracking and it is over. The world economy is not that robust and strong. If the US had not accumulated 9 Billion in debt since Leman, the US economy would still be shrinking at a couple percent a year.

Gold and Silver. He was long 4 or 5 weeks ago. But deflationary pressures are more than inflationary. Gold is taking a back seat. If it breaks lower to new lows then buy, and sell if it breaks $1250. New lows could result from tax loss selling of gold stocks.

Short Oil ETFs? There is no ETF that shorts oil producers in Canada. He does not recommend shorting oil producer long ETFs.

Hedged or unhedged for Europe exposed ETFs? The biggest differentiating factor in equities around the world is currency fluctuation. At the moment you want to be hedged, but when we get to parity you want to be unhedged to get the benefit of the currency gains.

Corporate spreads – have they impacted ETFs? Credit spreads have widened. There is some value in the credit area right now. But if interest rates rise you will lose some capital.

Educational Segment. It is FED Week. What happens with interest rates for the next couple of years is really important for investors. The probability of them moving up a full 25 basis points next week is about 20%. He is expecting half that. There is about a 60% chance that the Fed does a half a move. In the 50’s when interest rates went up at first when hikes started, the markets also went up because it was due to the economy being stronger. He does not think we will get over tightened any time soon. He thinks that even if the FED tightens 4 times, the markets will still be strong. There is no historical period to use as reference as to what to expect. He thinks lower rates are here to stay for quite a while.

Markets. The reaction to what has happened in China is excessive. We have seen a huge draw down in earnings expectations in the US as the year has gone on. Earnings are now looking like they will be down this year. This decade, US stocks have been the best place to be. About 45% of his clients’ investments are in the US. The key to selecting US equities is to look at large cap, battleship type blue chips with most of their revenues in the US.

Markets. The market is waiting for the Fed to decide on interest rates on Thursday. In the absence of anything positive, the market will sort of dip a little. We are at a level where the market looks to be value, and there is also seasonality. He is hoping that they raise rates to 0.25% which will take the volatility. The initial reaction for a half hour or a day might be negative, but after that it would be positive through to the end of the year. If they don’t raise rates, as long as they are extremely clear that they are going to shortly, that is still okay, but not as bullish. Looking at non-resource, this correction has provided value for lots of things. You have to be selective, but there is value both by group and by stock.

Markets. You have to be careful in the Canadian landscape. In the last 5-6 years many companies have had excessive amounts of yields being generated, but have leveraged the balance sheet in order to deliver that yield. He looks for companies that have good free cash flow and gives some of that cash flow back to investors and reinvesting some of it into the business. Currently is seeing a lot of value in that part of the market. When looking at indices that are pure yield, they are down significantly more than the broader market, so he is seeing value in the yield part of the market. Thinks Canada is a sale that is going on. There are no US investors buying the Canadian market. Banks have been under pressure because people are trying to short the real estate market, real estate has been under pressure because Americans think it is overvalued, energy has been a headwind, and there haven’t been many Americans that want to take currency risk here. Many of these headwinds are starting to wane, so he thinks Canada should see a little bit of outperformance relative to other markets going forward. The part of the market you want to be invested in, are businesses generating revenue outside of Canada, more dependent on US growth.

Why have Rate Reset Preferreds fallen off the cliff? When the Government of Canada cut rates, the 5 year followed and many of the rate resets reset to the government of Canada 5% plus reset spread. He was heavily invested in preferred shares in 2011 when he saw volatility in the market and it was a good area to hide. They are starting to look very interesting here. The problem with the reset spread now is that many of them are very, very skinny, so this is becoming a cheap cost of capital to CFO’s. Right now you have to assume they will not be recalled. Ask yourself what will be your yield post reset. From there determine if you are getting paid an interesting yield or not.

Canadian Telcos. Right now it is an extremely expensive market versus historic valuations. In the past, these multiples were not too difficult because you always knew there was growth in the pipeline. You had wireless, broadband, video over wireless. Doesn’t know what the next real growth catalyst will be. Right now, paying a premium valuation in an environment where rates might go up, there are better investments in the market.

Preferred shares? The reason we have seen these trade down significantly is that there is a lack of liquidity, a lack of buyer on the bid, and sometimes somebody will sell $10,000 of a preferred on the market and it gets pushed down $.50, and then down $1. That shouldn’t happen, so liquidity is an issue. He had exited these because at $25 you didn’t have any upside or downside risks, and now you are getting some upside potential with a good yield going forward. An interesting place to invest in.

REITs. There are some really interesting values along with some interesting volatility in the market. We are seeing some discounts that are very rare, almost historical, excesses. He is really watching Alberta where the fundamentals are still quite strong, especially in the apartment market. The apartment market correlates very well with the job market, and there is more talk now about layoffs in Calgary, so he has to assume that the apartment market will be affected, but doesn’t believe it will be to the extent that the stocks are showing. The REIT sector has been a little irrational. It is one of those fearful times when it is best to be greedy. He is fully invested. The economy in Canada is not that strong, so you can understand why retail would be suffering. However at the same time we are seeing a lot of demand for Canadian physical real estate. Many of the properties in the GTA have been trading at record low cap rates, very high values, despite the fact that office REITs of 52 week lows are not being touched. The US has a growing economy. Everyone is waiting for the rate cut information. He likes to take the position that whatever the Fed does shouldn’t affect your view on real estate. There has been quite a dramatic pullback in the US REITs lately, as people are expecting higher rates. That should be something you would Buy when that decision happens. They are well positioned to benefit from a stronger economy by raising the rates and they have lower debt, so they aren’t affected by the higher lending costs anyways.

Is a potential rising interest rate environment hitting the REIT sector too hard? Many of the REITs, very stable vehicles, are trading at significant, double-digit discounts. Because of that, this is a time you should be accumulating them. Buy something with a yield that you are comfortable with, and if it takes a little longer, that is okay. You have that income support.