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

Selling Calls? Very often he will Buy a Call back before it expires. If it drops in price, very often he will just take the profit on the option and hold the stock, and then rewrite the option again. This has been particularly attractive this year with a flat market that has gone up and down with no direction.

Naked Puts, E.G. January 2016. Can this Put be exercised by the buyer at any time? Yes. A Naked Put is an uncovered Put. When you sell a Put Option, you are obligating yourself to Buy the shares of the underlying stock at a specific price.

Does the seller of a Covered Call on dividend paying stocks have the responsibility to pay the dividend to the buyer of the call option? When you do a Covered Call, you own the underlying stocks and you get to keep the dividend. You are not responsible to give anything to the Call buyer.

How do you know when to sell a Covered Call Option? This is a judgment call. When you buy a stock you should have an exit strategy. “Is there a point I would sell the stock and at what price would I be comfortable doing that?” If you are not going to exit it, then don’t sell options against it. If you are looking to trade out of it at some point, you should establish a price at which you are willing to sell the shares. The sale of a Covered Call actually does that, so it brings discipline to a trading strategy.

Danger to Obama care if the Republicans get in? If you are concerned, he would buy Puts and would probably do a Put Spread, as premiums on healthcare would be fairly rich. Would probably look at health care providers, like Humana (HUM-N), Aetna (AET-N) and SPDR Health Care (XLV-N) because there would probably be a squeeze on margins. Not a strategy that he would be jumping on.

China. China is potentially a big game changer. They have been saying they have been growing at 7% a year, but in reality they are probably growing at 3.5%. When you start factoring in lower growth, that has huge implications for everything, but globally it is a slower growth world. Investors should be thinking about and looking for things that can demonstrate growth, despite the fact that we are probably growing slower. We are 5-6 years into recovery, and it doesn’t feel like a classic bull market or a robust recovery, or anything traditional. Thinks that is the way it is going to be for the next little while. It is going to be slower for longer, but that is not necessarily a bad thing. There are still plenty of ways that investors can make money in a market like this. So far the Chinese government has tremendous resources, a huge foreign currency reserve, that they can use to soften the blow. However, you have a country that is disproportionately spending essentially on infrastructure, but much of that infrastructure is useless. At some point in time, that just doesn’t make any kind of sense. Eventually when the correction comes it will be bad, but he doesn’t think it will happen quite so soon. What we are seeing with a selloff in Shanghai, is that it is the beginning of the realization that is dawning on investors that growth in China is not nearly as strong as we thought. That has huge implications for global demand. With that, you have to start thinking a little more defensively and where else you can go that can give you some growth. The silver lining in the whole story is that they are trying, and the leadership is trying to encourage a consumption based society. That is very, very positive in the longer-term.

Markets. The Chinese are not devaluing their currency. They are moving toward a freeing currency. From ’07 to ’08 this is where we are looking for the Chinese currency to go to. The move thus far means nothing to Canadian investors. We are due for a slow period for growth. You have to be somewhat tactical. In Greece, it is complete failure.

Preferreds. Resets are linked to the 5 years Gov’t of Canada Bonds. But there is indiscriminant selling by retail investors of these. There is a lot of value there.

Interest Rates. There are all kinds of what if scenarios. He thinks interest rates will stay low for 10-30 years. The bond market will not go up because of yields.

Educational Segment. How to position yourself for a low growth environment. He has an equal weight portfolio:

He gets about 45% exposure to Canada and an average yield of just over 4%. YTD he got 2.16%, ahead 3.6%. Annualized since inception is 9.55%.

Markets. It’s getting easier to find compelling valuations. His view is long term and that this is a cyclical event with oil. We should have a recovery in the medium term in oil. If you look at the commodities and health care sectors, they have cycles. Commodity producers are forced to pay you a dividend. When the tech sector pulls back it can take all your gains with it. CPG-T cut its dividend and it was painful, but he understands what they did. Things tend to sell off harder and faster than you predict. It should impact their growth in the long term. He is happy to stick with that kind of stock as oil recovers and hopefully he gets his dividends back.

Markets. He wants to be everywhere except “Canada”. His typical client would have maybe 20%-30% of equity exposure in Canada. That number is starting to go down and he is telling his clients that if they want to meet their targets they have to a) reduce their Canadian exposure or b) realize that their target is going to be lower than what they had thought. Thinks Canadian equities will underperform other parts of the world for the foreseeable future, by maybe 2%. Canada, by market cap, is only about 4% of the world. When he talks about investing, he usually talks about having some money in income and then equal weighting in 5 other asset classes, but has been telling his clients to get out of hard commodities of rocks and trees, but instead use things like infrastructure, agriculture and water. They are a little more recession proof and are doing better in this environment. He tends to use ETF’s which have a global mandate and which give very little or no exposure to Canada.

Collapsing a RIF and moving the funds to a TFSA? Why do you want to do this at all? What you are doing is accelerating your tax liability. If you take all or most of the money out of your RIF, all of that money will be taxed in the year of the withdrawal. That could bump you into a higher tax bracket. If you take the money out in dribs and drabs, you might be able to save yourself some taxes and reduce your OAS claw back. There is a tax benefit you get if you have pension income.

Sector weighting in a portfolio? There are 2 ways of doing this. You can buy more globally diversified portfolios, or you can go sector by sector. He prefers buying a more globally diversified portfolio, and as a by-product, you tend to not overweight any given sector.

What can an investor due to produce income with little risk of capital? There is nothing you can do. You can either get some security with very little income, or you can try to get a little bit of income and forgo the security. In this environment, income and security is not going to happen.