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

Tax Info. One of the very big things for people who have foreign assets is the Foreign Income Verification form (T1135). This is a complicated form to complete and is required for anybody who has $100,000 of foreign assets outside of their RRSP. You can go to www.goodreid.com to E-articles to read about this.

Economy. Here we are 6 years after the crisis and not only have we had all the geopolitical problems, it is like the world has been having a huge experiment in the monetary policies. No one quite knows how it is all going to turn out. It almost seems to be a race for the bottom in currency wars the way people are lowering their bank rates. Some are even negative now. Quantitative easing is also spreading across the world. At the same time, the US$ has been so strong that it is almost like people have been cutting rates to become more competitive. At what point does the US become unhappy with this? He thinks it is beginning to seep a little bit into US manufacturing, but nonetheless their economy seems to be the one that is strong and growing. It has been the place to be the last couple of years. In Canada we have had the opposite effect through oil prices collapsing, which is also having ripple effects across our economy. As a value investor, to position yourself over the next business cycle, you have to figure out where you want to be, how you want to do it and try to figure out what opportunities are going to come from these kinds of changes that are happening. That is what he is struggling with now.

What metrics do you focus on, as to whether a stock should be classified as Growth or Value? As a value manager, he tries to judge what he is paying for against what he is getting now, and is likely to be there in the future. He is looking much more for organic growth rather than through acquisitions. If you are looking at stocks in any one industry, growth stocks are generally going to have higher multiples, whereas value managers are probably going to be buying more return on equity.

Markets. Stocks at 18X earnings on the S&P 500 sounds expensive, but it’s all about interest rates. Interest rates are low in Canada and it doesn’t look like the US is in any hurry to raise interest rates. That means that anything that drives the cash flow makes that cash flow work even more. He has lots of retired clients that need to live off their portfolios, and they are not paying him a fee plus taxes and inflation, to make 1% on bonds. They would run out of money. If you expect interest rates to stay in a low environment for many, many years, then you want to own dividend and cash flow producing assets. The best assets that he can invest in are stocks. Also, pension funds have to rethink things in order to make their payments so they need to be buying stocks. People are living longer. We all have to ditch our bonds, get rid of our preferred shares, and be in more stocks. This is why the stock market is going up and why he believes the stocks are mispriced. If you believe interest rates are going to stay low, then stocks are roaring cheap.

Gold. The simple answer on this is “Don’t Buy It”. He has no interest in gold and is not going to buy it.

TFSA accounts? This is a wonderful vehicle. Great for the young investors. If the government lets it continue and lets it grow over time, people are going to have millions of dollars in their TFSAs when they retire.

Reset preferred shares? January was not a good month for these. The terrible wrinkle on these is that they were built for a rising rate environment, not a decreasing rate environment. It looks like interest rates are to be cut again. The good news is that they have already taken their hit and if you don’t expect further rate cuts past March, then you can stick with some of them. He wouldn’t Sell, as long as you own good quality preferred shares.

Economy. With a pullback in commodity prices, the whole economy has been getting a lot of tailwinds, which has been reflected in some of the companies related to manufacturing in the US as well as retailers. Energy has affected the US equity markets such as Starbucks, fast food companies, retailing groups, which are all hitting new highs. Right now it becomes a difficult exercise to pick the winners. Valuations look stretched to him, but he thinks there is room to grow from where we are.

Markets. The markets are nutso on the ‘patience’ word. Is the Fed going to push it down the road or not. They need 150k jobs to keep up with the population growth. About 50% of the last year’s job growth was related to fracking. The quality of the US employment rate is not fixed. The Fed definitely wants to try rising interest rates. If they don’t like what happens they may lower them again. Nothing is fixed in Greece. They have to leave the Euro at some point. They have significant challenges. They are just another can kicked down the road for 6 months. QE has been the backbone of the recovery including the European QE. We will see in March what the ECB’s program is going to look like. We may be in for a bit more volatility in Europe.

ETFs specializing in REITs. Prefers ZRE-T because it does not overweight the big ones and gives the small ones more of a real chance. FRF-T is an actively managed ETF and you might consider that. There is a smaller cap bias to the markets in the uptrends.

Educational Segment. 63 year old’s potential portfolio. VCE-T (30%) is an ETF that invests in Canada. XWD-T (40%) is the world index. XBB-T (30%) is the entire Canadian bond market (no emerging market exposure). It had a 2.8% annual return over the last 13 years with 13% standard deviation. That is probably not what you are hoping for. But from ‘09 to present the returns are quite good at 15%. Would he have sold in `08?

Markets. Looking for a lot of M&A over the next year in N.A. Small Caps. Small caps have underperformed over the last 4 years and he thinks they will catch up. We are at a point in the bull market where this just kind of thing happens. There are opportunities for the big guys in the area of acquisitions. A lot of Tech names are hitting new highs. People are looking to move out of the energy space. Small cap index is laden with energy and material stocks and this is why the index has underperformed over the last 4 years. He thinks people will start to move down to the smaller caps. About a third of his top picks have been taken out. If the market does not reward the small caps with a higher multiple, someone takes them out.

Markets. Sees this business cycle extending for 2 to 3 years. There are lots of catalysts for the US economy to move forward. The 7 year period for US loan defaults is ending. There are lower oil prices. Interest rates have made mortgages more affordable. Consumer savings has built up over the years and cap-x will get a boost because plant capacities are approaching 85% where they find they start to get tight on capacity. Major risks are geopolitical: Ukraine and Isis. Subprime lending on homes and autos is back where it was in 2008, which would be the risk to the US economy.

The venture exchange. They are venture companies so unless you are prepared to possibly lose all your money, you should not go near it. If the TSX is not working for you, then go internationally, not to the venture exchange. Suggested UL-N.

Markets. Bull market has been going on almost 6 years now and could keep going on. Doesn’t think the Central Bank accommodation is the key issue. A more important issue is that global growth is positive and accelerating. Global GDP growth came in at around 2.5% last year, and will certainly be closer to 3% this year. This is happening in an environment where the valuation backdrop is still generally supportive. Stocks are basically right in line with long-term averages. European and Japanese stocks look a little more attractive than North American or US stocks. Stocks, relative to the other main asset classes, specifically cash and bonds, probably offer a value for money versus the other alternatives. We haven’t had a decent correction in the market since 2007, and it has been unusual how little volatility there has been. The key drivers for equity performance are growth and valuation.