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

Rate reset preferreds? The preferred share market is very cheap right now. They really haven’t followed the rally in bonds at all. These are perpetual securities. As much as they have lower interest rates (because a dividend does reset every 5 years), it comes along with some Call risks and a lot of credit risks, because it could remain outstanding forever. They are a good investment, and up to 25% of your fixed income portfolio could be in these. You want to hold them in your taxable portion because of the advantages of the dividend tax credit. Be selective and stay with investment-grade of P2 or better.

Ontario government bonds? This is probably the credit to Buy right now when you look at what is available. BC, Alberta and Saskatchewan trade at well below what Ontario does. Ontario and Manitoba are the ones that you want to look at right now.

Markets. People were hoping they could finish 2014 with some great holdings and some great returns that they had had for the whole year. The minute the calendar changed, there was a big repositioning amongst a lot of money managers, and this is having a lot of repercussions now. If you look back 30 years at the Canadian market, there were 3 major eras. 1.) There was the whole restock piling of China in the last 7 years and we outperformed the S&P 500 for some period of time. 2.) There was the whole restocking in the 80s as well as some of the postwar periods as well. The commodity cycle was starting to show a lot of weakness about 3 years ago. 3.) This then started showing up in stock prices and in oil, probably in earnest about a year ago. We are now at a point where if oil can consolidate here and give us some breathing room for a little while, we might see a bottoming process here. With the extra drop-down in the Cdn$ after the bank announcement, we are getting an equilibrium here where the question is, do you want to buy a beaten up Canadian infrastructure stock or do you want to convert the currency, hope for some more downside in the Cdn$ and maybe pick up a US bank or a US growth name. This makes it even more confusing for portfolio managers and investors.

Should I purchase US stocks in US$ or Cdn dollars? He would prefer the US market and a majority of the US names over the Canadian names. Staying in US$ and the US market is still preferable. However, the marginal benefit for the average investor is getting a little long in the tooth.

Markets. We are seeing the Euro recovering after today’s Greek announcement. The market anticipated it. The focus now is on QE. Equities in Europe should move higher. It is the right time to put your money into emerging markets. They are outperforming. EFA-N covers the rest of the world other than North America. The seasonality is from Feb. to May of each year. This year we are seeing international markets outperform North American markets. The strong US dollar is causing companies to give negative guidance, but after January things look very good.

Gold. Strong from July to October and mid December until the beginning of March. XGD-T has already had a run as it went into the period of seasonal strength. It is pulling back now and providing an opportunity to buy on weakness. HSBC downgraded Canadian gold stocks today so wait until they come down and then buy on weakness.

Educational Segment. He is at the largest ETF conference in the world. Every ETF provider in the world is there describing their new products. Greece is a hot topic. He showed a chart of 10 year Greek bond yields. Yields have really come down. The question of Greece leaving the Euro could lead to a rocky road in the markets. What is happening in Greece is having an impact on your portfolio and you have to know how to handle it. They are projecting the global ETF market will double to over 5 trillion dollars next year. If Greece defaults on its debt it will have an effect even on North American markets.

Markets. Stocks are still the best game in town. Stocks that are geared to a growing economy are the right place to be. The safety trade is way overbought. Telcos, grocery stores, utilities, pipelines have all gotten overbought. There is a lot of momentum money in these stocks and when they get out they get out indiscriminately. We have seen a lot of fear based investing. The next step is when people turn away from high multiples.

Banks. He is not that positive on the Canadian banks because of oil. By spring we should know where the price of oil will be. You want to look at banks in the fall.

The baby boomers are shifting out of fixed income and into dividend stocks. They are being forced to. Some rates in Germany are negative. In Japan it takes 10 years to get a 1% return in fixed income.

Markets. We are in a market of haves and have-nots. Capital is constantly being reallocated. Canada had a great cycle on the back of China’s growth and emerging markets, between 2000 and 2012. Since 2012, capital is slowly moving away from commodities, away from emerging markets and back towards consumer led developed economies. Canada still has some big pieces that are tied to that other world. We just have the wrong sectors. He has very close to a 0% Canadian bank weighting in his portfolios. In the US, he is more interested in the regional banks. In Canada, 70% of the market is made up of materials, energy and banks. That makes it tough in the Canadian market. Fortunately there are some great opportunities in the US, and there are some sectors that really benefit from what is going on. This is a market where you pick your spots. There are some great opportunities, and there is some stuff you have to avoid.

Gold. Having been out of gold for about 18 months, he recently started back in with some “very partial” positions in some of the equities. The market has been on more of a defensive footing over the last few weeks. If the gold equities start to outperform the metal, that is something that may point to a little bit more strength coming in the future. He does have some concerns about gold, so he is looking at this as a shorter term trade to begin with. He prefers Franco-Nevada (FNV-T), which is a royalty company. Their price held in much better than the group and they have a very defensible business model. The key risk for gold right now is that it is a defensive play, and things in the US are getting better.

Canadian healthcare? Healthcare has probably been one of his 3 Top Picks for 2 years now. It is the biggest industry in the US and highly domestically focused. This was a sector that has been universally underperformed in portfolios. He would prefer a US name such as Actavis (ACT-N), a pharmaceutical company that has roughly 50% of their revenue coming from generic drugs and 50% from branded drugs. A wonderful management team that has been very efficient at creating value. Recently purchased Allergan (AGN-N), which gives them a great opportunity to integrate that business and to generate profitability. Trades at a valuation similar to a generic company, but does have branded drugs which probably make it a little more valuable.

Bonds. Canadian bonds went up something like 9% last year, but that was a rebound from a weak 2013. We actually had a negative return on the Canadian bond index in 2013, and people in the bond market had thought this was the end of the low interest rates that we saw in 2013. In 2014, we realized that tapering wasn’t a bad thing that everybody thought it was, so we had a really hard rally down again when interest rates dropped. 8.8% total return, on the Canadian bond index last year. He is overweight on the corporate bond markets, where spreads haven’t compressed yet.

What do “D+18” and “FF” mean in corporate bonds? FF is a “Fixed Floater”, which means the bond is fixed for a certain period of time, and after that time it begins to float. In Canada it is a rare for it to go past the fixed point. The D+18 means the company has the right to Call that bond at the Deposit Rate +18 basis points. This is usually quite a bit tighter than where the market usually trades the bond.