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

Good quality ETF’s in Asia, particularly Thailand, Indonesia and Laos? Not a huge fan of regional ETF’s, especially in those countries, as the markets are so shallow and so susceptible to fund flows that it can really be a volatile investment. Growth in East Asia, especially in Malaysia, has come down with the decline in oil prices. Thailand is still trying to recover from the decline in economic activity because of the political instability last year. Indonesia is still trying to pick up growth after the elections last year. He would suggest instead investing in these regions through either Jardine Matheson (JM-SP) or United Overseas Bank (SP) out of Singapore. Both are well-managed companies and pay good dividends.

Markets. The Dow and S&P 500 have hit all-time closing highs today. The only holdout right now is the NASDAQ and he is sure the NASDAQ will clear that. This will mean that all the major indices are breaking into all-time highs. The only thing that could spoil it is the currency wars that are going on. Most local governments that have their own currencies are trying to devalue their currency. We have the Cdn$, the British pound, the euro all being work down. Eventually the high in the US$ running upwards will eventually impair the earnings of the S&P 500, and we are going to gradually start Topping out. It doesn’t mean a Crash, but we will get this turning business and things are going to gradually start leaving the US and going global. Over the next year, investors should start reducing their US exposure and picking up some global stuff, including Canada. This currency war has all the banks fearful of raising rates, and that is going to continue for a while. A chart comparing the UK with the S&P 500 shows the S&P 500 breaking out above the 2007 highs. The UK is just trying to break out. Investors who are chasing yields right now and are buying into the dividend growth stuff are going to get harmed, so he would be very careful. One of the easiest trades out there has been going on the US$, and this is probably going to work for a little while yet, but he thinks we are near the end of that. Eventually we are going to see US internationals being punished by their high dollar which is impairing their earnings.

Energy. Basically the energy index bottomed in 1998, followed by a big run up. There was a spike in 2008, which dragged the TSE up to a false move. From that point on there is pretty much of a sideways move. He would suggest that we are just in a multiyear trading range. We could run up to the old highs of 2011 and 2014, but doesn’t think we are going to match that high for a long time yet. Be very careful.

US$? The strong dollar is a real problem for the Fed. They don’t dare hike rates, which could push the dollar higher. It is eventually going to create problems for US earnings. The natural course of the year is that as money leaves the US$, it will push the US$ down. He thinks the US$ has had its course.

Markets. Thinks we get a rate hike in June. The Fed minutes are overanalyzed. It doesn’t matter what everyone in the Fed thinks, it is a matter of when rates need to go up. Lots of professionals in the business have never seen the Fed raise rates (9 years ago last) and may overreact. He thinks the economic impact of a rate rise won’t be felt for 2 years. The odds are that Canada will lower rates. Thinks Canadian rates go up mid -2016 again.

Preferred shares can be floating (cash flows are tied to rate), rate resets (every 5 years they re-issue with new rate) and straight perpetual (can be called any time). In this environment it is tricky. Markets were hit hard especially in the last few weeks and the rate resets were hit the hardest. It’s all in the hands of the issuer, so he has little exposure to preferreds.

Prefers an actively managed pool of corporate credits. You can’t get enough diversification in corporate bonds. If you want to move some of your corporate bonds into stocks, how do you trim your holdings – a bit of each? An actively managed corporate bond fund is more appropriate. 85% of his are in high yield corporate bonds.

Canada US exchange rate in the next 6 months. He sees 3 or 4 more cents of potential decline in the Canadian dollar.

GICs for 1 or 2 years? Not the worse investment. You are sometimes handcuffed for two years – you are locked in sometimes. You could probably do better in a short duration bond fund.

Rate adjustments in quarters – Why? Greater than 25 basis points has a shock value. In developed market countries smaller than 25 basis points is just silly and you aren’t impacting anything. You can’t fine tune the economy that much by 5 and 10 point changes.

Rising rates in the utility sector. There is a higher degree of certainty of the cash flows in the future so there is a lower discount needed to be applied when comparing to government bonds. Higher quality cash flows like these get hit harder when government rates go up. You are only positively affected when rates go down.

Preferred Shares with nice yield that have gone up – continue to hold? They would have to be perpetuals. Rate resets have inherent volatility. He thinks the perpetual preferreds are okay as long as they are not called away from you.

River Cree Entertainment bond, 11%, due 1/20/2021. (Top Pick Jan 6/14, Up 12%) Smoking rooms in a casino. Edmonton. The bonds fell and he bought more. 11% coupon.

Mattamy Group 6.875% 11/15/2020 Bond. (Top Pick Jan 6/14, Up 6%) Modest coupon. Bond was trading lower because of lower outlook in Ontario real estate. Financials are rock solid and he was looking to buy more.

Commerzbank AG 8.125% 9/19/2023 Bond. (Top Pick Jan 6/14, Up 15%) Lower in the capital structure -- in the middle. It is a decent bank and he is high enough in the capital structure that he is not worried.