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

Markets. Looking to buy companies trading at a discount to their breakup value. He looks for strong companies trading at a discount that are generating free cash flow. He also requires financially sound companies. The US has been on an amazing run. He sees better value elsewhere. European governments are poised to start a little spending.

ADRs. Vs. Global stocks on the Local Exchange. You can buy on the New York exchange so it is cheaper and easier to trade. On proper liquid stocks you get proper execution, but on illiquid stocks you have to go to the local market.

Energy. She is seeing some green sheets that are looking quite favourable. Whenever the rig counts come out, there is a little bit of buying in the sector. The rig counts are coming off a little bit faster than she anticipated, and this is definitely a good sign. It means producers are heeding the warnings. We are getting close to the point where we have just enough rigs to keep production flat which is very encouraging. The inventory issues we have seen are because we have had excess supply in the US. Saudi Arabia has indicated that they are not willing to pull back on production. If this becomes a demand issue where we start to lose demand growth, it could really become a much bigger problem than it is today. It is very possible that we will see a retest of the $43 lows.

Drillers or oil sand producers? Producers that drill are better to own then oil sand companies in a downturn. You get higher margins for light oil in this environment. Also, drillers can recycle your dollars a lot quicker. Also, oil sands are a little bit more marginal in terms of returns than conventional oil production.

Energy. The rally in the past few sessions was just a head-fake. There is nothing fundamental about the move above the $50-$54 range. He believes we are going to see a $30 or lower price before we see $60, probably in the next quarter or so, but by the end of June. This is because production continues to grow. What drove the move higher was the reduction in the rig count, but beyond that you see that production is still growing in excess of demand. Also, you have huge inventory numbers. Through January, the inventory numbers were the highest in terms of inventory in 80 years.

Copper. He would say that the copper price is widely expected not to recover until mid year 2016. Currently we have too much supply and too little demand.

US Economy. Last Friday’s US employment report pretty well put the seal on a rate increase this year, probably by June. The US is on a self-sustaining expansion now. We are way below where rates should be, so one modest increase here is not going to halt the economy in its tracks. A 2.5%-3% would be a normal rate, sort of in line with GDP growth.

Cdn Economy. He had a feeling that the Bank of Canada was going to drop the rates, because the two-year yield had fallen like a stone, but he still didn’t see any reason why they had to do it. Another increase is already discounted in the market for 2.5% next month. If there is anybody thinking that the Bank of Canada does not want the currency lowered, they now have their answer.

Preferred shares price declines? The Bank of Canada really triggered this with their surprise cut. This all occurred when global rates were falling, which means that five-year yields have just absolutely tanked. They are going to call most of these preferreds, and probably issue them at a narrower spread.

Risk in bond ETF’s as opposed to individual corporate bonds, if held to maturity? There are a few subtle risks in ETF’s that should be explained. With individual bonds you know exactly what you are going to get back, when you are going to get it back, and how much it is going to be. ETF’s by nature invest in a basket or an underlying index of bonds. There is no guarantee they can buy all the bonds in an underlying corporate, because some of the corporates are impossible to buy. Your money never matures in an ETF, which is the same criticism he has in mutual funds. The good thing about ETF’s is that they have good diversification and low fees, compared to mutual funds. He prefers individual bonds.

Equities vs. Bonds? Thinks stocks are not that dangerous right now, because they are being underpinned by cheap money. Bonds are probably a little riskier right now than they have been for a long time, because their yields are artificially compressed, and at some point in time will rebound.

A corporate, government or other ETF that would do OK in a gradually rising interest rate environment? You could look at iShares Core Cdn Short Term (XSH-T) which has a short duration of about 2.8 years. Also, the iShares 1-10 Yr (CBH-T) which has a duration under 5 years and a reasonable diversification. These are 2 that he would recommend. (See Top Picks.)

Senior Secured Floating Rate Loan Fund for a 75 year old? He has a problem with this investment. He would like to know who the issuer was of the paper and decries this kind of investment, because people are reaching for yield in products that they have no business being in.

US bonds? Doesn’t think you should buy any US bonds right now. The Cdn$ has fallen too far and too fast, and has fallen below its purchasing power of parity. Over time it will work its way higher again, maybe to the mid-$.80’s and perhaps close to $.90. You have much less risk by staying in the Canadian bond market at this point.

3 months to 1 year effect on Canadian markets of the recent Bank of Canada rate cut and European quantitative easing? Indirectly this has an effect because it makes people look for more risks because bond yields are going to be close to zero for the next period of time. People look around for something to buy that makes more sense, and Canadian equities would be an attractive place for global investors to look.