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

What do rising rates do to high yielding equities such as Emera (EMA-T), Fortis (FTS-T), TransCanada (TRP-T) or Enbridge (ENB-T)? In this marketplace, the yield on bonds is so much lower than these higher yielding utilities, that if there is any weakness at all, it will be very, very slight in the early stages of rising yields.

Rate Reset vs. Perpetual Preferreds? Definitely avoid perpetuals, because they will be the worse hit by rising bond yields, which is going to happen eventually. Rate resets are the only preferreds to buy, and right now you would want to buy bank ones trading at a discount from their Call price if you can find them.

Laddering bonds using 20% RBC Target 2015 (RQC-T), 2016 (RQD-T), 2017 etc.? He likes the target maturities. These are a bunch of bonds in a basket of each of those maturities. Very low cost. Bank of Montréal has ETF’s similar to this, with a shorter maturity. Not quite as effective, but very attractive.

Target maturity bond ETF’s as an alternative to buying individual bonds? He still prefers individual bonds.

Bond education. He has authored a book called “In Your Best Interests” and “The Ultimate Guide To the Canadian Bond Market” is the trailer. This is available at any Odlum Brown branch or at Amazon. You can also ask him questions on his website www.inyourbestinterest.ca where you can ask him questions.

Videotron 2020 corporate bonds maturing in 2020 at a coupon rate of 7.125%? This is an attractive coupon and he likes the credit. If you sell them, you are not going to be able to replace the income.

Markets. Usually it’s recessions that cause an end to a bull market and she doesn’t see that, particularly in the US. There are very strong employment growth numbers, housing is picking up, consumer spending is picking up and the sentiment is improving. All of these things point to an expanding economy. The recovery is actually accelerating. US GDP has gone up 3.6%, and had been under 3% for the last 9 years. She thinks the US has a good chance of carrying the rest of the world, and actually may boost the rest of the world. The collapse in crude oil prices is benefiting the US consumer, as well as a lot of other countries. For this market to continue going up, it is all about corporate profit growth going forward. Earnings season is underway right now and she thinks it can grow in the mid-single digits. Despite the headwinds of currency, she still sees lower interest rates.

Investing Style. He likes to look for names where there are zero, 1 or 2 analysts on the name when he initiates a position. Doesn’t like being the 5^th, 6^th or the 20^th person to look at a stock. Being early and looking at under-owned and under-researched names allows him to unearth some interesting opportunities, particularly in the mid-cap space. There are only about 450-500 names in this category in the Canadian market, so he typically invests in a maximum of 40 names, which means he is looking for less than 10% of them. Has a library of names that he knows, that he built up over the last 7 years, and he tends to stick with his knitting in those names. Has 4 components to his portfolios, but pair trading is the bulk of it. Two thirds of his portfolio is in pairs trading. This means going Long in one position and typically going Short a stock in the same industry. That helps you to take out market specific risks, but also industry specific risks. A great example of that would be Canadian National (CNR-T) versus Canadian Pacific (CP-T). As the market moves up or down, it is how they move together. Because they are in similar industries, you can offset the impact of rising or falling diesel prices, or weather, or currency impacts, so you can really isolate the alpha in those 2 trades. What people miss on pairs trading is that it is not in absolute terms what happens to the stock, it is how they react relatively. For example, in a falling market, both of them can fall in value, but as long as the Short position falls more than the Long position, you actually earn money. This means you can make money in any market condition.

Markets. Greece is talking tough on austerity. Greenspan said the Euro does not work for all countries. Berman feels the Euro will eventually fall apart and this is just the next iteration of the debate. The markets will have some anxiety about it. China has some growth issues they have to manage. They will soon be the largest economy in the world, so when their trade numbers slow down, it is significant. Growth rates could fall to low levels over a number of years. We can see strong numbers in the markets without Chinese growth, however. We are in the very early phases of banging out a bottom in the price of oil, but it could take a year. We should be accumulating a position in the crude space. Don’t invest in ETFs that hold the commodity because of losses from the rolling over of futures contracts.

Having just one oil stock and one gold stock is not diversified. Use an ETF. Don’t try to choose between oil and gold. You might want to be more weighted in oil than gold.

What happens if the manager of your ETF runs into trouble? The assets become custodied in segregation and there is no issue and you get your money back, unless there is fraud. It is relatively insignificant in the grand scheme of things.

Safe ETF for one to two year hold. The more diversified you are, the lower the volatility. In two years, Greece could blow up, or the US and China could lift the world. ZMI-T is corporate bonds, preferreds and a lot of everything, Canada focused. There is no global balanced ETF that gives you that exposure.

Education Segment. Comments by a TV Personality on ETFs. He was shocked that this host of a popular money show does not ‘get’ ETFs, saying they were only for short term trading and you should go to mutual funds. The corner stone of investing is diversification. You need 30 to 40 individual stocks to diversify a market and it is hard to manage that many, and that’s why ETFs are great. Comparing CPG-T and RY-T to ETFs containing them, you got more return for less volatility using the ETF recently. The point is that you have to be diversified.

Markets. When visiting Europe he found the mood was better than expected. German is positive and is benefiting from the weak Euro. The Swiss are nervous because of what the S&P did and the appreciation of the Swiss Franc and the Spanish much more optimistic than they have been for a long time. Greece concerns him. He does not know the unintended consequences of Greece defaulting on the debt. If you stick with the quality companies you should do okay. India was the exciting country last year to invest in. If you look longer term, that is probably still going to be true, but there should be a pullback short term. China is the real wild card. There could be spillover effects into other parts of Asia. He looks for companies with strong balance sheets that can finance their growth internally and that have quality management.

India ETF or Mutual Fund. Long term he thinks India is turning the corner. They have a reform oriented government and good growth. Oil prices being lower benefit India as an oil importer. We may hit a few road bumps, so he would scale into it. Start now and buy over the next year or so for a 3-5 year hold.