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

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.

Sinclair Broadcast (Television) Group Inc (SBGI.O) Bond, 5.625%, August 1, 2024 A local broadcaster in the US. They reach 38% of the population. They are almost like a toll road for the national broadcasters instead of relying on local advertisers. [They charge the national broadcasters instead of local advertisers]

Markets. Thinks we are in the 1^st half of a multiyear bull market. Even if we get higher rates, we are still going to be generational low, lower than we have been in the last 30 years. We have a long way to go to get back anywhere near a normal interest rate environment. Because of that, even though the S&P is trading at the upper end of the range, that historic multiple has been obtained in varying interest rate environments, none of which are calling for rates where they are now.

What percentage of investments could be in speculative stocks? This all depends on the individual. If you are very risk adverse, you probably shouldn’t have anything in speculation. It should certainly be no more than 5% of your portfolio. You could do this 1 of 2 ways. Either through very, very junior speculative companies or with seasoned companies through the options market, where you have a time risk element as well. He doesn’t recommend it for his clients.