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

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.

Interest rate drop. How does this look with the new issues of banking preferreds, high-yield, corporate debt, etc. You are looking at much, much lower yields, but he thinks there is a limit there, but doesn’t know what it is.

$5000 in an RESP to run for 13 years. Suggestions? He would suggest looking at either a fund or an ETF. You could also look at individual preferred shares.

Energy. The drop in oil prices is one of the catalysts to be looking out for going forward. This and the US$ are interrelated on the rise of the dollar. The key concern going forward which will bring more volatility to the North American market, is the level of debt on the fracing industry. A lot of this debt is not going to be able to be paid if oil prices stay here; you need oil prices above $85. He is currently under weighing the oils completely, but is looking forward to getting in. Thinks it is a great opportunity for Canada in the next couple of months. As the fracing industry gets destroyed because of debt, that production is going to have to be replaced, and Canada is that good supplier of that energy. This could be a pretty big hit to the economy.

Gold. Last year, this was the world’s 2^nd best performing currency. If you look at gold as money, it is finally catching up to the US$. Looking at the period between 1978 and 1980, when gold had a massive run from $200-$100, it started moving in tandem with the dollar, and eventually caught up and beat it. If you have a race to the bottom, gold is finally catching up.

Zinc? He thinks it is too early to step in. He would wait to see when the dollar tops, and then start to pick away at some of the miners.

Markets. Markets are always fooling us. This one is different in that we have the background of the significant fall in oil prices and with virtually no inflation. There are a whole lot of different problems going on out there. The world has changed in the last few years. He is keeping his powder dry right now. Europe is finally doing their QE and that should be positive. He is looking at companies that trade into Europe. Exports should be cheaper after the point and half drop in the Euro. He thinks we have seen the bottom in oil. The oil supply side is adjusting in Canada. He thinks there will be an upper kick in terms of demand in the future. At the moment you can buy oil and store it for 6 months and make money.

Economy. The European Central Bank finally pulled the trigger on quantitative easing. If they had not done this, it would have affected the markets quite negatively. The markets went up on the news and was a little more than what he had expected. This will help the ECB from slipping back into a recession later this year. If they hadn’t done anything that could have caused a ripple effect, it could have landed on this side of the ocean.