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

Canadian Banks? He has no Canadian banks at this point. Prefers US banks, which in the last 6-9 months, have done better. Canadian banks are great businesses and great franchises, but his view is that your best bet is something with exposure to the US, which is going to grow quicker and more steadily than something in Canada. Ideally you want something with exposure to business lending in the US, which would be Bank of Montréal (BMO-T).

Markets. He would describe himself as mildly constructive on equities. Notwithstanding the correction that has occurred, valuations remain high. More so for the smaller and mid-caps, but nonetheless the S&P 500, trading where it is, causes him a bit of caution. Had been planning for some form of correction and had raised cash through the summer, but just hadn't thought it would come back as quickly. You are starting to see the debt issue spread around developing countries, such as China and India. Also, he doesn't think the European debt crisis is over, by any stretch. Also, doesn't think there will be a huge rise in rates in the near term.

Economy. The signal that Japan sent, when they increased their QE to devalue their currency, is a beautiful example of a country exporting its deflation. Looking at it from the US side, it is a rise on the currency, but by the same token it is a rise on the debt. They have been trying to control the low interest-rate environment, and they say they might be able to control interest rates much further down, but the currency is being kept. All of a sudden you have a rise in the currency, and that is almost the same as a rise in interest rates. That is deflation. China and everybody is feeling it, and in order to control it they either have to accelerate QE on their own country or try to devalue their own currency. This is similar to what has happened in the 30s. Because of that he thinks that at the currency level we are going to see a lot more volatility, because countries will have to deal with it. If you listen to what China and a lot of other countries are saying, they are all affected by the volatility in the US$, and it is getting harder and harder to do trade. We are starting to see a dislocation in a lot of the processes that we have set up over time. He had instituted a lot of stop/losses for his clients and did raise cash levels in September. Staying flexible is still important. Also, feels that precious metals should be a part of everybody's portfolio as insurance.

Energy. What is happening right now with petroleum prices is good for Canada because it is killing the shale industry in the US. Shale industry has extremely high outputs and then levels off, so it is not a very productive industry, and it needs a lot of money and high prices. Long-term the geopolitics of the middle east should overtake any short-term decline in price.

Precious metals. Between gold and silver, he expects silver will outperform gold, but we have to wait for gold to take off. Thinks the miners are going to take off first. Looking at that sector, he would rather own the miners before he owned the commodity. You have to be careful in what you are buying. You have to look at management, the geography, etc. People are buying silver. The demand out of India has increased when they were switching out of gold.

Markets. Earlier in the early days of summer, he felt it would be nice to have a 10% correction in this market and that is pretty much what you got. It was a cleansing and a need the market had before continuing its healthy trend upward. Some people may wonder if this market can handle this trajectory without the extra help of QE. He feels we are 2/3rds or 3/4ths of the way through this cycle. You have to be selective and adjust asset allocation according to change in the environment. You have to be ready for a transition to take place sometime next year.

REITs. REITs have been very strong this year. Took a bit of a dip last year, which was very painful, but what this has proven is that this is not the kind of asset class to have those sharp selling reactions. The value of real estate did not plummet and increase in the last 6 months. This is proof of the steady cash flow that these products produce, and shows the strength of real estate, as people sell out of some of the more volatile sectors in oil/gas/mining and have been coming back into real estate. One of the main attractions is the yield. If you look at some of the other yield sources, such as bonds, yields in REITs look very attractive. He is favouring some of the US REITs over Canadian, but also there are some Canadian REITs with some kind of US connection. The US REIT market has had quite a run and has done very well, so there is a chance of a short pullback. That would be a buying opportunity. A lot of smaller cap REITs have been neglected and have very attractive value in some of the names.

Are large indoor malls dying? There is a question as to what are our shopping habits going to be in the future. He doesn't think the mall is dead. People are not going to sit at their computers and shop all day. Shopping is a community experience, so they are going to continue to go to these areas. It is the smaller, secondary, tertiary areas that are going to be difficult. There is also a certain amount of re-tenanting that is going to have to happen. Certain stores are just not going to survive the Internet age, but they will be replaced.

Silver? This is different than gold, because silver has industrial uses. The US$ is getting stronger and will likely continue to strengthen against the rest of the world. Gold and silver are both valued in US dollars. The weakness we have seen in both precious metals, is partly because the US$ is outperforming everybody else. It may be a little while before you see a turn in either precious metal.

Markets. Thinks markets will grind higher. Earnings have been better than expected. Analysts often get too pessimistic. They were making predictions in the midst of a correction. There is global and US growth. The market is trading at 14 times earnings – not cheap, but not expensive. Yields are still pretty juicy on dividend payers. Lower energy prices mean consumers fill up for less and spend more at the department store. If you look at oil prices in Edmonton (not WTI), they have not changed much. Being a Canadian producer is not so bad right now. Would not be surprised if we rally 4-5% going into the new year.

TFSA. Keep your preferred shares outside of the TFSA because of preferred tax treatment of the income and put REITs in the TFSA.

Markets. About 90% of the US companies she holds have reported earnings and have come in better than expected. Earnings so far are up about 10% year-over-year. Going in, it was about 6%. Doing this is one of the reasons the US market has done so well off the lows in October. TSX has a larger energy component and there is a cautious tone because none of the companies really know what is going to happen in 2015. The US economy recovery is definitely underway with strong employment numbers and very strong manufacturing activity. The “new order” number was actually at 64, a very high number, which is a good signal for future business activity. GDP has come in at 3.5% for the 3rd quarter, better than expected. Because of lower energy prices, consumer is at a new recovery high, a good signal for future consumer spending. Going forward, as long as we don't see a deep recession in Europe and China stays at the 7%-7.5% level, and as long as the US companies can still post relatively attractive profit growth, then equities have more upside. There are still geopolitical risks in the Middle East and Russia, which is always a concern.

Markets. There have been 5 modern bull markets since 1974. The average bull market is about 2500 days. Our current one is over 2000 days, so we have around 300 days left. The bull is getting long in the tooth, so the question is, what do you do about it. Indexing is probably not going to work the way it did. He would suggest that you move away from indexing products and get more accurate information. Or you could embrace “The Dominant Theme”, a secular trend within the bull market such as lumber. Lumber is one of the few commodities that is operating counter cyclical to the broader commodity markets. A chart showing lumber versus crude showed crude peaking in the midst of the financial crisis in 2007-2008. At the same time, there was a massive downtrend in lumber. Since then, lumber has had a very nice advance and well under the radar screen. There are other dominant themes such as aerospace, healthcare, food and to a certain degree, technology. He also thinks we are going to see improvements in metals and mining, along with a topping process in financials. It will be slow and gradual, but if you are in early you can take advantage of it. What he would like to see is the commodity under pressure with the equity stocks (producers) holding up.

TSX? Thinks this will outperform over the next 6 to 9 months to a year. Also, thinks it will outperform the US markets. Money has been piling into the US markets and he thinks we will get a surprise and see the Canadian market outperform.

Markets. US earnings. 90% of the S&P has reported. The numbers are great. We have progressed from a B+ to a firm A. MCD-N disappointed, but it is not systemic. Earnings drive markets. The stronger US dollar might detract from earnings. 30% of recent stock price appreciation is from share buy backs. He thinks we will get a grind into year end. Hedge funds need to chase some performance numbers into year end and that might actually push markets up then. We are already anticipating that natural gas prices go up into February in the futures. FCG-N has been beaten with the natural gas prices recently.