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

Economy. Germany is a concern. Italy and France are showing negative GDP numbers and now Germany is heading to be stalled out. It was supposed to be a beacon of strength along with the UK. US$ has been strong largely because it is the economy that has shown the most growth. This is a country that put together the most fiscal and monetary easing policies that has actually started to work, whereas some of the other countries are not getting the same response. You are seeing a flight to safety with the US$. With the easing policies everywhere else, the signs of inflation are really not there, so people are continuing to plow into US treasuries and keeping yields low. Given that the US continues to be strong and the job growth is there, corporate America is in the best shape that it has been in a long time. The next leg he would like to see is the consumer benefiting and starting to spend. Job growth has been there. He would like to see some wage growth next. Canada should benefit to some extent as the US economy does better. Our weakening dollar is a tailwind as well.

Energy. West Texas oil below $90 is a bit of concern. There is either a problem with demand or too much supply globally or a mixture of both. WTI is going to trade in relation to Brent or international pricing. It is worth keeping an eye on, because he thinks that a lot of the countries that have increased their production, especially the ones with geopolitical problems, are not sustainable. Over time they are going to run into hiccups.

Markets. Markets are off today, but the S&P 500 is really only off about 4% from their highs, and the TSX is off about 7%. Maybe this is the 5%-10% that everybody keeps talking about. She doesn’t see anything on the horizon that would make it any more severe than that. Thinks there was probably some profit taking. Feels the US economy is recovering. As long as we get profit growth from the corporations, she can see markets continuing to have upside over the next year. Stock valuations are not that unreasonable given that there is not a lot of inflationary concern. PE multiples are just above historical averages. Germany is a concern because of US multinationals that do business there. Strong US$ is a headwind for multinationals. IMF is calling for 7%-7.5% growth in China.

Markets. Global growth forecasts are starting to lower, but there is still growth. The correction last week was an opportunity to buy. There has been a large move in the US$ based on what has been happening in Europe. We are getting close to resistance for the US$.

TSX Support Level: The 200 day average last week was taken out. The next big support would be around 14,200-14,300. We should hit that in the next month or so.

The pipeline sector is not cheap. There is no ETF, but ZJN-T and FCG-N are gas ETFs. Stay away from ETFs with direct commodity links. Pipelines are best played with ZWU-T although it also plays Telcos.

Markets. It has been 5 years of free money with QE. The markets have been complacent, but now the markets changed as we come to the end of the process. He thinks the Fed will be cautious and not raise the rates quickly. There is a potential for bonds to get out of control when interest rates start to rise. As interest rates rise, corporate spreads narrow. Higher yield bonds are as overvalued as any asset class and will get a double wammy when interest rates go up.

It has been a challenge for investors because of their age. 55+ investors should be invested heavily in fixed income, but the rates are not high enough to live on. They are being forced into the equity markets.

Government of Canada Interest Rates. The government auctions their bonds from time to time. The coupon is set to the current rate, but after the date of issue the price goes up or down according to interest rates.

What is the criteria for a bond to be high yield? A bond rated lower than triple ‘B’.

Educational Segment. Gauging Market Health. Spread Between Small and Large Cap Stocks. The US market is generally up about 7.5% The Russell 2000 is down 4% on the year. The divergence started about March. The global growth downgrade started to come out about that time. So right now small caps are screaming as much cheaper than large. We are seeing a decay in the Russell 300 index. We should get a short term bounce, but he thinks there is one more leg down by November. Small caps will be where you want to go for a good bounce.

Reset Preferreds. They are issued at $25 and trade in the market wherever the market has them. The reset is an answer for the perpetual preferreds that had infinite interest rate risk. Resets are only extended if it benefits the issuer. If interest rates rise then they get extended at an increased rate spread and if interest rates fall, they are called. You get paid only a fraction of what you should get for the risk you are taking.

A floating rate ETF has little return, although not much interest rate exposure. You would want to earn more than 1.25%.

Money Flows as investors return to bonds – where does it come from? It moved from bonds into equities over the last 12-18 months. A lot of money is sitting on the sidelines, however, waiting to get into equity markets.

Bond ETFs, bond mutual funds and bonds straight up have the same exposure to rising interest rates.