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

Oil and Gas. Oil prices have to go up because the cost of getting it out of the ground is going up, but that is over decades. There is some technical selling that is playing out right now. Crude oil will be in a trading range for the next 5 years because of new supply coming on line. The stocks are going to trade. Buying opportunity for stocks will be about 3 months for the next low.

Educational Segment. Financial Literacy. Seniors: Increasing bankruptcies. Larry’s guest is trying to develop a national financial literacy strategy. Seniors are entering their senior years with more debt and don’t have good financial literacy. In terms of low interest rates, it is a great time to pay down debt before interest rates start to go up again. The guest wants seniors to know what questions to ask about the products the advisor is suggesting they get into.

Markets. We had muddled growth since the last recession, but he still see some growth for the next couple of years. We are starting to see positive numbers out of manufacturing. 8% equity and 2% bond returns will be normal going forward. Brent oil fell below $100, could go lower than that still. Sees robust prices on oil, but not as high has previously. $80-$90. Oil demand is starting to flatten worldwide. Sees US production increasing. If Iran sanctions get lifted over the next couple of months we see even more supply. He is not long on any shale producers that have higher costs, but is long on oil with net backs of $30-$40. Canadian dollar at $0.90 is good also if it stays there. Nat Gas inventories will be at 3.4 Billion cu. Ft. this fall which is below where we were last year. There are seven states in the US with snow this week. Suspects Nat Gas will act well this winter. It should be driven higher.

Bonds. Bond performance this year has generally been terrific. Doesn’t think any bond manager in Canada thought that we would see a 6.5% return year-to-date or a 7.6% return year-over-year. We were coming up with such a bad year last year with a small negative performance on the overall bond index with an even bigger negative return on preferred shares. There was a lot of fear, but we are really having a terrific year. He starts top down with a macro view and then starts getting into sectors and countries. Obviously the US is doing very well. Canada a little softer. Europe is still in a kind of quagmire. We are in the 4^th quarter where we will eventually get into rate increases, which is usually danger for the bond market. It usually lasts only a short period of time, but it is the period of time that people remember and are most fearful of. Easy money has been made, so at this time you have to be really selective.

Good time to purchase a European bond? Which type? Corporate, high-yield or government? Europe is a good place, but you have to be careful. When you’re talking about corporate or high-yield, it is a very different environment there than what is in North America. Financing tends to be through banks so there are a lot of bank issues. It might be best to play this through an ETF or an index. Sometimes it is better to take your time, work through an advisor and look for opportunities that make sense for your portfolio.

Owns Government bonds. 20-25 years at 4%-4.5%. This would be subject to more volatility. The further you go out, the more volatility there is. However, the Government of Canada is a good solid credit. Surprised at the high interest rate, but this was perhaps purchased 30 years ago. A 10 year bond today would be around 2%.

T-bills, one year, 10 year, etc. are always quoted at current yield. What are the coupon rates and are they always set at the same rate? Coupon rates are not always set at the same rate. Usually bond managers are looking at yield to maturity. Each quarter, the Bank of Canada will issue new bonds, usually a 2, 5, 10 and 30 year bonds, or they may add to existing issues. There are approximately 50 existing issues being traded right now, and each day they get shorter and shorter. The 10 year bond you got last year is now a 9 year bond. As it comes down the yield curve, the coupon stays fixed. In order to make up for that yield differential, the price goes up. Sometimes they do quote current yield, which is basically just that coupon over the current price. This is not very accurate, so bond managers use a calculation called yield to maturity. This is the true yield that you should be using.

Closed End Bond Funds. What are the risks in holding this fund until it winds up? You don’t see too many of these around, because there are usually pretty hefty fees on them, which makes it pretty tough to make any money.

Building a 10 year ladder. With most bonds selling at a premium, won’t this result in capital losses? A ladder is a passive strategy and not a bad way to go. All the bonds now have a premium. They were issued with a fixed coupon, rates have come down and the price of the bond is at a premium. As a bond manager, he looks at “yield to maturity” and takes a little bit off the coupon that you would be getting and this does shrink the yield. He would do it with corporate bonds rather than government, or perhaps mixed, when they are at a premium. A better way to do it would be through a fund or an ETF, instead of doing a ladder.

Convertible Bond Fund? Convertible bonds are kind of a mysterious animal, especially in Canada. Looks like a bond in every way, but at some point there is a conversion feature. Usually, as the underlying stock starts taking off, you can convert to the stock. Usually it is weaker companies, weaker credits that issue these. A good way to play it would be through the iShares Convertible Bond Index ETF (CVD-T).

Markets. It has been a very strong recovery over the last year. He finds that a couple of the names that are large caps are entering into expensive territory, but the whole middle section is very attractive, especially from a yield perspective. Picking the right name with a higher yield is okay if you are careful. He is still seeing some very attractive values. It’s a good time to be in the space. In Canada we are not seeing the participation in the REIT space that would be expected, which is a good thing if you are buying.

Interest rates. They will have to go up over time. So he is not that concerned. REITs will not continue to grow double digits year after year. He does not see those sharp fears from a while back.

How to select REITs? Watch the debt to enterprise value, or debt to total assets. Look at FFO. 12-15 range is fair. Growth is how they are growing FFO over time.

Markets. The economy in the US is still chugging along. It is early in their recovery. Some months, jobs are very encouraging and other months they are not, so don’t make a judgment on one economic number. The 2 year bond yield in the US is starting to edge up, as is the 10 year, which is encouraging to him. Thinks the Fed will move interest rates in the next 6 months. He has 55% of portfolio out of North America. That’s where bargains are. He is looking in Northern Europe and emerging markets. It could take a year or two to pan out for him. Toronto has been one of the best markets this year, but he is worried about oil prices. If the US dollar continues to be strong that does not bode well for commodities and so for Canada.

Financials and how much to allocate. A lot of investors allocate a lot to financials due to weighting in the index. He does not do that. He only owns one Canadian bank (BNS-T). He has 3 US financials.