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

REITs. Interest rate sensitive, but they’ve been able to roll over their own debt at remarkably low levels. His main investment stance is stagflation and inflation with no growth. From that perspective he does think REITs, on a long-term basis, offer pretty good returns in that they are inflationary hedges. However, we might see a dip first before we see a rise. He wants the income that they are paying, but not necessarily the full hit to the equity first, so he has been reducing his exposure to the REITs. Hasn’t been selling them because he still wants the income.

Gold. He always looks at this as a currency hedge, as the ultimate insurance for what is actually taking place. Because of this, he feels this has to be part of a core of a portfolio. He is looking at companies that are producing it below the current cost of production.

Canadian Banks. Will these be affected if there is another major crash by international banks? Thinks that after 2008, the banks will make it. They did what they needed to do to save the banking system. They created a bigger problem, but they saved the system. Because of this, he is not overweight on the banks. Thinks the storm is coming out of the US, and because of that there are a number of uncertainties. If you own a lot of banks, put a lot of stop losses in place.

Markets. Not really thinking about the trade war with Russia. He is not exposed to companies that will be exposed to the Russian trade war. He is at his lowest net exposure to the market in three years. He is cautious right now. If a correction comes, foreign investors will get out of the more liquid names. He is seeing buying opportunities in the long and short side.

Shorting Banks. BMO-T or CM-T. He would not hold one bank and short another without a very compelling reason. He doesn’t own any banks except as part of a pairs trade where BMO-T is short and Guardian (GCG.A-T) is long.

Golds. History has shown that gold stocks are stocks, so as stocks decline, gold stocks will decline as well. Looking into the intermediate longer-term, it will be a function of why a correction occurred in the broad market. If a correction occurs in the broad market as a consequence of market nervousness about the euro or the dollar, that could theoretically be very good for gold. Conversely if there is a global liquidity crunch, it would probably be bad for all asset classes. With the situation in the Ukraine, sabre rattling has generally been good for gold. Gold can tend to act as catastrophe insurance. As an American, he juxtaposes gold against what he calls anti-gold, which is the US 10 year treasury. Thinks the US treasury has had a spectacular run. Believes the underlying premise of the U.S. Treasury, paying 2.7%, in a world where it feels like purchasing power is depreciating at 5% compounded, suggests that the promise behind the U.S. Treasury is that they will take 2.3% of his wealth, guaranteed every year, for 10 years. Looking at this, he feels that gold is very cheap, or conversely that the US 10 year treasury, i.e. the US$, is very expensive.

Ring of Fire. Are any of the companies in this area in North Western Ontario of interest? They are. He hasn’t played the game yet because the exit of Cliffs as a consequence of their exit strategy, means that the area is going to be under funded for 1-1.5 years. He will be very interested in that area, but it is probably a year too early.

Prospect Generators. With this, you are investing in process. You are buying a portfolio of them because you are going to participate in discoveries. Statistically it is the best chance to participate in a discovery. Which name is going to work? He doesn’t know. When is it going to work? He doesn’t know. What he does know is that if you have a group of 5 to 7 Prospect Generators, you will participate in a large discovery. The probabilities of that are better than any other probabilities in exploration financing in Canada or any other country.

Uranium. Expect you will have to be in the uranium business for 1.5 or 2 years to begin to see real dramatic increases in the spot and term market. Uranium equities are beginning to anticipate that so there has been strength in the uranium equities outpacing the strength in the uranium market.

Uranium. The general price of uranium will have to go higher. The industry, represented by Cameco (CCO-T), suggest that they are all in costs. Total costs are about $70 a pound and they sell it for $30 a pound. They lose $40 and try to make it up on volume. That can’t last. It could take 2 or 3 years. The restart of the Japanese nuclear fleet and the continued buildout in Japan tells him that the price can and must go higher. It doesn’t have to do it right away.

Markets. Feels there is an August phenomena where people want a bit of a pause. We’ve had good runs on both sides of the border, but better in Canada, however that follows a year where the US outperformed Canada. Not so sure it is going to be more pronounced in one market than the other. It may be more pronounced in some sectors than others, where fatigue has set in. He views it as a healthy pause and there is nothing like getting the wall of worry reactivated to make us more confident that we are going up. He likes the earnings stories on the things he owns and the strength in the jobs market on the US side. Feels this phenomenon will be well done by Labour day and we will have a very strong last quarter. We are in a corrective climate and there is some rotation back towards income. The 2^nd part of a correction is, where there are opportunities. Feels there are some opportunities where there has been some downward pressure on earnings in really fine companies. There are some other companies that are within striking distance of their all time highs, because the growth is there. He is tending to hold a little more cash and to be a little more cautious, but where there are good earnings growth and where he is confident of the story, he is adding.

Markets. We always get a correction at this time of year. People talk endlessly of a correction coming, but later we will look back and say there was a correction, but you could find a lot of fine stocks and find that they are down 10% to 25% even without bad news. When people talk about a correction, they are talking about some classic doom and gloom, where everything just falls. We haven’t had that and we need a catalyst for that. He has been sitting on what he has, mostly blue chips and dividends.

Gold. This has had a long base, and he keeps on thinking that we are about to break out to the upside, but we just now hit a low of just above $1,100. We should be hitting a summer rally just about now. He sees it at $1,600 a year from now. Last year people sold their golds, and are out of the sector. Have now seen stock market gains go up dramatically with it looking a little expensive, so he expects we will get new buyers coming back. One of the big issues is all the quantitative easing and printing of money. A lot of the money has stayed on the banks’ balance sheets, and hasn’t gotten into the economy. At some point he believes the banks will realize they are getting only 2% on their treasuries, and could get a bit higher return and start lending out to businesses, etc. When you get the money going into the system, your M2’s and M3’s start to kick in, and that’s when you could start to see inflation kicking up.

Silver. Absolutely loves this commodity. On a long term basis, this is going to outperform gold. About 66% is for industrial use, and industrial use has been good. But it also has a precious metals characteristic. Ratio of gold to silver historically has been on a ratio of 16 to 1. Right now we are at about 60 to 1, and he expects that ratio to come down. If gold was at $1,600, silver historically would be at $100, a 4 or 5 fold increase from where we are. He is expecting to see that. The last time we saw this was in 1980 when the gold price was around $800 and silver was at $50, a ratio of 16 to 1.

Markets. He looks at earnings. Earnings drive stock prices over time. Wouldn’t be surprised to see the market correct 10%, and wouldn’t be surprised to see it go higher 10% from here. Thinks Fair Value on $130 of earnings per share on the S&P 500 next year is somewhere in the $2,000-$2,100 range. A lot more in the next 5 years, so he is more focused on 5 years from now, not 5 minutes. He is hugely bullish on equities. Thinks that corporate managers are doing everything right these days. They are buying back stock and using low debt to make acquisitions, which is accretive to earnings. Canadian population is growing, people are richer, portfolios are growing if you stay invested, our houses are becoming worth more. The same in the US. These are positive things.