The Andras Group

First Quarter 2010

History has shown us that downturns like these can lead to innovation and opportunities to remodel our economy, our cities, our work-life balance and our focus/priorities/lifestyles. This essential part of the economic cycle shows us what is working and what needs to change, paving the way for renewed growth and prosperity.

The Markets

The economic recovery appears to be taking hold in Canada. Signs that the US recovery is underway continue to appear. India, China and much of the developing world’s economies continue to expand. China recently became the #1 importer of Saudi oil, a position previously held by the US.

The recovery in equity markets slowed in the quarter. Headwinds from Europe, attempts by China to moderate growth, constrained government spending, and anticipated domestic interest rate increases will likely lead to increased volatility and moderate the pace of equity gains going forward.

Canada appears to be in a relatively good position to continue to outperform other developed economies. Continued growth in India and China should provide support for commodity producers. Canadian banks continue to be best in breed and they may avoid many of the punitive measures that may be placed upon the foreign banks that helped create the conditions that led to the recession. The Canadian real estate market never became as unbalanced as it was in the US. As a result, Canada has not suffered from ongoing foreclosure rates which appear to be hindering recovery in the US. Strength in the Canadian Dollar should help moderate inflation levels and future interest rate increases. Weakness south of the border should keep the Canadian economy from over-heating.

Europe is a concern. The fall out from the economic downturn appears to be threatening several weaker members of the European Union (Portugal, Italy, Ireland, Greece and Spain, the so called PIIGS). All eyes are upon Greece. Reliant on government spending for much of its GDP, burdened by tax evasion and structural deficits, Greece will have to restructure its entire government, economy and individual’s attitudes to turn the corner. Bailouts alone will not create a meaningful, lasting recovery. Real austerity measures focused on deep government spending cuts and privatization to balance budgets will be required. Raising taxes will be counter productive as it could lead to even greater levels of tax avoidance and will lead to diminished productivity. Greece may look to measures taken by Ireland, Belgium, Finland and Sweden in the 1980’s and 1990’s as a road map of how to proceed. Although known as “the cradle of democracy”, Greece was a dictatorship into the 1970’s. The roots of democracy may not run deep. Even though the situation appears contained in terms of Greek default, the market remains nervous.

The US sub prime mortgage fiasco continues to unfold and may dampen the rate of US GDP growth for years to come. Foreclosure rates remain extremely high. The US home owner is still struggling with massive debt loads. As a result, growth in consumer spending should remain tepid. Although counter intuitive, this could be positive for equity markets on both sides of the border. Inflation should remain constrained, allowing interest rates to remain at historically low levels and moderating growth. This should help prevent a boom and bust cycle.

The recession has given manufacturers an opportunity to restructure. For example, the auto sector is beginning to rehire, however compensation rates are now much lower and it is doubtful that they will ever return to pre-recession levels. Although this will further constrain the consumer, corporate productivity and profitability may rise.

Strategy

We continue to believe that the Canadian economy and Canadian equity markets are relatively well positioned going forward. It is increasingly apparent that Canada’s recession was mild when compared to the economic contraction in the US. There was not the same level of government, corporate or individual indebtedness. The severity of job loss was less in Canada. Individual net wealth was impacted far less in Canada. As a result, the level of stimulus required to stabilize the economy in Canada was much lower, tax revenues held up better and the resulting deficit is far less of an issue. The US economy will feel the impact of the recession for many years as banks work through foreclosures, property values remain depressed and Municipal, State and Federal governments cope with large structural deficits. As a result, we continue to favour the Canadian market.

The relatively strong position of Canada should lead to a gradual appreciation of the Canadian Dollar. The improving Canadian economy should lead to Canada increasing interest rates well before the US which should support further Canadian Dollar strength. As interest rates increase bond prices should fall. Although the yield curve may well flatten somewhat, there appears to be capital risk at the long end of the bond market. As a result, we remain underweight in bonds and remain in the shorter end of the market.

We are of the opinion that dividends, which in many cases are at levels well above 10 year government bond yields, should provide share price support and could provide a major portion of the overall return for the next year. As a result, we favour equities which have relatively high yields, stable and growing earnings profiles and a history of regularly increasing dividend payouts.

We are of the opinion that the Greek economic and budget issues will be contained. If the Greek economy can be stabilized, the other PIIG countries should be able to manage through the current structural challenges. This is the first true test of the concept of a European Union. If the Union holds, Europe could emerge stronger in the future.

Concerns over the situation in Europe could roil equity markets in North America over the next few months. Although we feel the economic backdrop does not warrant a re-test of March 2009 lows, a correction in the range of 10% from the highs is possible and could provide a base for valuations moving forward.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (”MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Second Quarter 2009

It looks like we may be entering a period of slow growth, not boom bust. We remain focused on Canadian dividend paying stocks.

Second quarter 2009

The Markets

In our last letter, two scenarios for recovery were presented: slow growth or boom/bust. At the time, there was concern that the stimulus being pumped into economies around the world would lead to rapid expansion, commodity supply squeeze, inflation, rising interest rates and eventual collapse into an extended recession. This appears to be increasingly unlikely.

It is still general consensus that the recovery will begin towards the end of 2009. However, it now appears that recovery will be muted, inflation will remain subdued and interest rates will remain at low levels. It is also apparent that unemployment levels will continue to rise long after GDP growth begins. It appears possible that we will enter into an extended “jobless recovery”.

Government spending to date has gone primarily to bail out the financial service sector. Although stabilizing the credit market is a precursor to recovery, it seems that very little money allocated to infrastructure spending has actually been spent. Projects that should be “shovel ready” appear to be stuck in red tape. The situation is worse south of the border where stimulus, when it comes, will be funneled into hundreds of pork barrel projects that appear to be tailored more to enhance politician’s re-election opportunities then to provide lasting economic benefit. It appears that it will not be until late 2010-2011 before funding really starts to flow. By that time, of course, the Recession should be over. We believe there is enough slack in the economy and unemployment rates should be high enough so the spending, when it finally occurs, should help extend the recovery without triggering excess inflation.

Global economic leadership appears to be shifting from the United States to the BRIC (Brazil, Russia, India, China) regions. There are increasing calls for the creation of a global basket currency to become the reserve currency rather then the US Dollar. While this appears to be little more then saber rattling at the moment, it does point to an erosion of US dominance in world affairs.

Second quarter earnings which begin to be reported on July 9th will reflect conditions that should be close to Bear Market bottom earnings. Analyst’s consensus points to US corporate earnings falling 38% year over year. Comparing 1st and 2nd quarter earnings should show signs of stabilization.

Investors appear to be vacillating between hope for a “V” shaped recovery and fear of an extended economic bottoming process or worse, a second leg downward. We believe an extended bottoming process and modest recovery is the best case scenario. The financial system has been damaged and will take time to heal. If a “V” shaped recovery was to occur, we fear that, without sufficient healing time, imbalances would rapidly re-emerge, new bubbles would be created and governments, hamstrung by massive deficits, would have little choice but to watch as markets and economies decline.

Although equity markets, especially in Canada, appear to be correcting from recent gains, it appears unlikely that they will retest the March lows. Over the short term, rapid appreciation in commodity prices, due to economic recovery, appears to be unlikely. As the TSX is heavily weighted in commodities, the recent sell-off was more severe then in the US equity markets. Over the longer term, as the economy slowly recovers, commodity prices should rise as exploration and development, required to replace reserves, has not occurred. Over the long run, we believe that Canada and the Canadian equity markets should out-perform and the Canadian Dollar should appreciate vs. the US Dollar. However, volatility will remain at high levels as investors swing between hope and fear.

Strategy

In a period where we anticipate that growth will be muted, inflation levels low and interest rates subdued, we believe that stock dividends will become critically important. We would not be surprised if equity markets become range bound for a time and yields of 4-6% will become important to prevent capital erosion.

Looking ahead, we believe that yield spreads will revert to more ‘normal’ levels. It is unusual, even after recent gains, for dividend yields on common shares and preferred shares of many financial service companies (for example: Bank of Montreal, CIBC, Manulife, Power Financial) to be higher then the yields on the companies underlying debentures. Assuming we are correct in our belief that rates in the bond market will be stable for some time and dividend rates are secure, equity valuations should rise.

We remain focused on Canadian dividend paying common shares. We are of the opinion that the relative strength of the Canadian financial system and the comparable fiscal responsibility of the Canadian government will, in time, allow the Canadian Dollar to out-perform the US Dollar. In a slow growth environment, currency fluctuations can distort returns. As a result, we remain underweight in US equities.

Mackie Research Capital (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (“MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Slow Growth or Boom/Bust?

Equity markets on both sides of the border are working through the healing process and are up substantially from the bear market bottom reached in March. There is a growing consensus that economies will begin to see some growth in the fourth quarter of 2009. Economists refer to indicators showing that the decline in economies is slowing. However, it should be noted that the Canadian, American and European economies are still contracting. It is hoped that all the talk of “second derivative” and “green shoots” represents substantially more than wishful thinking.

The recovery will probably come in one of two forms: slow growth or boom/bust.
Slow growth: Most likely, economic recovery will be somewhat underwhelming (1-3%). Central banks will have to gradually tighten monetary conditions to avoid inflation. There also could be a trend toward higher taxes to bring deficits under control. There is considerable slack in manufacturing and employment. If there is a gradual expansion, inflation should not be an issue for some time.

Boom/bust: There is some concern that economies will begin to expand at a pace that will cause shortages in materials. Since there has been very limited exploration activity due to unavailability of credit, little new supply will be available to meet an increase in demand. Demand for commodities could cause prices to rise. An inflationary commodities boom might be followed by a bust as interest rates are forced higher to counteract inflation. An environment of rapidly rising interest rates could derail any recovery and lead to a new wave of defaults, foreclosures and bankruptcies. If an inflation triggered recession occurs within 2-3 years, central banks may not yet have recovered enough fiscal flexibility to provide adequate stimulus to prevent economies from falling into extended recessions.

In either scenario, interest rates at both the short and long end of the spectrum appear to be heading higher from historically very depressed levels. We remain underweight in bonds and are focused in the short end of the market.

We are of the opinion that the US Dollar could continue to weaken as the full impact of over 3 trillion dollars of bail-out and stimulus deficit spending becomes apparent on the Government’s balance sheet. We remain underweight in the US markets.

Canadian financial service companies emerged relatively unscathed compared to banks and insurance companies elsewhere in the world. As a result they have flexibility to take advantage of acquiring distressed assets at attractive valuations. Dividends at all Canadian banks and life insurance companies appear to be secure and equity values have bounced back nicely. Commodity prices should be firm as economies recover. This should benefit Canadian oil and gas producers, mining companies and agricultural suppliers. The Canadian market should benefit. We remain overweight in Canadian securities with a bias toward equities.

First Quarter 2009 Report

First Quarter 2009
The Markets

We believe that, in time, equity markets will recover. The US Dollar burdened by huge deficits should decline in value leading to inflation, higher commodity prices and an environment where the Canadian Dollar and Canadian equities should perform well. In addition, supply destruction in a wide range of basic commodities could lead to much higher pricing once economies start to turn higher benefiting resource rich Canada.

Economic leadership may switch away from the US to China as any rebound in US economic growth will be hampered by the need to service debt. Canada is in much better fiscal shape then our Southern neighbours. Canada controls much of the global reserves of recoverable oil. The country is rich with precious metals, base metals and agricultural products that the world will require. Our financial service companies appear to be relatively strong compaired to major US and European financial institutions. Canadian banks and insurers are positioned to be strategic acquirers of distressed assets.

There are initial indications that economic indicators may be starting to stabilize. Debt spreads are starting to narrow somewhat as credit is beginning to unfreeze. There has been some restocking by China of iron ore and copper leading into a bounce in the prices of the underlying commodities from extremely depressed levels. Housing prices and purchasing activity in the US have stopped falling on a month over month period. Infrastructure spending announcements are starting to trickle out although most contracts have yet to be awarded and money has yet to be spent.

However, there is still much damage that has to be worked through. Chrysler is being taken over by Fiat, GM is hovering on the edge of Chapter 11 and of the “Big Three” only Ford appears to be viable. The ripple effect on parts makers, unemployment, housing, etc. have yet to be fully realized and will act as a break to any meaningful recovery. The major US financial companies are still awash in toxic debt and have taken major balance sheet hits. They will be constrained from making credit available. In addition, credit card defaults are increasing and many issuers are cutting back credit lines. The US consumer is becoming a net saver and cannot be counted on to lead an economic recovery.

The depth of the current Bear Market may have been reached on March 3, 2009. The S&P 500 closed the day at 666 and bounced back to close the quarter at 797.87. Even with the rally, the S&P 500 fell 11.67% in the quarter and 39.68% in the 12 months ending March 31. As equity markets around the world have declined, there has been a flight to perceived safety.

The US Dollar has been a prime beneficiary and has been remarkably strong even though US deficits have become bloated with bail-out and infrastructure spending. It is interesting to note that days where the equity markets fall the US Dollar strengthens and days where equity markets rise the US Dollar tends to fall in value relative to other currencies. The rise of the US Dollar has somewhat offset the impact of falling US equity markets for foreign buyers. For example, in the one year period the S&P Index fell 39.68%, but only 16.73% in Canadian Dollars when adjusted for currency fluctuation.

Economic recovery may well be subdued in North America and Europe as Government stimulus is offset by corporate and consumer restraint. Although we may have touched bottom March 3rd, the current rally may not continue at the current pace. A significant pullback may occur in the near term. Technically this would be healthy and could be the precursor to a sustained rally.

Strategy

Although we believe that markets may be unstable and volatile and the market bottom may be tested, we believe the recovery process has begun. Too much money is being pumped in through stimulus spending over the next 3-6 months not to have an impact. We believe that the US Dollar should decline as stability returns and the flight to perceived safety moderates. Canada should be a net beneficiary of recovery and infrastructure spending.

Canadian financial service companies appear to be able to maintain dividends on common shares and may be able to benefit as aquisitors of prime assets being sold by less solvent foreign competitors. The proposed sale of the I-Shares franchise by Barclay’s Bank may be the first of many dispositions by cash starved international financial service companies needing to prop up balance sheets.

Canadian oil and gas companies may benefit from higher energy prices as economies recover and the cuts to conventional drilling budgets and the delay of mega-projects in the oil sands, deep water and frontier basins lead to a shortage of new supply. The amalgamation of Suncor and PetroCanada creates a protected made in Canada senior producer that can compete with the multinationals.

Eventually manufacturing rates should pick up as production levels are currently running below replacement levels across a wide range of industries as companies unload inventories. A cycle of inventory rebuilding should begin and may have already started with recent developments in China. This should be supportive of coal, copper, nickel, iron and other base metals.

We continue to stick with quality, dividend paying common shares. We wait and anticipate better times ahead.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (“MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.