First Quarter 2010
May 21, 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.
Looking to a Brighter Future in 2010
January 20, 2010
As this trying year has past, we look to a brighter future in 2010.
History doesn’t repeat, but it sure does rhyme -Mark Twain
If anyone had told us in the second week of March, when the TSX bottomed out at 7,479.96, that the index would close the year at 11,746.11 we wouldn’t have believed it. The TSX closed up 57% from the March low and up 30.7% year over year. Impressive though the market rally has been, equity valuations are still 22.5% below the June 2008 peak.
In March, in the wake of the collapse of Lehman Brothers, credit around the world was frozen. Businesses found working capital constrained and found it difficult to fund regular operations let alone invest in upgrades, expansions, exploration and development, etc.
Before the recession many investors were financing their investments with borrowed funds. This led to a flood of liquidity causing the equity markets to rise above their intrinsic value. Euphoria set in and the term, “irrational exuberance” resurfaced. We heard the phrase, “this time is different” echoed as markets continued to rise and a new investing paradigm was established where equity markets would continue to rise and growth would continue unfettered. This exuberance continued despite the fact that the US economy began to fall into recession after hitting its peak in December of 2007.
As it always does, reality set in and job losses began to mount. Americans cut back on spending, housing prices plunged and the equity markets followed. Corporate profits fell, dividends were cut in some cases and panic selling ensued. Once again “This time is different” was shouted in the streets as the media and individuals saw the great economic apocalypse on the horizon and recovery was uncertain.
It took unprecedented intervention to stabilize the global banking system and get credit flowing again. Bank stabilization combined with massive stimulus spending primed the economic pump. Record low interest rates supported equity valuations. Corporate profitability sprang back, and equity markets rallied.
Although the last year was extremely difficult and caused many sleepless nights, ultimately this time wasn’t really different after all. Markets work in cycles as do businesses. The key to investing, planning for retirement and life’s goals is to keep the end in mind and stay the course. When crises hit, people innovate, cut costs and get ready to prosper in the future. History is a great teacher if one can keep emotion at bay.
The market has rebounded sharply and we are likely to see some corrections, however the underlying long term trend is up. Short term predictions are speculative at best. Economic recovery is a process that takes some time.
Our Thanks
We would like to sincerely thank our clients for staying the course over this past year. We appreciate how difficult it was. For the most part, our clients remained calm and resisted the temptation to liquidate equities at the market bottom.
Our focus on large cap, high dividend paying Canadian common shares allowed clients to maintain income flow while riding out market turbulence. As a result, most accounts enter 2010 in poised for continued growth. The past year, once again, proved that a long term, strategic approach to investment helps avoid panic and the knee jerk reaction that inevitably hurts portfolio valuations.
We believe the continuity and perspective that the Andras Group has compiled over three generations makes us unique in the Canadian investment business. We believe that we provide a personalized service that is valued by our clients and produces value for our clients.
Thank you for your trust in us and we appreciate your business. As always, if you ever have any questions, please call us any time.
Sincerely,
Ken Andras John Andras Will Andras Pat Thompson
The Andras Group
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.
Second Quarter 2009
July 27, 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?
June 16, 2009
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
April 22, 2009
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.
Andras Group Annual Report for 2008
January 9, 2009
Andras Group Annual Report
December 31, 2007 to December 31, 2008
The Markets
We are of the opinion that the worst of the recession will be realized in the fourth quarter of 2008 and first quarter of 2009. The stimulus already in the system and infrastructure spending already announced and to be announced will start to flow into economies in the first quarter and beyond. As economies begin to recover, we anticipate a revival of inflationary pressure. Equity markets should start to stabilize by the end of the first quarter as infrastructure spending begins to have an impact. We may see a considerable bounce back in the second quarter as markets look ahead to recovery in 2010.
The hope that growth in the Developing World would offset recession in the United States and Europe is now dashed. Although economies such as China and India may still be expanding, growth numbers have slowed dramatically as consumers, especially those in the US, retrench. Equity markets around the world have sold off.
The new administration in the United States has inherited an economy in deep recession. The US GDP is estimated to be down 5.5% on an annualized basis in the 4th Quarter, the lowest since 1982. Unemployment is growing. Housing prices in the US continue to fall while mortgage defaults continue to rise. Providing stimulus in the US will lead to sizable deficits for at least the next two years.
Over half of the $700 billion pledged under the Emergency Economic Stabilization Act has been spent on providing liquidity to the US banking system. Credit needs to be made more readily available to individuals and businesses. US Banks are still reserving cash to offset balance sheet hits caused by write downs. Banks in Europe have also been forced to write off huge investments in toxic debt, mostly emanating from the US. Some European banks have become partially nationalized. One leading indicator that credit markets may be starting to thaw is that LIBOR rates have dropped. It is important to remember that a great deal of the negative news is being released at the end of 2008 and the news will get worse before it gets better. Layoffs often jump to frightening levels just as the market begins to get set to move higher. All things considered, if you were told a year ago that Citigroup would be trading in the range of 3$ it is likely that one would have believed that the S&P 500 would be in the 600 range, however we are holding around 800.
The US Dollar has benefited from a fear premium as funds from around the world have flown into the Dollar, widely seen as a safe haven investment. The amount of stimulus being pumped into the US economy and the resulting extreme fiscal deficits should devalue the US Dollar over time. In addition, a combination of low commodity prices and lack of credit have led to the cancellation of some exploration and development projects. These projects represent the new supplies of oil, natural gas, and base metals which will be required to replace reserves being used. Suncor alone has cut back its 2009 capex spending to $3 billion from $10 billion. Once economies begin to recover and demand for raw materials pick up, there will be a limited new supply coming into the system meaning prices could rise as quickly as they fell. A rebound in commodity prices combined with a debased US Dollar would be inflationary. This higher inflation due to higher commodity prices should be beneficial to the Canadian economy. Gold also looks poised to strengthen.
President Obama has stated that the US must become less dependant on Mid-East oil. The move to alternative energy will take at least a decade to make any real impact on the demand for oil. To become independent from non-North American energy sources the US will have to rely on strategic investment in the Canadian oil sands. Programs involving CO2 sequestration, accelerated reclamation, and an emphasis on SAGD extraction vs. strip mining could make bitumen extraction more palatable.
The fourth quarter resulted in lower valuations for equities around the world. North American indices, as represented by the S&P/TSX and the S&P 500 fell 23.53% and 22.56%. However, the flight to perceived quality led to the appreciation of the US Dollar by 15.4% against the Canadian Dollar. This resulted in the S&P 500 falling only 7.16% in Canadian Dollar terms
2008 found markets sharply lower with much of the damage having been done in the fourth quarter. The S&P/TSX fell 35.03% for the year and the S&P 500 fell 38.4%. Every sector of the economy was lower. The only bright spot was the US Dollar which rose 22.03%.
Strategy
We believe the equity markets on both sides of the border are over sold. It should be kept in mind that most of the troubling economic figures being published (especially employment numbers) are lagging indicators. Leading indicators and longer futures are indicating a potential recovery in 2010.
Easing credit conditions and lower write downs levels should be experienced by the global banking system as the subprime debt fiasco works it way through. Canadian banks claim that dividends are safe and will be maintained. As recovery becomes apparent, the share prices should appreciate in value.
The banking system in the US and UK is in crisis and fears of nationalization have spread. The steps taken in the UK to insure bank debt and the proposed “Bad Bank” solution in the United States are creative and should provide the necessary liquidity to avoid socializing the system. The banks have rallied sharply recently.
The Federal Budget in Canada, although not offering any real surprises, did appear to address the flow of credit issues that have stagnated our banking system. These measures should allow credit to flow. The infrastructure spending announced should also offer an immediate jumpstart for the shorter term as well.
The equity value of shares of oil and gas companies could do exceptionally well as demand picks up with any recovery. Lack of new supply and a desire by the United States to break dependence on Mid East oil should benefit Canadian producers. Companies that focus on infrastructure should benefit from Government spending packages.
If the US Dollar falls against the Canadian Dollar an overweighting in Canadian denominated securities will pay rewards over the next several years.
Companies that are relatively well capitalized and have relatively high dividend yields should provide some level of downside protection. Interest rates should remain at historically low levels until there are clear signs of recovery. Once inflation becomes entrenched, interest rates could move much higher impacting the relative performance of interest sensitive equity issues. We do not believe there will be a dramatic increase in interest rates in the near future.
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.
Giving back to our community: Toronto Star article
December 19, 2008
We received some positive coverage in the Toronto Star recently. John Andras was recognized for his ongoing anti-poverty work with Toronto’s poor and homeless. From the article:
For Andras, 49, the influential moment came nearly 30 years ago, when he took a year off university to work in a mine in Red Lake, Ont. “At that time a lot of the miners were ex-cons and people who couldn’t fit into the urban environment. A lot were illiterate. I had been to university so they called me ‘professor.’ I ended up teaching some of them how to read.” He learned something, too: that luck and circumstance can make a big difference in how life turns out. “It was eye-opening for me, because up to that point I’d lived a sheltered, privileged existence.” His prominent father, K.B. (Kenneth Bertram) Andras, was a founder of Care Canada. “Dad believed that one would be ultimately judged not by how wealthy and famous you were, but by how much you gave back to society,” says Andras.
Interested in the new TFSA’s?
December 4, 2008
Tax Free Savings Accounts
Now you can save and watch your investments and the income grow tax-free. And not just for retirement – the new Tax-Free Savings Account (TFSA) complements your RRSP by letting you save for any goal you choose, whether it’s a downpayment,a car, a trip or a cottage.
You can contribute up to $5,000 a year and enjoy the income free of tax. Contribution and withdrawal limits are generous and fl exible. It’s the perfect complement to your RRSP and it’s available to all Canadians over 18, even if you’re already retired.
Download our Tax Free Savings Account or contact us to learn more.
Third Quarter 2008
October 1, 2008
“Short Term Markets are unknowable, Long term they’re inevitable”
-Nick Murray
We are witnessing history and it is causing a great deal of uncertainty and it will take time for people to recover emotionally. At the time of writing, the US Senate and Congress have passed the $700 Billion Emergency Economic Stabilization Act. The US and Canadian equity markets, instead of trading higher in a relief rally, saw a broad market selloff to levels below anticipated. It appears likely that smaller investors, with 401K’s and self directed RRSPs in mutual funds, seeing their retirement plans uncertain, panicked and sold equities at any price. The redemptions caused mutual funds and hedge funds to liquidate at any cost. As often happens during Bear Markets, emotion takes control of decision making.
The Global banks cut rates across the board 5 basis points in an effort to put some confidence back in the marketplace and attempt to stave off a global recession. Historically moves such as this have rallied the markets and brought back buyers. The response was muted by the general market malaise, but it has shown the markets that the Central banks are poised to do whatever it takes in a unified effort to shore things up and get credit flowing again.
So far all sectors have sold off and it appears that the beginning of the capitulation phase in equity markets has overwhelmed fundamentals. Stocks are beginning to “return to their rightful owners” as some leveraged hedge funds face liquidation.
Second tier companies, especially those with stretched balance sheets, have been hit the hardest. Growth companies have found it increasingly difficult to fund growth and to roll over existing debt. Oilexco, for example, was a darling of the investment community. The shares were trading at $19.00+ as the company grew by the drill bit in the North Sea. Unfortunately, funding challenges have constrained growth and made the company’s future uncertain. The share price sold down to $3.94. The assets and reserves appear solid. Either the assets, or the company may well be taken over at a deep discount by a better capitalized major oil and gas company with free cash flow.
Toxic debt much of it stemming from the US sub-prime market, strained many US and European banks’ capital ratios and their ability to provide loans. Banks have been hording cash and have been unwilling to lend even to each other. The freeze up in credit is reflected in record LIBOR (London Interbranch Bank Overnight Rate) spreads. The UK has recently pledged assets to shore up their banking system and this has had an impact on the share prices of their banks.
Well capitalized companies with free cash flow will ultimately be the beneficiaries of the current market sell off. Major oil companies, mining companies, financial service companies and industrial companies have an opportunity to purchase assets at a fraction of the values that would have been realized even a month ago. The big will get bigger and the strong will get stronger as it is predicted that there will be consolidation in most market segments. In the U.S. and European financial sector there appears to be emerging an almost Canadian, concentration of large, soon to be highly regulated financial institutions.
There is little doubt that the OCED countries are either in recession or on the verge of recession. Inflation fears are easing as commodity prices fall due to hedge fund liquidations and lower demand. Central banks appear to have room to lower interest rates even further if necessary. However, until some level of confidence returns, it is difficult to see how a further decline in central bank rates will stabilize the markets.
The process and timing of the US sub-prime “bailout” have yet to be determined. Potentially the fund could recapitalize the banking system by $400-$500 billion as frozen mortgage debt will be purchased at fair value (closer to 75 cents on the dollar). Assuming the banks use the recapitalized balance sheets to provide credit, it could result in $4-5 trillion in economic stimulus. Most of the mortgages in the toxic debt instruments are current and are paying interest. Mortgages that default still have the residual value of the underlying property behind them. As mortgages in the debt packages come due, the Fed should be able to recoup most if not all of the funds provided.It is unknown what debt will be taken up and what institutions will be involved but it is hoped, that once the process is made clear, there will be some stability is returning to financial markets and the global credit freeze will begin to thaw.
Moving forward, we anticipate there will be a back to basics approach to investing. Companies with strong balance sheets and stable cash flows that provide high dividend yields should lead the eventual market recovery. Canadian banks, life insurance companies and utilities should perform relatively well.
Strategy
Despite the incredible volatility, it is important to remember that historically Bear Markets decline in the range of 30-35% and that is where we find ourselves. The good news is that once the Bear sees itself through the volatility and a Bull begins the increase is in the range of 180-190%. This is why the historical market trend is up. Sir John Templeton, one of the greatest investors of the 20th century stated, “The four most costly words in the English Language are, this time it’s different. Since WWII there have been approximately 13 bear markets, each lasting anywhere from 12-16 months (one every 5 years or so). The last quarter of the century and the beginning of this century brought about some incredible challenges that caused Bear markets. In the 1970′s we faced rampant inflation, oil shortages and recession; in the 1980′s we faced the challenge of Black Monday; the 1990′s brought the Savings and Loan Crisis, the new millennium brought the bursting of the technology bubble and 911. Each cause has been different and seemed to be catastrophic. What Sir John meant was that althought the causes were different, the recovery from all these crisis was inevitable. We all have frayed nerves and the anxiety will likely continue for the short term, but longer term history has shown that we will make it through this. Attached is a chart which shows the volatility we have faced historically.
The equity investments in the accounts are primarily common shares of highly capitalized companies, that have the balance sheet strength to weather the current economic storm, benefit from the potential takeover of weaker competitors and should emerge stronger and more dominant when economies recover. Among equities, there is an overexposure in Canadian banks and utilities and relative underexposure to highly volatile commodity plays. The dividends should help insulate the portfolio on the downside and your income will remain relatively stable. We believe that there will be a flight to quality and these companies will help lead the indexes higher when the eventual recovery occurs.
As always, we are here to answer any questions and concerns that you have. Please don’t hesitate to call.
Ken, Will & John
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.
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Andras Group brochure
September 3, 2008
We’ve published a brochure with some quick facts about the Andras Group. Download the two page .pdf file here.
