Fund Manager
Craig Porter
The year started off the same way that 2008 ended, as job losses continued to pile up and with daily announcements of bleak economic news. Global equity markets dropped a further 15-20%, adding to the losses of the previous year. In the auto sector, Chrysler and Ford were given deadlines to slash cost and sort out their balance sheets issues before they are forced into bankruptcy protection. Fears of the tens of thousands of jobs that could be lost sent investors running for the exits. Then as we entered March a more optimistic tone took over the market. After bottoming early in the month, markets rallied over 15% to end the quarter. Although North America is not yet growing, the rate of decline seems to be slowing, which is a positive sign, signaling a leveling off in the economy.
The markets also got a boost as some US banks preannounced that they would be profitable in the first quarter, and many stated that they would like to start paying back the rescue loans as soon as possible to the government. The liquidity that the government sought in the debt markets has started to reappear, as the banks are slowly starting to lend businesses money again. It also appeared that the banks were foreclosing on fewer homes and were starting to work with homeowners on refinancing their properties.
China which was the economic powerhouse of the last cycle seems to be rebounding from the downturn quicker than most other countries. Imports of copper and iron ore were up quite dramatically in March, as infrastructure spending by the government boosted demand. Many major cities saw record home sales, after a year and a half of dismal sales. As well, Premier Wen Jibao stated in a speech (before an official announcement,) that industrial production rose 8.3% in March, compared to less than 4% in January and February.
The merger and acquisition activity that we had expected has started to pick up this quarter. Those with a longer term view and the financial wherewithal, typically Asian state owned companies, are starting to buy hard assets. We have seen Chinese entities buying numerous base metal companies and properties around the world, as well as significant activity from the Koreans in purchasing uranium assets. Stability and safety of supply are crucial for these nations. They are trying to prevent the supply and cost bottlenecks seen in the last up-cycle by acquiring these assets cheaply now.
Oil was quite volatile in the quarter, falling to as low as US$34 per barrel, before rebounding to close out at $50, up 11% on the quarter. The price recovered on some very modest economic improvement as well as the realization that growth in new supplies of oil has, and will be, quite limited. At its meeting during the quarter OPEC decided to maintain its production levels and not to take any more oil out of the market. They vowed to work towards meeting their previously announced production cuts, over four million barrels a day, in an attempt to bolster prices. Corporate activity also picked up as we saw numerous deals including the announcement of a proposed Petro-Canada/Suncor merger, which would create a company that could rival the world’s super-major oil producers.
The price of natural gas fell 33% during the quarter, as slowing industrial demand and ballooning inventories conspired to drive prices lower. Over the past few years new technology on the drilling side has opened up a significant number of new fields to gas development. At the same time the falling manufacturing sector in the US and the subsequent decline in gas consumption have caused inventories levels to rise to a point where we are about 25% above the five year average. However, at these severely depressed prices many companies have cut back on drilling due to budget constraints. The full impact of these decisions will be felt next year as we will see a significant decline in North American gas production. Longer term the upside for natural gas will be when it becomes the fuel of choice for the automobile. China is already forcing taxis and buses to be converted to natural gas, and a few major companies in North America are converting there truck fleets as well. The US could eliminate most of their dependence on foreign oil, by using this fuel which is cheap, clean burning, and plentiful at home.
Base metals and the companies producing them were by far the strongest area of the TSX in the first quarter. Having reached severely depressed levels last year on the fears of a global recession, or worse, many stocks rebounded and saw their share prices double in one quarter alone. Copper stocks in particular outperformed, as that metal was up 27% on the quarter on the back of strong Chinese buying. Although the other base metals didn’t perform as well, the shares of producing companies rose on the notion that when we exit this downturn global supply will not meet demand. One theme that we have talked about in the past remains intact, that being the lack of new mines being built to match global consumption. Even though we went through a period of all time high commodity prices very few new large projects were built, either due to soaring construction prices, lack of funding, or shortages of equipment and labour. As well, we have seen many money losing mines shut down with 10% of the world’s nickel, and 15% of the world’s zinc production closed in, keeping inventory levels from being built to excessive levels.
Gold ran through US$1000 per ounce for only the second time ever in February as equity markets were hitting their lows and the economic news seemed at its direst. Although jewelry demand was down significantly, investors were fleeing to gold as a safe-haven investment during times of economic turmoil. As well, fears of increased inflation due to the massive fiscal stimulus and liquidity being pumped into the global economy drew investors to the metal. As a measure of this demand, the largest exchange traded fund in the US which invests solely in gold has become the world’s seventh largest holder of the metal, rivaling large central banks and the IMF.
As we go through the spring and summer, volatility in the markets will continue as bad economic news emerges. Hopefully we have seen the bottoms, and the markets will look through the weaker earnings out into a stronger economy later this year and into 2010. It may take some time to gain traction, but the trillions of dollars being spent globally should ultimately boost economic growth.
Craig Porter - Q1 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
The year started off the same way that 2008 ended, as job losses continued to pile up and with daily announcements of bleak economic news. Global equity markets dropped a further 15-20%, adding to the losses of the previous year. In the auto sector, Chrysler and Ford were given deadlines to slash cost and sort out their balance sheets issues before they are forced into bankruptcy protection. Fears of the tens of thousands of jobs that could be lost sent investors running for the exits. Then as we entered March a more optimistic tone took over the market. After bottoming early in the month, markets rallied over 15% to end the quarter. Although North America is not yet growing, the rate of decline seems to be slowing, which is a positive sign, signaling a leveling off in the economy.
The markets also got a boost as some US banks preannounced that they would be profitable in the first quarter, and many stated that they would like to start paying back the rescue loans as soon as possible to the government. The liquidity that the government sought in the debt markets has started to reappear, as the banks are slowly starting to lend businesses money again. It also appeared that the banks were foreclosing on fewer homes and were starting to work with homeowners on refinancing their properties.
China which was the economic powerhouse of the last cycle seems to be rebounding from the downturn quicker than most other countries. Imports of copper and iron ore were up quite dramatically in March, as infrastructure spending by the government boosted demand. Many major cities saw record home sales, after a year and a half of dismal sales. As well, Premier Wen Jibao stated in a speech (before an official announcement,) that industrial production rose 8.3% in March, compared to less than 4% in January and February.
The merger and acquisition activity that we had expected has started to pick up this quarter. Those with a longer term view and the financial wherewithal, typically Asian state owned companies, are starting to buy hard assets. We have seen Chinese entities buying numerous base metal companies and properties around the world, as well as significant activity from the Koreans in purchasing uranium assets. Stability and safety of supply are crucial for these nations. They are trying to prevent the supply and cost bottlenecks seen in the last up-cycle by acquiring these assets cheaply now.
Oil was quite volatile in the quarter, falling to as low as US$34 per barrel, before rebounding to close out at $50, up 11% on the quarter. The price recovered on some very modest economic improvement as well as the realization that growth in new supplies of oil has, and will be, quite limited. At its meeting during the quarter OPEC decided to maintain its production levels and not to take any more oil out of the market. They vowed to work towards meeting their previously announced production cuts, over four million barrels a day, in an attempt to bolster prices. Corporate activity also picked up as we saw numerous deals including the announcement of a proposed Petro-Canada/Suncor merger, which would create a company that could rival the world’s super-major oil producers.
The price of natural gas fell 33% during the quarter, as slowing industrial demand and ballooning inventories conspired to drive prices lower. Over the past few years new technology on the drilling side has opened up a significant number of new fields to gas development. At the same time the falling manufacturing sector in the US and the subsequent decline in gas consumption have caused inventories levels to rise to a point where we are about 25% above the five year average. However, at these severely depressed prices many companies have cut back on drilling due to budget constraints. The full impact of these decisions will be felt next year as we will see a significant decline in North American gas production. Longer term the upside for natural gas will be when it becomes the fuel of choice for the automobile. China is already forcing taxis and buses to be converted to natural gas, and a few major companies in North America are converting there truck fleets as well. The US could eliminate most of their dependence on foreign oil, by using this fuel which is cheap, clean burning, and plentiful at home.
Base metals and the companies producing them were by far the strongest area of the TSX in the first quarter. Having reached severely depressed levels last year on the fears of a global recession, or worse, many stocks rebounded and saw their share prices double in one quarter alone. Copper stocks in particular outperformed, as that metal was up 27% on the quarter on the back of strong Chinese buying. Although the other base metals didn’t perform as well, the shares of producing companies rose on the notion that when we exit this downturn global supply will not meet demand. One theme that we have talked about in the past remains intact, that being the lack of new mines being built to match global consumption. Even though we went through a period of all time high commodity prices very few new large projects were built, either due to soaring construction prices, lack of funding, or shortages of equipment and labour. As well, we have seen many money losing mines shut down with 10% of the world’s nickel, and 15% of the world’s zinc production closed in, keeping inventory levels from being built to excessive levels.
Gold ran through US$1000 per ounce for only the second time ever in February as equity markets were hitting their lows and the economic news seemed at its direst. Although jewelry demand was down significantly, investors were fleeing to gold as a safe-haven investment during times of economic turmoil. As well, fears of increased inflation due to the massive fiscal stimulus and liquidity being pumped into the global economy drew investors to the metal. As a measure of this demand, the largest exchange traded fund in the US which invests solely in gold has become the world’s seventh largest holder of the metal, rivaling large central banks and the IMF.
As we go through the spring and summer, volatility in the markets will continue as bad economic news emerges. Hopefully we have seen the bottoms, and the markets will look through the weaker earnings out into a stronger economy later this year and into 2010. It may take some time to gain traction, but the trillions of dollars being spent globally should ultimately boost economic growth.