Fund Manager
Craig Porter
After a strong start to 2010, equity markets in North America sold off in the second quarter with the TSX off 6% and the S&P 500 down by 12%. Fears of a slowing global economy or a double-dip recession sent investors to the sidelines. A number of issues were fueling these fears during the quarter. A handful of European countries, led by Greece, saw their debt downgraded, raising fears that the Euro and the European Union may be on the verge of collapse. We also had the Chinese government tightening a number of monetary and fiscal measures in an attempt to cool the economy and hold inflation in check.
Globally, governments are trying to walk a fine line in helping their economies recover. There are great concerns that many are still not strong enough to survive on their own without government stimulus programs. Conversely, continued government spending is leading to increasing deficit issues as well as the possibility of promoting inflation. Central banks are also struggling with when to raise interest rates from near zero levels without choking off growth. We saw Bank of Canada rates rise 25 basis points in June, on the back of stronger domestic economic data.
The price of oil averaged around U.S.$78 per barrel in Q2. Prices remained buoyed by continued stockpiling by China, fears of a heavy hurricane season, OPEC maintaining supply cuts, and continuing political noise from the Middle East. In addition, U.S. energy policy took an interesting twist last quarter. Initially, in an effort to boost self sufficiency, the Obama administration offered to extend drilling areas and to ease regulations for oil exploration in the Gulf of Mexico. However, after the BP oil spill, all offshore drilling was stopped and the political rhetoric in Washington started to heat up. This caused oil prices to firm on the belief that excess regulation would limit future exploration and production in the Gulf, which could end up increasing U.S. dependence on foreign supplies.
Natural gas prices rose about 16% this quarter, as hotter than normal weather in the U.S. drove prices higher. We, however, are not positive on the near term outlook for gas, due to large inventories and a lack of industrial demand in the U.S. Moreover, there has been a 40% increase in the number of drill rigs in the U.S., compared to this time last year. Unless we experience extreme heat or major hurricane activity in the Gulf of Mexico, we expect to exit this injection season with inventory levels at all time highs.
Most base metals saw prices fall 15-20% in the quarter, again due to fears of the slowing global economy. The big fear is that Chinese demand will fall as the government attempts to cool a booming property market. However, many of the producers who serve this market, especially those in commodities like coal and iron, tell us that demand from China has not slowed and remains quite robust. Base metals are one of the most economically sensitive sectors and should be a leader in a recovery.
Whenever we have political instability, ballooning deficits, and financial turmoil, gold normally performs well. This quarter was no exception as the price of gold reached an all time high of $1266 per ounce. Many central banks such as India, Russia, and China have been buying gold as both a safe-haven asset as well as a means of diversifying out of the U.S. dollar. The price has also been fueled by investors buying gold through funds that invest solely in bullion. A number of these funds’ holdings rival those of the world’s largest central banks, and we have to wonder how long individuals will remain invested in an economic recovery.
M&A activity, a theme we’ve touched on in the past, remained firmly in play last quarter, particularly in the resource sectors -- cash rich companies are taking advantage of the lower equity prices offered by today’s markets. Many producers and end users are wary of the supply bottlenecks seen in the last cycle, and are acquiring assets now at what may be the last chance to get in at reasonable valuations.
Investors will be watching the third quarter earnings period in July for clues as to the future direction of global economies. There still remains larger than normal cash balances in money market funds around the world earning minimal returns in a low interest-rate environment. As investors gain confidence in an economic recovery, they will embrace risk and shift these funds back into equities. We are not believers in a double-dip recession, and some of our best portfolio returns have been made by deploying cash when investors are paying too much attention to short-term noise in the markets.
Craig Porter
Craig Porter - Q2 2010 Commentary
Date Published
Fund Manager
After a strong start to 2010, equity markets in North America sold off in the second quarter with the TSX off 6% and the S&P 500 down by 12%. Fears of a slowing global economy or a double-dip recession sent investors to the sidelines. A number of issues were fueling these fears during the quarter. A handful of European countries, led by Greece, saw their debt downgraded, raising fears that the Euro and the European Union may be on the verge of collapse. We also had the Chinese government tightening a number of monetary and fiscal measures in an attempt to cool the economy and hold inflation in check.
Globally, governments are trying to walk a fine line in helping their economies recover. There are great concerns that many are still not strong enough to survive on their own without government stimulus programs. Conversely, continued government spending is leading to increasing deficit issues as well as the possibility of promoting inflation. Central banks are also struggling with when to raise interest rates from near zero levels without choking off growth. We saw Bank of Canada rates rise 25 basis points in June, on the back of stronger domestic economic data.
The price of oil averaged around U.S.$78 per barrel in Q2. Prices remained buoyed by continued stockpiling by China, fears of a heavy hurricane season, OPEC maintaining supply cuts, and continuing political noise from the Middle East. In addition, U.S. energy policy took an interesting twist last quarter. Initially, in an effort to boost self sufficiency, the Obama administration offered to extend drilling areas and to ease regulations for oil exploration in the Gulf of Mexico. However, after the BP oil spill, all offshore drilling was stopped and the political rhetoric in Washington started to heat up. This caused oil prices to firm on the belief that excess regulation would limit future exploration and production in the Gulf, which could end up increasing U.S. dependence on foreign supplies.
Natural gas prices rose about 16% this quarter, as hotter than normal weather in the U.S. drove prices higher. We, however, are not positive on the near term outlook for gas, due to large inventories and a lack of industrial demand in the U.S. Moreover, there has been a 40% increase in the number of drill rigs in the U.S., compared to this time last year. Unless we experience extreme heat or major hurricane activity in the Gulf of Mexico, we expect to exit this injection season with inventory levels at all time highs.
Most base metals saw prices fall 15-20% in the quarter, again due to fears of the slowing global economy. The big fear is that Chinese demand will fall as the government attempts to cool a booming property market. However, many of the producers who serve this market, especially those in commodities like coal and iron, tell us that demand from China has not slowed and remains quite robust. Base metals are one of the most economically sensitive sectors and should be a leader in a recovery.
Whenever we have political instability, ballooning deficits, and financial turmoil, gold normally performs well. This quarter was no exception as the price of gold reached an all time high of $1266 per ounce. Many central banks such as India, Russia, and China have been buying gold as both a safe-haven asset as well as a means of diversifying out of the U.S. dollar. The price has also been fueled by investors buying gold through funds that invest solely in bullion. A number of these funds’ holdings rival those of the world’s largest central banks, and we have to wonder how long individuals will remain invested in an economic recovery.
M&A activity, a theme we’ve touched on in the past, remained firmly in play last quarter, particularly in the resource sectors -- cash rich companies are taking advantage of the lower equity prices offered by today’s markets. Many producers and end users are wary of the supply bottlenecks seen in the last cycle, and are acquiring assets now at what may be the last chance to get in at reasonable valuations.
Investors will be watching the third quarter earnings period in July for clues as to the future direction of global economies. There still remains larger than normal cash balances in money market funds around the world earning minimal returns in a low interest-rate environment. As investors gain confidence in an economic recovery, they will embrace risk and shift these funds back into equities. We are not believers in a double-dip recession, and some of our best portfolio returns have been made by deploying cash when investors are paying too much attention to short-term noise in the markets.
Craig Porter