Fund Manager
Frank Mersch
A strong quarter, but the month of June shows some potential cracks developing.
Following a better than 20% rally off their lows, North American markets entered a consolidation phase in June. The rally has focused on a slower pace of decline in the economic numbers rather than an outright turn in the economy. Although we do believe a turn is in the cards, the numbers are still quite negative. As predicted, unemployment is quickly advancing to 10% plus, housing is still bouncing along the bottom while mortgage delinquencies are still rising and longer-term interest rates are up sharply. Inflation expectations have risen but, frankly, we don’t see it. Capacity utilization rates are low worldwide and wages are still being cut or frozen.
Given the return exhibited during the quarter we believe that the market will now focus more on earnings after bouncing from an oversold position. With analysts trimming earnings estimates by over 40%, the question becomes whether it is too much or too little? Once again we have raised our cash positions and look for better entry points. Volatility is likely to rise, and we see strategic opportunities selling puts on favoured stocks with specific targets for entry. We will also look to trade short positions when we believe they are overextended.
We have become more cautious toward the markets. Historically, June, August, September and October have produced the four worst monthly returns. As at this writing, we are 35%+ cash. We are entering earnings season and prefer to allocate funds to companies and areas where we see marked improvement. We may miss a move to the upside, but our strategy is to look for greater certainty.
For the month, the Front Street Canadian Hedge Fund return was .09% versus the S&P/TSX 0.05%.
Frank Mersch
Frank Mersch - Q2 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
A strong quarter, but the month of June shows some potential cracks developing.
Following a better than 20% rally off their lows, North American markets entered a consolidation phase in June. The rally has focused on a slower pace of decline in the economic numbers rather than an outright turn in the economy. Although we do believe a turn is in the cards, the numbers are still quite negative. As predicted, unemployment is quickly advancing to 10% plus, housing is still bouncing along the bottom while mortgage delinquencies are still rising and longer-term interest rates are up sharply. Inflation expectations have risen but, frankly, we don’t see it. Capacity utilization rates are low worldwide and wages are still being cut or frozen.
Given the return exhibited during the quarter we believe that the market will now focus more on earnings after bouncing from an oversold position. With analysts trimming earnings estimates by over 40%, the question becomes whether it is too much or too little? Once again we have raised our cash positions and look for better entry points. Volatility is likely to rise, and we see strategic opportunities selling puts on favoured stocks with specific targets for entry. We will also look to trade short positions when we believe they are overextended.
We have become more cautious toward the markets. Historically, June, August, September and October have produced the four worst monthly returns. As at this writing, we are 35%+ cash. We are entering earnings season and prefer to allocate funds to companies and areas where we see marked improvement. We may miss a move to the upside, but our strategy is to look for greater certainty.
For the month, the Front Street Canadian Hedge Fund return was .09% versus the S&P/TSX 0.05%.
Frank Mersch