Fund Manager
Frank Mersch
Another excellent quarter for capital markets, despite all the doomsayers and economists.
Bull market momentum continued through September, pushing the rebound from the March lows, to 50% plus. In fact, the TSX returned 5% in September, going against the long-term negative for this month. (Historically, September has been a worse month than October, even though common perception is the inverse). Nevertheless, major indices remain below the last cyclical peak (S&P 500 still 32% below ‘07 highs) and relative to fixed-income alternatives, it is still attractive. The spread between earnings yields and long government bond yields is wider than average. The yield curve is steeper than average, which supports further repairs to the financial sector, i.e. Banks.
More than a year after the collapse of Lehman Brothers., the aggressive intervention of the monetary authorities has successfully lowered the likelihood of a financial crisis. With cash earning very little, combined with a rebound in credit markets, the appetite for risk has slowly begun to return. We stress slowly, because there is still large amounts of cash waiting on the sidelines. As of this writing, over 40% of total financial assets as a percentage of total S&P 500 market cap is held in U.S. money market mutual funds. This compares to a historical average of 15-20%. Further, inflows into equities are just beginning to turn positive. Until we see a large spike of retail buying we feel the market will climb a wall of worries.
Outlook
Recently, Australia raised rates and is the first to do so. Since the U.S. was the epicenter of the financial crisis, it will likely be the last to raise rates from 0%. This suggests that the U.S. dollar will be under continued pressure, reinforcing that growth will be stronger outside the U.S. With continued high unemployment the Fed is unlikely to do anything. It is interesting to note that with Australia’s rate move, the dollar fell 0.5% while the S&P 500 rallied 1.1%. More significantly, commodities rallied with gold moving to an all-time high. A weaker U.S. and soaring gold prices diminished the asymmetric risk of a return to deflation.
Although the dollar has declined 15% since March, it is only back to the levels of August, having unwound the 25% gain. It now appears we will see multiple assaults on the dollar as global economies rebound.
For this reason, we believe the market may have further potential to advance. As the U.S. dollar weakens, commodity prices advance, as this correlation remains in tact. It appears that if oil breaks $75 it will confirm a breakout similar to gold breaching $1,000. As oil goes, so goes the Canadian dollar.
When we look at the market, we do see some value and some groups that have not participated. Certainly, the agriculture area, specifically the fertilizers, has not participated in the rally. We expect this group to begin to outperform near year end. We also see uranium as a laggard. There are some special situations, trading 10 times below earnings, that should see their economics improve as the U.S. recovers. We also believe that much of the government stimulus money has not begun to be allocated and as such, should boost activity in 2010. All in all, we remain cautiously optimistic.
Fund
For the month, the Fund registered a 6.7% return vs. the S&P/TSX, up 4.8%.
Frank Mersch
Frank Mersch - Q3 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
Another excellent quarter for capital markets, despite all the doomsayers and economists.
Bull market momentum continued through September, pushing the rebound from the March lows, to 50% plus. In fact, the TSX returned 5% in September, going against the long-term negative for this month. (Historically, September has been a worse month than October, even though common perception is the inverse). Nevertheless, major indices remain below the last cyclical peak (S&P 500 still 32% below ‘07 highs) and relative to fixed-income alternatives, it is still attractive. The spread between earnings yields and long government bond yields is wider than average. The yield curve is steeper than average, which supports further repairs to the financial sector, i.e. Banks.
More than a year after the collapse of Lehman Brothers., the aggressive intervention of the monetary authorities has successfully lowered the likelihood of a financial crisis. With cash earning very little, combined with a rebound in credit markets, the appetite for risk has slowly begun to return. We stress slowly, because there is still large amounts of cash waiting on the sidelines. As of this writing, over 40% of total financial assets as a percentage of total S&P 500 market cap is held in U.S. money market mutual funds. This compares to a historical average of 15-20%. Further, inflows into equities are just beginning to turn positive. Until we see a large spike of retail buying we feel the market will climb a wall of worries.
Outlook
Recently, Australia raised rates and is the first to do so. Since the U.S. was the epicenter of the financial crisis, it will likely be the last to raise rates from 0%. This suggests that the U.S. dollar will be under continued pressure, reinforcing that growth will be stronger outside the U.S. With continued high unemployment the Fed is unlikely to do anything. It is interesting to note that with Australia’s rate move, the dollar fell 0.5% while the S&P 500 rallied 1.1%. More significantly, commodities rallied with gold moving to an all-time high. A weaker U.S. and soaring gold prices diminished the asymmetric risk of a return to deflation.
Although the dollar has declined 15% since March, it is only back to the levels of August, having unwound the 25% gain. It now appears we will see multiple assaults on the dollar as global economies rebound.
For this reason, we believe the market may have further potential to advance. As the U.S. dollar weakens, commodity prices advance, as this correlation remains in tact. It appears that if oil breaks $75 it will confirm a breakout similar to gold breaching $1,000. As oil goes, so goes the Canadian dollar.
When we look at the market, we do see some value and some groups that have not participated. Certainly, the agriculture area, specifically the fertilizers, has not participated in the rally. We expect this group to begin to outperform near year end. We also see uranium as a laggard. There are some special situations, trading 10 times below earnings, that should see their economics improve as the U.S. recovers. We also believe that much of the government stimulus money has not begun to be allocated and as such, should boost activity in 2010. All in all, we remain cautiously optimistic.
Fund
For the month, the Fund registered a 6.7% return vs. the S&P/TSX, up 4.8%.
Frank Mersch