Fund Manager
Frank Mersch
My oh my, two months in a row! How good does that feel? Although economic news is still grim, the market seems to have sufficiently discounted much of the bad news. It appears to be looking at things as half full versus half empty.
The extreme downturn is now easing and odds are good that the U.S. recession will end by the second half of the year. We expect Europe to lag by at least 3-6 months. However, we believe credit issues, continued deleveraging, and dilution due to equity injections argue against an extremely strong recovery. The reasons are that banks have too many loans and not enough capital. The U.S. consumer has hit the debt wall and faces increased taxes. With modest employment growth, real consumer spending may rise only 1.5% or less. This would be the worst increase since the ‘30’s. This will make it very difficult to withdraw monetary and fiscal policies. However, the economy has been able to grow in the past without ever increasing leverage. We also have additional engines of growth in the BRIC nations which must be accounted for. Thus we are more constructive going forward.
At this stage, equity markets can still move higher due to some technical factors such as 9 out of 10 groups in the S & P/TSX still have high short interest, a large amount of cash continues to sit on the sidelines, and many stocks remain below key resistance levels.
Finally, for the month, the Fund registered a 4.19% return versus the S & P/TSX, at 6.9%. Year-to-date, we are up 10.3% versus the S & P/TSX, at 3.75%. We did continue to have more cash than usual, but our level of trading has been more active. During the month we went from 40% cash to 10%, then back to 35%. As at the time of this report, we are approximately 15% cash. Sector rotation is the reason for the variability of the cash.
Front Street Canadian Hedge - Commentary
Date Published
Related Fund(s)
Fund Manager
My oh my, two months in a row! How good does that feel? Although economic news is still grim, the market seems to have sufficiently discounted much of the bad news. It appears to be looking at things as half full versus half empty.
The extreme downturn is now easing and odds are good that the U.S. recession will end by the second half of the year. We expect Europe to lag by at least 3-6 months. However, we believe credit issues, continued deleveraging, and dilution due to equity injections argue against an extremely strong recovery. The reasons are that banks have too many loans and not enough capital. The U.S. consumer has hit the debt wall and faces increased taxes. With modest employment growth, real consumer spending may rise only 1.5% or less. This would be the worst increase since the ‘30’s. This will make it very difficult to withdraw monetary and fiscal policies. However, the economy has been able to grow in the past without ever increasing leverage. We also have additional engines of growth in the BRIC nations which must be accounted for. Thus we are more constructive going forward.
At this stage, equity markets can still move higher due to some technical factors such as 9 out of 10 groups in the S & P/TSX still have high short interest, a large amount of cash continues to sit on the sidelines, and many stocks remain below key resistance levels.
Finally, for the month, the Fund registered a 4.19% return versus the S & P/TSX, at 6.9%. Year-to-date, we are up 10.3% versus the S & P/TSX, at 3.75%. We did continue to have more cash than usual, but our level of trading has been more active. During the month we went from 40% cash to 10%, then back to 35%. As at the time of this report, we are approximately 15% cash. Sector rotation is the reason for the variability of the cash.