Fund Manager
Norm Lamarche
Welcome back from vacation!!! With Labor Day over, many of us were looking forward to the continued (relative) calm in the broader capital markets that August delivered. The early September reality however, have us all wishing we were back in time! But before we deal with September, let’s deal with August. Commodity prices continued on their downward path during the month. On the energy side, WTI Oil fell 7% (to $115/bbl) while Natural Gas NYMEX dropped 13% to below $8/mmbtu. In the materials world, the Base Metals were largely all down. Copper, Aluminum and Zinc for example, dropped 7%, 10% and 6% respectively. Nickel however, bucked the trend and rose 10% to close above $9.15/metric tn. The Precious Metals were not so precious in August, as they responded to the U.S. dollar strength and a Forex game of relative economic weakness. Gold and silver both dropped 9.1% and 23.5% during the month. The rest of the precious metals club (platinum/pladium) didn’t fare any better.
Energy stocks began the month where the previous ended, lower. The mid-month rally in the seniors and integrateds took the Canadian S&P/TSX Energy sub index to a positive 4.4% close for the month. The fragile capital markets left the smaller and intermediates behind, as investors flocked to size. While our short position on Nymex oil helped, our “short big (and slow) E&P and long growth” worked against the Fund in August. The Fund lost 4.06% during the period, with the E&P segment, Energy Alternatives and OTHER segments losing 226, 88 and 92 basis points respectively.
M&A activity was rather quiet during the month. Xtrata made a bid for Lonmin while BHP maintained its pursuit of RTZ. Our view was that, while we didn’t know where the lows were, the valuations were becoming very compelling based on our views of where the economies would settle-in, of where the long term commodity prices should be (reflective of industry costs and a difficult geopolitical world), Net Asset Values and importantly, replacement costs! Inflation was not of concern as the state of the weaker economic union would preclude a full pass-thru of costs to selling prices. Headline inflation is already on its way down as the energy and food groups work their way into a lower wholesale and consumer inflation numbers. We would expect more of the same. This is great news as it will allow the central banks, particularly the European price-hawks, to begin dealing with their weaker economies. Interest rates are on their way down again for the next foreseeable future. The lower WTI is also very beneficial to both the consumers and businesses, to say nothing about the weakened state of some geopolitical foes! Lets do the math again as we did the exercise on its way up. Lets see, the U.S. economy consumes 20 million barrels a day and WTI is (now) down $40-$45/bl and so the U.S. economy is saving $800-$900m a day! With the legislators back in Congress post labor day, maybe they’ll spend more time campaigning and less on the Bill to stop speculators from driving up oil prices (won’t hold our breaths on that one!).
Enter September. Bill Gross’ comments of We are angry and we are not going to take it anymore, sent shivers through capital markets and nudged the Feds to take control of Fannie/Freedie, while re-igniting the fear in Fixed-incomeland. With the MAC and MAE dealt with, the markets are now focusing on Lehman,…..The Fear and panic spread quickly into commodities and resource stocks, particularly on the news of the faulting of many Hedge/Commodity Funds. The troubled Hedge Fund portfolios showed up on the PM’s desks about as quickly as it took Jamaican born BOLT to run the 100 metres in China! Not only were these stocks looking for new homes, investors were front running the sales, in a market fraught with fear! The end result of the circus show was the insanity that prevailed.
While, on any given day, the game is won and lost in the stock market, its important to remember that the stock market fundamentals will reflect the economic fundamentals mid-longer term.
At its worst point in September to date, the market corrections for resource stocks from Peak/through have been as severe as the 1998-1998 period. It’s also important to remember that resource companies then had been busy building new projects and were saddled with debt. It’s also important to keep in mind that the commodity price downturn in 1998 sent WTI to below $10/bl and metal prices to all-time low levels (on a real basis). The resource based companies today have never been so well capitalized! In fact, many are trading near cash values. Last time we checked, WTI was still above $100 with Copper above $3, and the businesses are generating very healthy cash flows! Where do we go from here? We suppose capital markets will remain caught-up with Lehman et all, until they get dealt with, with the Fed’s help. In the meantime, look for inflation and interest rates to drop. With lower gasoline prices, consumers will have more to spend elsewhere. We expect the flight-to-safety to the Greenback to lighten up, and reverse as Forex traders begin to take a good hard look at the long-term cost to the American tax payers as a result of this financial fiasco.
Front Street Energy & Power Performance Fund - Monthly Commentary
Date Published
Related Fund(s)
Fund Manager
Welcome back from vacation!!! With Labor Day over, many of us were looking forward to the continued (relative) calm in the broader capital markets that August delivered. The early September reality however, have us all wishing we were back in time! But before we deal with September, let’s deal with August. Commodity prices continued on their downward path during the month. On the energy side, WTI Oil fell 7% (to $115/bbl) while Natural Gas NYMEX dropped 13% to below $8/mmbtu. In the materials world, the Base Metals were largely all down. Copper, Aluminum and Zinc for example, dropped 7%, 10% and 6% respectively. Nickel however, bucked the trend and rose 10% to close above $9.15/metric tn. The Precious Metals were not so precious in August, as they responded to the U.S. dollar strength and a Forex game of relative economic weakness. Gold and silver both dropped 9.1% and 23.5% during the month. The rest of the precious metals club (platinum/pladium) didn’t fare any better.
Energy stocks began the month where the previous ended, lower. The mid-month rally in the seniors and integrateds took the Canadian S&P/TSX Energy sub index to a positive 4.4% close for the month. The fragile capital markets left the smaller and intermediates behind, as investors flocked to size. While our short position on Nymex oil helped, our “short big (and slow) E&P and long growth” worked against the Fund in August. The Fund lost 4.06% during the period, with the E&P segment, Energy Alternatives and OTHER segments losing 226, 88 and 92 basis points respectively.
M&A activity was rather quiet during the month. Xtrata made a bid for Lonmin while BHP maintained its pursuit of RTZ. Our view was that, while we didn’t know where the lows were, the valuations were becoming very compelling based on our views of where the economies would settle-in, of where the long term commodity prices should be (reflective of industry costs and a difficult geopolitical world), Net Asset Values and importantly, replacement costs! Inflation was not of concern as the state of the weaker economic union would preclude a full pass-thru of costs to selling prices. Headline inflation is already on its way down as the energy and food groups work their way into a lower wholesale and consumer inflation numbers. We would expect more of the same. This is great news as it will allow the central banks, particularly the European price-hawks, to begin dealing with their weaker economies. Interest rates are on their way down again for the next foreseeable future. The lower WTI is also very beneficial to both the consumers and businesses, to say nothing about the weakened state of some geopolitical foes! Lets do the math again as we did the exercise on its way up. Lets see, the U.S. economy consumes 20 million barrels a day and WTI is (now) down $40-$45/bl and so the U.S. economy is saving $800-$900m a day! With the legislators back in Congress post labor day, maybe they’ll spend more time campaigning and less on the Bill to stop speculators from driving up oil prices (won’t hold our breaths on that one!).
Enter September. Bill Gross’ comments of We are angry and we are not going to take it anymore, sent shivers through capital markets and nudged the Feds to take control of Fannie/Freedie, while re-igniting the fear in Fixed-incomeland. With the MAC and MAE dealt with, the markets are now focusing on Lehman,…..The Fear and panic spread quickly into commodities and resource stocks, particularly on the news of the faulting of many Hedge/Commodity Funds. The troubled Hedge Fund portfolios showed up on the PM’s desks about as quickly as it took Jamaican born BOLT to run the 100 metres in China! Not only were these stocks looking for new homes, investors were front running the sales, in a market fraught with fear! The end result of the circus show was the insanity that prevailed.
While, on any given day, the game is won and lost in the stock market, its important to remember that the stock market fundamentals will reflect the economic fundamentals mid-longer term.
At its worst point in September to date, the market corrections for resource stocks from Peak/through have been as severe as the 1998-1998 period. It’s also important to remember that resource companies then had been busy building new projects and were saddled with debt. It’s also important to keep in mind that the commodity price downturn in 1998 sent WTI to below $10/bl and metal prices to all-time low levels (on a real basis). The resource based companies today have never been so well capitalized! In fact, many are trading near cash values. Last time we checked, WTI was still above $100 with Copper above $3, and the businesses are generating very healthy cash flows! Where do we go from here? We suppose capital markets will remain caught-up with Lehman et all, until they get dealt with, with the Fed’s help. In the meantime, look for inflation and interest rates to drop. With lower gasoline prices, consumers will have more to spend elsewhere. We expect the flight-to-safety to the Greenback to lighten up, and reverse as Forex traders begin to take a good hard look at the long-term cost to the American tax payers as a result of this financial fiasco.