Fund Manager
Norm Lamarche
Resource players took it on the chin during July. The investor rotation (out of Energy/Materials into Financials/Technology) that began in June, accelerated in July, as the energy prices hit a boiling point for the economy worldwide, and began to slide. The slide in energy carried all commodities lower. The MSCI Worldwide index is now showing the group in an official Bear Market, as it has dropped in excess of 20% from its highs of May. The Front Street Resource Hedge Fund dropped 12.16% during the month. In Canada, the Materials group fell 12.2%, led by the Golds (-14.2%), Steels (-12.9%) and Metals and Mining (-12.6%). July was an active M&A month for the Materials group with: Teck Comminco buying Fording Coal; Hudbay buying Skye; Kinross buying Aurelian; and Goldcorp buying Gold Eagle, to name a few.
The volatility is unprecedented! Equity share prices have lost sight of any fundamentals as the commodity trade unwinds.
We believe commodity prices, particularly oil, may drop some more but will not crash, as the underlying fundamentals are stronger than the tape shows. The Metals group has been left for dead in many ways as many of them are trading at extreme (low) EBITDA multiples. A downturn in the commodity cycle is usually accompanied with bloated (debt) balance sheets as the producers worldwide have been busy building new supply capacity to sell into the high price environment. The companies today however have ultra clean balance sheets! In fact, many are trading at or near cash values. The message to take away from these cash-filled balance sheets is the difficult, unfriendly, geopolitical world that control the undeveloped resources. The fundamentals are much tighter than what the tape is telling us!
Investors are pricing in a Bear Market scenario for the Basic Materials, where the global economy falls into recession, the financial sector continues to worsen and commodity prices continue to roll-over.
We believe that investors will realize, once the capital markets settle down, that the world economy is doing better than muddling along. Where the growth of the BRIC-type nations will offset the weakness in the developed world. Where the supply-side difficulties will likely keep commodity prices at higher-for-longer. Where headline inflation will likely decline over time while core inflation remains in check. Where interest rates remain low (and likely lower) and the global spending infrastructure theme also remains in place. When (not if, but when) the capital markets do settle down, investors should realize that the weakness in the Basic Materials has been overdone.
Front Street Resource Hedge Fund Ltd. - Monthly Commentary
Date Published
Related Fund(s)
Fund Manager
Resource players took it on the chin during July. The investor rotation (out of Energy/Materials into Financials/Technology) that began in June, accelerated in July, as the energy prices hit a boiling point for the economy worldwide, and began to slide. The slide in energy carried all commodities lower. The MSCI Worldwide index is now showing the group in an official Bear Market, as it has dropped in excess of 20% from its highs of May. The Front Street Resource Hedge Fund dropped 12.16% during the month. In Canada, the Materials group fell 12.2%, led by the Golds (-14.2%), Steels (-12.9%) and Metals and Mining (-12.6%). July was an active M&A month for the Materials group with: Teck Comminco buying Fording Coal; Hudbay buying Skye; Kinross buying Aurelian; and Goldcorp buying Gold Eagle, to name a few.
The volatility is unprecedented! Equity share prices have lost sight of any fundamentals as the commodity trade unwinds.
We believe commodity prices, particularly oil, may drop some more but will not crash, as the underlying fundamentals are stronger than the tape shows. The Metals group has been left for dead in many ways as many of them are trading at extreme (low) EBITDA multiples. A downturn in the commodity cycle is usually accompanied with bloated (debt) balance sheets as the producers worldwide have been busy building new supply capacity to sell into the high price environment. The companies today however have ultra clean balance sheets! In fact, many are trading at or near cash values. The message to take away from these cash-filled balance sheets is the difficult, unfriendly, geopolitical world that control the undeveloped resources. The fundamentals are much tighter than what the tape is telling us!
Investors are pricing in a Bear Market scenario for the Basic Materials, where the global economy falls into recession, the financial sector continues to worsen and commodity prices continue to roll-over.
We believe that investors will realize, once the capital markets settle down, that the world economy is doing better than muddling along. Where the growth of the BRIC-type nations will offset the weakness in the developed world. Where the supply-side difficulties will likely keep commodity prices at higher-for-longer. Where headline inflation will likely decline over time while core inflation remains in check. Where interest rates remain low (and likely lower) and the global spending infrastructure theme also remains in place. When (not if, but when) the capital markets do settle down, investors should realize that the weakness in the Basic Materials has been overdone.