Fund Manager
Norm Lamarche
Capital markets worldwide continued to unwind during the second quarter of 2008 as evidence of the credit-led financial woes spreading into the rest of the economy took hold. South of the border, the S&P500 and the Dow Jones Indices dropped 3.2% and 7.4%, respectively. Year-to-date, stocks in the U.S. (Dow Jones) are down almost 15% while their European & Asian cousins are faring much worse.
The “sell-in-May and go away” concept missed Canada this year, at least to the end of June. In fact, had investors sold in early May, they would have missed a milestone in the Canadian market. The S&P/TSX barreled through 15,000 and hit a new all-time high in the month (May 21). At that level, the Index was up a whopping 26% from the 52-week low set on January 22. The Canadian market ended June 30/08 up 4.6% year-to-date, thanks to the Energy and Materials groups, which more than offset the devastation to the Financials and Consumer Discretionaries.
Energy prices marched on during the month of June, undeterred by the apparent impact on the consumer and the world economy. WTI climbed another 10% during the month, to close above $140/bbl, representing a whopping 40% second quarter increase. Similarly, Natural Gas prices rose another 14% to over $13.50/mcf, rallying largely in sympathy with its crude cousin. Natural Gas inventories, however, remain well below last year’s levels, as well as the 5-year average, notwithstanding the rapid growth in U.S. onshore production. Energy and Food prices accentuated the capital market woes during the month of June, as share prices worldwide tumbled. In Canada, share prices benefitted from the resource exposures.
Commodities continued to outperform share prices in June, widening the gap further, as commodities reflect the goings-on in the world (fundamentals and geopolitical) while stocks are acting like stocks (reflecting the fear in capital markets). The disconnect has been growing over the past year as WTI doubled. Nigeria continued to perform for the oil-bulls. The middle-eastern tensions took centre stage in June, as the war rhetoric intensified between Iran and Israel over Iran’s Nuclear programs. Demand destruction, however, is clearly becoming evident in the western world and we believe it will intensify further, as the economy growth profile slows considerably. The Fund has begun layering some shorts on commodities in early July. While its rationale is supported by a long list of fundamentals, there is also a long list of hedge funds happy to tell you that shorting WTI is the quick way to ruin! We like our odds here as the consumer behavior is now seemingly taking hold, and industrial activity continues to slow. The Fund’s energy producers in the mid-cap world are performing in both the real world and in the stock market (not so real world). Commodity prices are surely helping out but the Fund has remained quite focused on the Producer sub group that has substantial visibility in growth profile by virtue of playing the deeper basin and shales.
As it has been the case for energy, the materials’ commodity prices have continued to outperform share prices in June. The mergers theme continues to play out as it remains cheaper to buy than to build. Another interesting theme developing is the steel sector’s need to vertically integrate in order to control costs and destination.
Brazilian Metals conglomerate, CVRD, finalized its intention to raise $15 billion for expansion and acquisitions. The saga continues with BHP still trying to win over Rio Tinto. We have also seen partial vertical integration with competitors Posco and ArcelorMittal buying stakes in coal supplier Macarthur Coal. Either way, consolidation is bound to continue.
Companies from BRIC (Brazil, Russia, India and China) countries are the leaders in this consolidation, acquiring resources to feed their economies’ growth. Will steel makers continue to be held hostage by the suppliers of iron ore and pay 70-100% price increases each year going forward as happened in the latest round of negotiations? Or will they buy a source they can manage themselves? Some food for thought. A final morsel to chew on: for the first time ever the value of mining deals, over the first 5 months of 2008, was larger than in the financial sector.
We also saw the price of uranium stabilize in the mid $50s, along with the first positive move in the spot price this year. The term price dropped late in the month, and we should see further tightening of the spread. Companies experienced lackluster performance over the month until the final few trading days of June. We have been adding to the group.
The early July experience has not been pleasant for equity investors, including the basic materials segment, as the global economy continues to show signs of stress. Energy share prices have even stopped rising with ever-increasing energy commodity prices. They are now falling, along with the rest of the market. We expect to see relief on the oil front as both consumer and industrial behaviors change. Lower energy prices should bring about relief to both capital markets and to industrial activity.
While many investors will be wishing for an end to the credit crisis soon and jump back into the Banks, we continue to avoid the group, along with all the Consumer Discretionaries. As we’ve mentioned in many of our previous commentaries, the Financial Institutions will be chewing on their problems for years to come. We are staying focused on our key themes.
Norm Lamarche
Portfolio Manager
Front Street Capital
NORM LAMARCHE - Q2 2008 COMMENTARY
Date Published
Related Fund(s)
Fund Manager
Capital markets worldwide continued to unwind during the second quarter of 2008 as evidence of the credit-led financial woes spreading into the rest of the economy took hold. South of the border, the S&P500 and the Dow Jones Indices dropped 3.2% and 7.4%, respectively. Year-to-date, stocks in the U.S. (Dow Jones) are down almost 15% while their European & Asian cousins are faring much worse.
The “sell-in-May and go away” concept missed Canada this year, at least to the end of June. In fact, had investors sold in early May, they would have missed a milestone in the Canadian market. The S&P/TSX barreled through 15,000 and hit a new all-time high in the month (May 21). At that level, the Index was up a whopping 26% from the 52-week low set on January 22. The Canadian market ended June 30/08 up 4.6% year-to-date, thanks to the Energy and Materials groups, which more than offset the devastation to the Financials and Consumer Discretionaries.
Energy prices marched on during the month of June, undeterred by the apparent impact on the consumer and the world economy. WTI climbed another 10% during the month, to close above $140/bbl, representing a whopping 40% second quarter increase. Similarly, Natural Gas prices rose another 14% to over $13.50/mcf, rallying largely in sympathy with its crude cousin. Natural Gas inventories, however, remain well below last year’s levels, as well as the 5-year average, notwithstanding the rapid growth in U.S. onshore production. Energy and Food prices accentuated the capital market woes during the month of June, as share prices worldwide tumbled. In Canada, share prices benefitted from the resource exposures.
Commodities continued to outperform share prices in June, widening the gap further, as commodities reflect the goings-on in the world (fundamentals and geopolitical) while stocks are acting like stocks (reflecting the fear in capital markets). The disconnect has been growing over the past year as WTI doubled. Nigeria continued to perform for the oil-bulls. The middle-eastern tensions took centre stage in June, as the war rhetoric intensified between Iran and Israel over Iran’s Nuclear programs. Demand destruction, however, is clearly becoming evident in the western world and we believe it will intensify further, as the economy growth profile slows considerably. The Fund has begun layering some shorts on commodities in early July. While its rationale is supported by a long list of fundamentals, there is also a long list of hedge funds happy to tell you that shorting WTI is the quick way to ruin! We like our odds here as the consumer behavior is now seemingly taking hold, and industrial activity continues to slow. The Fund’s energy producers in the mid-cap world are performing in both the real world and in the stock market (not so real world). Commodity prices are surely helping out but the Fund has remained quite focused on the Producer sub group that has substantial visibility in growth profile by virtue of playing the deeper basin and shales.
As it has been the case for energy, the materials’ commodity prices have continued to outperform share prices in June. The mergers theme continues to play out as it remains cheaper to buy than to build. Another interesting theme developing is the steel sector’s need to vertically integrate in order to control costs and destination.
Brazilian Metals conglomerate, CVRD, finalized its intention to raise $15 billion for expansion and acquisitions. The saga continues with BHP still trying to win over Rio Tinto. We have also seen partial vertical integration with competitors Posco and ArcelorMittal buying stakes in coal supplier Macarthur Coal. Either way, consolidation is bound to continue.
Companies from BRIC (Brazil, Russia, India and China) countries are the leaders in this consolidation, acquiring resources to feed their economies’ growth. Will steel makers continue to be held hostage by the suppliers of iron ore and pay 70-100% price increases each year going forward as happened in the latest round of negotiations? Or will they buy a source they can manage themselves? Some food for thought. A final morsel to chew on: for the first time ever the value of mining deals, over the first 5 months of 2008, was larger than in the financial sector.
We also saw the price of uranium stabilize in the mid $50s, along with the first positive move in the spot price this year. The term price dropped late in the month, and we should see further tightening of the spread. Companies experienced lackluster performance over the month until the final few trading days of June. We have been adding to the group.
The early July experience has not been pleasant for equity investors, including the basic materials segment, as the global economy continues to show signs of stress. Energy share prices have even stopped rising with ever-increasing energy commodity prices. They are now falling, along with the rest of the market. We expect to see relief on the oil front as both consumer and industrial behaviors change. Lower energy prices should bring about relief to both capital markets and to industrial activity.
While many investors will be wishing for an end to the credit crisis soon and jump back into the Banks, we continue to avoid the group, along with all the Consumer Discretionaries. As we’ve mentioned in many of our previous commentaries, the Financial Institutions will be chewing on their problems for years to come. We are staying focused on our key themes.
Norm Lamarche
Portfolio Manager
Front Street Capital