During the third quarter, the TSE 300 total return index was up 1.79%. The leading sectors were Pipelines, Financial Services and again Oil and Gas. The lagging sectors were Gold and Precious Minerals, Industrial Products and Transport. The Standard and Poor’s 500 Index was down 1.24%. The EAFE (Europe, Australia and Far East) total return was down 8.3% in US dollar terms.
Interest rates across the developed countries remain pretty much unchanged. We should take notice that there are several signs of the economy slowing down. Most commodities prices are weak with the exception of energy related ones: lumber currently trades at their lowest level in 8 ½ years. Most wood product prices have been sawed in half. Other building materials have been slumping across the board. Copper prices have dropped 10 cents in the past month. In fact, they are back to where they started the year. With these observations in mind, we would look for lower US interest rates in the coming year.
The Canadian dollar slipped some more to US$ 1.5032. The Euro also ended lower at US$ 0.8827. We believe that the Canadian dollar is slightly undervalued versus the US dollar whereas the Euro is in the dumps because Europe’s economies remain uncompetitive relative to North America’s, and the European Central Bank has failed to create confidence in the currency. Europe still has a high unemployment rate, lofty tax rates and internal political wrangling that have undermined its currency.
Oil price continued its upward move to reach US$ 37.80 before settling down around US$ 30.84 at the end of the quarter. Presently it trades around US$ 33.40. It has been confirmed now that there will be another increase in oil production from the Middle East. Despite a production boost of more than 3 million barrels a day this year, prices continued to spike well out of the $22.00 to $28.00 range OPEC says it wants to maintain.
Please refer to the portfolio valuation in the next section of the report for a complete list of securities you own. You will find a transaction report that includes descriptions of selected securities that have been purchased.
As you all know by now, the Nasdaq, bell-weather of the technology stocks, has experienced one of the nastiest correction since the beginning of this bull market in the early 90’s. Some companies have seen their stock prices plunge more than 90%. Many investors have started wondering whether this is the end of one of the longest bull market in history.
We would like to put the recent events and market volatility (in the market places) into perspective:
- For the first time over the last 2 years, we feel that companies’ valuation have returned to a somewhat more normal level. Investors have finally realized that stock prices cannot keep going up without the underlying companies making a profit. “Growth for the sake of growth” is out. Funny accounting practices are no longer funny (just ask EBAY, Amazon and Priceline.com). Suddenly, profits seem to matter. Thank God, we are back to more familiar territory in the financial markets, something we missed terribly for the last 2 years…
- The Technology sector is going through a major shakeout and rationalization. At the end of this turmoil, which might last several more months, many companies will go bust. Most will be consolidated into larger, more successful entities. There will be a few big winners that will dominate their specific sector because they are smarter, have a competitive advantage thanks to the technology they control, or simply because they are better managers and operators. Past examples are the Intel, Microsoft and Cisco of the 90’s, the IBM of the 60’s. However, it is not an easy task to pick these companies out of a haystack, especially for the average investor.
- The market is also reminding us that, although great companies create huge long-term benefits to our economy and society as a whole, they do not always make great investments, especially when everybody knows about their greatness. These companies tend to be priced to perfection and there is no room for disappointment. When a bad surprise comes up, their stock prices tend to plunge dramatically. Anybody who owns Nortel will understand what we are saying here.
- There are several special economic forces in play that investors fail to give adequate weight to when they worry about a major downturn in the stock market: global political and economic liberalization, the productivity boost from new technology, the maturing of the baby boom generation and the likelihood of a flood of tax cuts around the world in this decade. The first example that comes to mind is Canada: our capital gain tax rate has been cut by one third over the last year!
All in all, the market looks a lot healthier today than in March and August. We would not venture to say that this is the buying opportunity of a lifetime. We are merely saying that investors should not worry as much about a collapse in technology stocks again because we have already had one. Meanwhile, the rest of the market (often called the old economy) held up reasonably well simply because it was reasonably priced in the first place.
We would like to take this opportunity to inform you that Jean-Paul Giacometti has joined Claret as an associate. Jean-Paul was previously First Vice President, and Head of Portfolio Management with Pictet (Canada), a subsidiary of a well-known Swiss private bank based in Geneva. His credentials are impeccable: MBA from University of Concordia, Bachelor of Mathematics from McGill University and a CFA (Chartered Financial Analyst) charter holder since 1993. He was also President of the Montreal Society of Financial Analyst in 1998-1999. Jean-Paul brings additional depth to our current team and we are pleased to have him on board.
Claret Asset Management Corporation