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Andras Group Annual Report for 2008

January 9, 2009 • Print This Article

Andras Group Annual Report

December 31, 2007 to December 31, 2008

The Markets

We are of the opinion that the worst of the recession will be realized in the fourth quarter of 2008 and first quarter of 2009. The stimulus already in the system and infrastructure spending already announced and to be announced will start to flow into economies in the first quarter and beyond. As economies begin to recover, we anticipate a revival of inflationary pressure. Equity markets should start to stabilize by the end of the first quarter as infrastructure spending begins to have an impact. We may see a considerable bounce back in the second quarter as markets look ahead to recovery in 2010.

The hope that growth in the Developing World would offset recession in the United States and Europe is now dashed. Although economies such as China and India may still be expanding, growth numbers have slowed dramatically as consumers, especially those in the US, retrench. Equity markets around the world have sold off.

The new administration in the United States has inherited an economy in deep recession. The US GDP is estimated to be down 5.5% on an annualized basis in the 4th Quarter, the lowest since 1982. Unemployment is growing. Housing prices in the US continue to fall while mortgage defaults continue to rise. Providing stimulus in the US will lead to sizable deficits for at least the next two years.

Over half of the $700 billion pledged under the Emergency Economic Stabilization Act has been spent on providing liquidity to the US banking system. Credit needs to be made more readily available to individuals and businesses. US Banks are still reserving cash to offset balance sheet hits caused by write downs. Banks in Europe have also been forced to write off huge investments in toxic debt, mostly emanating from the US. Some European banks have become partially nationalized. One leading indicator that credit markets may be starting to thaw is that LIBOR rates have dropped. It is important to remember that a great deal of the negative news is being released at the end of 2008 and the news will get worse before it gets better. Layoffs often jump to frightening levels just as the market begins to get set to move higher. All things considered, if you were told a year ago that Citigroup would be trading in the range of 3$ it is likely that one would have believed that the S&P 500 would be in the 600 range, however we are holding around 800.

The US Dollar has benefited from a fear premium as funds from around the world have flown into the Dollar, widely seen as a safe haven investment. The amount of stimulus being pumped into the US economy and the resulting extreme fiscal deficits should devalue the US Dollar over time. In addition, a combination of low commodity prices and lack of credit have led to the cancellation of some exploration and development projects. These projects represent the new supplies of oil, natural gas, and base metals which will be required to replace reserves being used. Suncor alone has cut back its 2009 capex spending to $3 billion from $10 billion. Once economies begin to recover and demand for raw materials pick up, there will be a limited new supply coming into the system meaning prices could rise as quickly as they fell. A rebound in commodity prices combined with a debased US Dollar would be inflationary. This higher inflation due to higher commodity prices should be beneficial to the Canadian economy. Gold also looks poised to strengthen.

President Obama has stated that the US must become less dependant on Mid-East oil. The move to alternative energy will take at least a decade to make any real impact on the demand for oil. To become independent from non-North American energy sources the US will have to rely on strategic investment in the Canadian oil sands. Programs involving CO2 sequestration, accelerated reclamation, and an emphasis on SAGD extraction vs. strip mining could make bitumen extraction more palatable.

The fourth quarter resulted in lower valuations for equities around the world. North American indices, as represented by the S&P/TSX and the S&P 500 fell 23.53% and 22.56%. However, the flight to perceived quality led to the appreciation of the US Dollar by 15.4% against the Canadian Dollar. This resulted in the S&P 500 falling only 7.16% in Canadian Dollar terms

2008 found markets sharply lower with much of the damage having been done in the fourth quarter. The S&P/TSX fell 35.03% for the year and the S&P 500 fell 38.4%. Every sector of the economy was lower. The only bright spot was the US Dollar which rose 22.03%. Strategy

We believe the equity markets on both sides of the border are over sold. It should be kept in mind that most of the troubling economic figures being published (especially employment numbers) are lagging indicators. Leading indicators and longer futures are indicating a potential recovery in 2010.

Easing credit conditions and lower write downs levels should be experienced by the global banking system as the subprime debt fiasco works it way through. Canadian banks claim that dividends are safe and will be maintained. As recovery becomes apparent, the share prices should appreciate in value.

The banking system in the US and UK is in crisis and fears of nationalization have spread. The steps taken in the UK to insure bank debt and the proposed "Bad Bank" solution in the United States are creative and should provide the necessary liquidity to avoid socializing the system. The banks have rallied sharply recently.

The Federal Budget in Canada, although not offering any real surprises, did appear to address the flow of credit issues that have stagnated our banking system. These measures should allow credit to flow. The infrastructure spending announced should also offer an immediate jumpstart for the shorter term as well.

The equity value of shares of oil and gas companies could do exceptionally well as demand picks up with any recovery. Lack of new supply and a desire by the United States to break dependence on Mid East oil should benefit Canadian producers. Companies that focus on infrastructure should benefit from Government spending packages.

If the US Dollar falls against the Canadian Dollar an overweighting in Canadian denominated securities will pay rewards over the next several years.

Companies that are relatively well capitalized and have relatively high dividend yields should provide some level of downside protection. Interest rates should remain at historically low levels until there are clear signs of recovery. Once inflation becomes entrenched, interest rates could move much higher impacting the relative performance of interest sensitive equity issues. We do not believe there will be a dramatic increase in interest rates in the near future.

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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