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First Quarter 2012

April 18, 2012 • Print This Article

A period of transition is always uncertain. Economies and nations are currently in transition around the globe. The US economy is transitioning from a period requiring stimulus to one that has sustainable growth. In time, as growth becomes increasingly more entrenched, stimulus should be withdrawn, and North American interest rates should rise. China is transitioning into a consumer society with increased wealth and demand for consumer goods, and the resources required to produce them. Europe is facing an extended period of economic uncertainty as the will of Germany clashes with the needs of poorer countries. The rise of Islam in the Mid East and Northern Africa as a result of the Arab Spring is an emerging issue as well.

Several things have occurred over the past six months to change the investment discussion. Debate changed from deficit funding - deficits in the US are still growing at record rates - to the political theatre of the Republican Primaries. As the US economy continued to grow and businesses began to invest, US equity valuations expanded. Chinese growth started to decelerate. A change in expectations surrounding China led to lower commodity prices and a rotation by "hot money" investors away from Canada.

The TSX had much more moderate growth in valuations. Strength in the financial service sector (especially insurance companies) was offset by weakness in gold stocks and interest-sensitive utilities. With growth in North America it is possible that interest rates will begin to rise as stimulus is removed. This would be seen as beneficial to the profitability of insurers, but detrimental to the earnings of utilities. As economic concerns recede, gold tends to weaken and lose its position as the last resort investment haven. Bonds were changed very little in this quarter.

As Canadian growth becomes increasingly reliant upon energy development, economic and political leadership will continue to migrate westward. The challenge for Ontario and the rest of Canada is the fact that traditional manufacturing is transitioning away from a high wage/secure employment environment. Attempts to create a new manufacturing base on Green technology appear to have been premature. There has been growth in highly skilled pockets (technology, healthcare, financial services).

Europe is acting like an anchor on global growth. Assuming Europe holds together, this could be a long term positive. European economic weakness helps contain inflation, keeps interest rates relatively low and provides time for the non-European banking sector to heal enough to bear the aftershocks that may come. A slow, gradual expansion in North America is required to build the reserve base in US banks. However, the low interest rate environment which is providing ongoing economic stimulus and allowing banks to heal could be creating economic imbalances that will ultimately need to be addressed. As time goes on, the impact of Europe on the global economy and on bond and equity markets outside Europe should lessen.

Although Chinese growth has slowed, it is still very impressive and should continue to drive demand for basic commodities. The US should continue to exhibit slow, steady GDP growth. We anticipate PE expansion in many technology issuers as companies implement overdue technology upgrades. Any discussion about fiscal austerity will probably be put off until after the November elections. At some point the US Deficit will once again top headlines, but for now it appears to have become a background issue. As economies recover, interest rates should begin to rise. Any increase should be gradual, as government deficits cannot handle high borrowing costs. Canadian interest rates should already be increasing and are probably ½-1% lower than they should be due to the need to limit Canadian Dollar strength. Europe should continue to go from crisis to crisis, but the story is getting old and Europe's ability to roil markets appears to be diminishing.

Although there are several global situations that we must monitor, we still prefer high quality equities to fixed income. We remain focused on finding the best quality investments for our clients.

Filed under: Quarterly Reports

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 épargnants.

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.

 

Third Quarter 2011

January 18, 2012 • Print This Article

The Markets

All eyes are upon Europe as we seek some clarity to the sovereign debt issues. Global markets swing with risk on/risk off trading following every pronouncement and/or rumour. Markets are trading on sentiment and headlines, not fundamentals.

It is becoming increasingly apparent that Greece will face major restructuring. The issue surrounding lawmakers in Europe and the markets is what shape that restructuring will take and whether the rest of the peripheral countries will be adversely affected. The ripple effect of a Greek default could spread to the European and global banking system, as many international banks have holdings of Greek and peripheral country debt. In the event of disorderly default, banks will have to take huge write-downs. Governments are negotiating how to recapitalize the banks to prevent potential bank failures and a freeze up of credit similar to 2008.

The necessity of having 17 EU member countries pass legislation to allow for $8 billion keeping Greece afloat was delayed by the internal politics of Slovakia. The funds were required to buy time to allow for a comprehensive agreement to be drafted providing for a potential orderly Greek default. This could include a devaluation of Greek bond principal of up to 50% and a bank recapitalization fund (similar to TARP). The uncertainty of EU members passing a bill to provide up to 2 trillion Euros required to fund the banks and to support the peripheral countries through bond purchase programs is finding difficulty reaching consensus. Until a comprehensive plan is in place markets will remain volatile. Talks are underway at the time of writing. If a resolution is reached there could be a stabilization of equity markets. If there is no agreement, markets should continue to be volatile.

The economic woes of the Euro zone are impacting global trade. There are signs of weakness showing up in developing countries as trade growth is curtailed by tightened credit conditions. For example, growth in China has slowed to below 10% for the first time in several years. However, it should be noted that growth of over 9% is still robust by any measure. China should continue to consume an increasingly large proportion of the world's commodities as the population continues to urbanize and the middle class continues to grow. This should help to put a floor under commodity prices. In addition, the slowdown in growth has allowed inflation to abate to a 6% growth rate. With inflation trending lower the Chinese government should be able to deflate asset bubbles without triggering the hard landing of the economy feared by market watchers.

The growth slowdown in developing countries and uncertainty in Europe has lead to a decline in commodity prices, especially economically sensitive base metals such as copper. Declining commodity prices impact commodity dependant economies such as Canada. We believe that continued growth in the developing world even at lower levels should help offset weakness in commodity demand from Europe. We believe, barring a global recession, that there are tight supplies in many basic commodities, especially oil, and that any pullbacks in prices should be relatively short lived.

Lost in the geopolitical clutter, is the fact that the North American economy is growing and growth appears to be accelerating (albeit from very stagnant levels). Corporate profitability continues to remain robust as companies continue to extract concessions from labour. Efficiencies realized go directly to the bottom line.

Globalization has meant that components can and are being made in the lowest cost environments. The iPhone, for example, has components manufactured in Korea, Vietnam and Cambodia, assembly that takes place in China and development occurring primarily in the United States. Entry level jobs are lost and high skill/high pay jobs are retained. This process has helped polarize society especially in the United States. The inability of many young people to get the higher education required for the high skilled jobs that remain is fuelling the anger that has coalesced into the Occupy Movement. The belief is that jobs are being exported to enrich corporate coffers, enrich the wealthy shareholders at the expense of the average worker. The reality that Apple and many other companies could not compete globally if manufacturing was done locally is lost in the rhetoric.

It would appear that the S&P 500 and the TSX 300 are discounting a mild North American recession. Markets are currently in a broad trading range. Equity valuations swing from extreme to extreme based on news from Europe. If a rescue plan can be put in place focus will begin to return to fundamentals.

The Andras Group

Filed under: Quarterly Reports

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 épargnants.

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.

 

Second Quarter 2011

July 1, 2011 • Print This Article

The Markets

Equity markets around the world are vacillating between the ups based upon strong corporate earnings and attractive equity valuations, and the downs, based on political turmoil. Overall, we are constructive about the stock market's second- half prospects. However, uncertainties on both sides of the Atlantic may need to be resolved favorably for markets to gain positive momentum.

It is important to note that equities have climbed from the March 2009 lows without a substantial correction. Although corrections are unsettling, they are essential for the overall health of the market. Corporate earnings cannot continue to grow exponentially and growth must in time slow down. We may be entering a period of sideways markets and increased volatility.

Canada, in comparison to much of the rest of the world, appears to be a bastion of stability both political and economic. Although we are not unaffected by the travails south of the border and in Europe, we do have much to be grateful for as investors. Our banking system continues to be seen as the soundest in the world. Our banks have the ability to expand at a time when many other financial service companies have been forced to divest. Bank of Nova Scotia, Bank of Montréal and TD Bank have made significant acquisitions over the past two years that should reward investors as the global economy recovers. Canada's materials and oil and gas sectors appear to go from strength to strength and should continue to out perform as demand for raw materials remains robust from the developing world and commodity prices remain elevated. International trade should benefit through lobbying and coordination by a business friendly government.

In Europe the sovereign debt crisis continues. The Greek parliament ratified austerity measures to allow for a second tranche of bailout funding. Politically, the other European countries cannot allow their taxpayers to bear the entire burden of the cost of a bailout/debt restructuring. The intransigence of the rating agencies has put a Greek deal in doubt and could potentially impact the debt of Spain and Italy and could lead to an escalation of interest rates in other EU countries. If this was to occur, the future of the EU experiment would be in great peril.

Events in Europe and the Mideast have resulted in funds flowing into the perceived relative safety of the US Dollar, keeping the Dollar artificially high and interest rates artificially low. At the end of the quarter, the end of QE2 had not had a significant impact on bond yields as funds poured in from overseas to purchase Treasuries. Of great concern for the US markets and economy is the gridlocked negotiations on the increase of the US debt ceiling. The Republican hard line on no tax increases and the Democratic aversion to cutting entitlement spending will take the debate to the 11th hour. Until a deal is reached and there is some clarity on the U.S. budget plan going forward, companies may wait to commit to expansion, hiring and growth plans.

Increased corporate profitability is not reflected in share prices, leading to a market that is undervalued by most metrics. Dividend yields are higher then either Government bond yields, or in many instances the yields on the underlying corporate debt. P/E ratios are at the low end of the historic norms. Corporate balance sheets are flush with cash and corporate debt ratios are at historic lows. In the event that Europe muddles through and the U.S. increases the debt ceiling (hiking taxes and cutting entitlements) there could be a substantial equity rally.

Bond yields in the U.S. are artificially depressed by fear of Greek default and resulting contagion. If Europe solves its sovereign debt dilemma, funds will return to Europe, the yields on U.S. Treasuries will rise and the US Dollar will fall. If a debt ceiling is not increased, there could be a technical default leading to higher US interest rates and a lower US Dollar. If a deal is reached on the debt ceiling, as is anticipated, the impact on the Bond market and Dollar should be muted. As the economy continues to slowly recover, interest rates should slowly rise as companies begin to expand and hire and inflation gradually reappears.

If these events occur, equity markets should rally considerably. As current risks in markets are resolved, bond yields should rise. However, the risk of failure by either the EU or the U.S. to rectify their issues prescribes a cautious stance. As always it is important to remember that a well balanced portfolio will be able to absorb corrections in asset classes. Dividends should continue to provide stable and predictable income going forward.

- AG

Filed under: Quarterly Reports

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 épargnants.

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.

 

First Quarter 2011

May 9, 2011 • Print This Article

The Markets

The ability of equity markets to absorb a litany of bad news has been remarkable. The price of oil and precious metals responded to political, economic events and natural disasters by rallying to multi year highs. However, increases in the share price of companies drilling and extracting remained muted. There was no broad weakness in North American markets as might have been anticipated. It appears investors were focusing on the domestic economy and on corporate earnings, both of which appear to be growing above expectations. The Canadian dollar remains strong based on commodity strength. Canada remains in a good position as we face a great deal of attention on our resources and strong banking system.

Both the S&P 500 and TSX/S&P indexes advanced by over 5% (unadjusted for currency) over the quarter.

It has been a quarter of turbulence. The Mid East and Northern Africa have seen Tunisia and Egypt's governments fall, and civil war broke out in Libya. Protests also began in Yemen, Syria, and Bahrain. It is still unclear what the new "democracies" will look like, or even if they will be democracies. The relationships between the new governments and the western countries are still unclear. It is also uncertain whether the unrest can be contained or will inevitably spread to Saudi Arabia. The situation has had a clear impact on oil prices.

The earthquake and Tsunami hitting Japan and the resulting damage to the Fukushima Dai-ichi nuclear plant will have lasting ramifications. The shares of uranium producers immediately traded lower as the long term risks inherent in nuclear power were clearly demonstrated. The long term damage to Japans infrastructure will impact global manufacturing as many parts are sourced from Japan for a wide range of products from electronics to automobiles.

The European sovereign debt crisis continues. Bailout support for Greece, Ireland and recently Portugal, has caused major political rifts and could eventually cause a reassessment of the EU. In time, a debt restructuring is possible in Greece and Ireland.

A longer term concern for the global economy is inflation. With inflation running at 5.7% and GDP growth of almost 10%, China is attempting to slow its economy by raising interest rates and tightening lending standards. Loose fiscal policy in the United States, required to combat the recession, has resulted in a steady devaluation of the US Dollar. The combination of demand from a rapidly expanding China and US Dollar devaluation has resulted in the price of many commodities (energy, metals, food) being either at, or near, record levels.

Corporations have been able to mask the impact of higher input costs by increasing efficiency (lay offs, concessions, rehiring contract and part time workers instead of full time, closing union shops and opening non-union plants paying a fraction of the wages, etc.). This has lead to robust corporate profitability. However, wage and labour efficiency can only be pushed so far. Eventually companies will be forced to rehire and wage push inflation is a distinct possibility.

Anticipation of future inflationary pressure continues to impact the bond market which declined modestly in the quarter. This is the second consecutive quarter with lower bond prices.

Inflation, long kept at bay through cost cutting, may start to accelerate as companies have run out of ways to further trim budgets. Increased corporate input costs will eventually result in higher consumer prices. As inflation heads higher, governments will be under greater pressure to raise interest rates. In Canada, it is anticipated that the Bank of Canada will begin a series of interest rate increases later this year. Banks and other lenders have begun to increase borrowing rates on mortgages and other loans in anticipation.

Equity markets have been trading steadily higher. Predictions of continued GDP growth, higher corporate earnings and diminished potential of a double dip recession have offset a continuous stream of negativity from abroad. It is important to note that equities have climbed from the March 2008 lows without a substantial correction. Although corrections are unsettling they are essential for the overall health of the market. Corporate earnings cannot continue to grow exponentially and growth must in time slow down. As we move forward it is becoming more apparent that we are in the midst of a business cycle that is becoming less erratic and more conventional.

The obvious beneficiaries of the first quarter were oil and gas, agriculture and mining and it is likely that after some correctional activity, commodities will be an important part of a portfolio. Insurance companies should benefit from higher interest rates as they will get improved premium spreads. Banks should be able to pass on higher costs to consumers. Grocery chains and food processors might suffer from margin squeeze as they find it more difficult to pass on costs. Pipelines should be able to pass on costs but regulated power utilities may face some downward pressure. Bonds and debentures, especially those with longer durations, should decline in value as interest rates rise. Some interest sensitive utilities, some former Trusts and some REITS may come under pressure as well.

As always it is important to remember that a well balanced portfolio will be able to absorb corrections in asset classes. Dividends should continue to provide stable and predictable income going forward.

Filed under: Quarterly Reports

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 épargnants.

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.

 

Third Quarter 2010

October 8, 2010 • Print This Article

Canada continues to be in a relatively good position.

  • Canadian stimulus measures were moderate.
  • Funding went into needed infrastructure which may have future economic benefit.
  • The Canadian deficit appears to be manageable and it is anticipated that the books will be balanced, at least at the federal level, in 2015.
  • Interest rates will continue to remain historically low.
  • Exports of materials required by the expanding developing world should help offset stagnation of activity with our largest trading partner.

In 3Q10 there was a strong recovery in equity markets on both sides of the border. Equities that were heavily sold during the recessionary contraction have performed strongly. Growth stocks outperformed interest sensitive issues by a wide margin this quarter. We believe growth stocks played catch up.

When compared to the United States, Canada's relative fiscal, financial and trade advantages should provide continued strength in the Canadian Dollar. Canadian bond markets should be supported by low yields and anticipated quantitative easing south of the border. Canadian equity markets should continue to perform relatively well with financials, utilities and resource stocks leading the way.

Individuals, pension funds and institutions are beginning to chase yield, realizing that interest rates may remain low in the near term. Given that interest rates on 10 year Government of Canada bonds are below 2.75%, the purchasing power of future interest payments and principal on maturity may be reduced by even moderate inflation. Individuals nearing retirement will be looking to higher yields in dividend paying equities. Canadian banks and utilities, income trusts and selected energy companies are currently paying dividend yields well above the Government bond yields. We believe interest sensitive common equity issues should outperform as the hunt for yield continues.

Investors on both sides of the border are realizing that economic expansion may not be robust. We see this as a good thing and believe it may take an extended period of relative stability to heal the imbalances that were created by the collapse of the U.S. sub-prime mortgage market. Banks in the U.S. are currently able to borrow money for little to no interest and loan it at historically high spreads, creating cash flow and profit, allowing repayment of bailout funding. It could take many years to unwind the overhang in foreclosed homes and to repair the balance sheets of a generation of American consumers.

As emerging markets face the challenge of controlling growth and keeping inflation in check, interest rates may rise as they attempt to contain potential asset bubbles by tightening money supply and imposing higher lending standards. Exports to North America and Europe are being supplanted by growth in regional and domestic trade. Canada should be well situated to take advantage the low U.S. interest rate policy and expanding demand for the materials in the developing world.

Filed under: Quarterly Reports

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 épargnants.

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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