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First Quarter 2009 Report

April 22, 2009 • Print This Article

First Quarter 2009

The Markets

We believe that, in time, equity markets will recover. The US Dollar burdened by huge deficits should decline in value leading to inflation, higher commodity prices and an environment where the Canadian Dollar and Canadian equities should perform well. In addition, supply destruction in a wide range of basic commodities could lead to much higher pricing once economies start to turn higher benefiting resource rich Canada.

Economic leadership may switch away from the US to China as any rebound in US economic growth will be hampered by the need to service debt. Canada is in much better fiscal shape then our Southern neighbours. Canada controls much of the global reserves of recoverable oil. The country is rich with precious metals, base metals and agricultural products that the world will require. Our financial service companies appear to be relatively strong compaired to major US and European financial institutions. Canadian banks and insurers are positioned to be strategic acquirers of distressed assets.

There are initial indications that economic indicators may be starting to stabilize. Debt spreads are starting to narrow somewhat as credit is beginning to unfreeze. There has been some restocking by China of iron ore and copper leading into a bounce in the prices of the underlying commodities from extremely depressed levels. Housing prices and purchasing activity in the US have stopped falling on a month over month period. Infrastructure spending announcements are starting to trickle out although most contracts have yet to be awarded and money has yet to be spent.

However, there is still much damage that has to be worked through. Chrysler is being taken over by Fiat, GM is hovering on the edge of Chapter 11 and of the "Big Three" only Ford appears to be viable. The ripple effect on parts makers, unemployment, housing, etc. have yet to be fully realized and will act as a break to any meaningful recovery. The major US financial companies are still awash in toxic debt and have taken major balance sheet hits. They will be constrained from making credit available. In addition, credit card defaults are increasing and many issuers are cutting back credit lines. The US consumer is becoming a net saver and cannot be counted on to lead an economic recovery.

The depth of the current Bear Market may have been reached on March 3, 2009. The S&P 500 closed the day at 666 and bounced back to close the quarter at 797.87. Even with the rally, the S&P 500 fell 11.67% in the quarter and 39.68% in the 12 months ending March 31. As equity markets around the world have declined, there has been a flight to perceived safety.

The US Dollar has been a prime beneficiary and has been remarkably strong even though US deficits have become bloated with bail-out and infrastructure spending. It is interesting to note that days where the equity markets fall the US Dollar strengthens and days where equity markets rise the US Dollar tends to fall in value relative to other currencies. The rise of the US Dollar has somewhat offset the impact of falling US equity markets for foreign buyers. For example, in the one year period the S&P Index fell 39.68%, but only 16.73% in Canadian Dollars when adjusted for currency fluctuation.

Economic recovery may well be subdued in North America and Europe as Government stimulus is offset by corporate and consumer restraint. Although we may have touched bottom March 3rd, the current rally may not continue at the current pace. A significant pullback may occur in the near term. Technically this would be healthy and could be the precursor to a sustained rally.

Strategy

Although we believe that markets may be unstable and volatile and the market bottom may be tested, we believe the recovery process has begun. Too much money is being pumped in through stimulus spending over the next 3-6 months not to have an impact. We believe that the US Dollar should decline as stability returns and the flight to perceived safety moderates. Canada should be a net beneficiary of recovery and infrastructure spending.

Canadian financial service companies appear to be able to maintain dividends on common shares and may be able to benefit as aquisitors of prime assets being sold by less solvent foreign competitors. The proposed sale of the I-Shares franchise by Barclay's Bank may be the first of many dispositions by cash starved international financial service companies needing to prop up balance sheets.

Canadian oil and gas companies may benefit from higher energy prices as economies recover and the cuts to conventional drilling budgets and the delay of mega-projects in the oil sands, deep water and frontier basins lead to a shortage of new supply. The amalgamation of Suncor and PetroCanada creates a protected made in Canada senior producer that can compete with the multinationals.

Eventually manufacturing rates should pick up as production levels are currently running below replacement levels across a wide range of industries as companies unload inventories. A cycle of inventory rebuilding should begin and may have already started with recent developments in China. This should be supportive of coal, copper, nickel, iron and other base metals.

We continue to stick with quality, dividend paying common shares. We wait and anticipate better times ahead.

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 ├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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