Commentary

Frank Mersch

31 Mar 2017

For the quarter the fund generated a return of 1.25% and while it slightly trailed the TSX (+1.70%) overall we are reasonably happy with this return given the weakness of the energy sector. During the quarter the energy sector was down 6.29%; in fact when one looks at medium cap and small cap energy names they underperformed the group. Names such as Crew (- 34%), Seven Generations -22.4%, Torque – 17.4%, Whitecap – 14.9% etc. were just a few names that underperformed. Even the pipeline stocks were down in the quarter.

31 Mar 2017
Market Overview: Equities

The S&P remains near record highs despite a modest pull back most recently. The only period when stocks were more expensive was during the days of the dotcom bubble.

On a historical basis, it is hard to argue that equities are anything other than expensive. However given the fact we see no systematic risk factors today, we believe they will remain expensive and likely get more expensive based on traditional methods.

15 Oct 2016

Market Overview

Equities climbed during the third quarter of 2016, despite the U.K’s vote to exit the European Union, weak global economic data and uncertainty from the Federal Reserve.

15 Oct 2016

Market Overview

Equities climbed during the third quarter of 2016, despite the U.K’s vote to exit the European Union, weak global economic data and uncertainty from the Federal Reserve.

14 Oct 2016

Market Overview

For the quarter ending September 30, 2016, the S&P/TSX Composite Index was up +4.7%, led by the consumer staples, consumer discretionary, industrials and energy sectors (IT strong as well, but it is a small group). It was perhaps a surprising result given the U.K.’s vote to exit the European Union, weak global economic data and uncertainty from the U.S. Federal Reserve. A long-awaited interest rate hike was previously proposed in September and now appears to be pushed out to December.

1 Oct 2016

Market Overview

Strong capital markets took most investors by surprise in the third quarter with both the U.S. markets (S&P 500 +3.85%) and Canadian (S&P/TSX +5.45%) powering higher. Given the events at the end of June (BREXIT), ongoing global macro risks, and the Fed beginning to signal higher rates, one would have expected a negative reaction with increasing volatility. In fact, the opposite has occurred as markets moved higher in relative uniformity while volatility probed new lows.

1 Jul 2016

Market Overview

The Canadian market continued its outperformance in the quarter. Momentum continues to pull the market higher. The strength has come from resource cyclicals as we have seen the stabilization of energy, and rebound in basic materials. With all the noise around the world, gold has once again become a safe haven. Certainly with over 20 trillion dollars trading at negative yields, gold becomes even more compelling.

1 Jul 2016

About Brexit

Welcome to the summer of 2016. The violently flat paradigm that the U.S. and, to a lesser degree, global markets have been stuck in for the past two years, continues following the U.K.’s vote to exit the European Union (“Brexit”). Brexit perplexity, an enigmatic U.S. Federal Reserve Board and U.S. presidential theatrics are scaring investors away from the facts once again. Yet, with all this uncertainty, we are very close to new highs. To be sure, these are confusing times, with many negatives including Brexit, negative interest rates, Trump uncertainties, protectionism, immigration, U.K. recession risk, ISIS, employment rates, Middle East instability, central banks out of ammunition, high frequency trading, ETF’s and China risks, etc.

1 Jul 2016

Market Overview

The S&P 500 has rebounded from the uncertainty caused by the U.K.’s vote to exit the European Union (“Brexit”), reinstating stocks as the more attractive risk/reward value over bonds. With central bank supported rotation into risk assets—likely due to continued stimulative actions and expectations of better growth in later 2016/17—we have overcome some of the concern that plagued market sentiment over the third quarter.

1 Jul 2016

About Brexit

Welcome to the summer of 2016. The violently flat paradigm that the U.S. and, to a lesser degree, global markets have been stuck in for the past two years, continues following the U.K.’s vote to exit the European Union (“Brexit”). Brexit perplexity, an enigmatic U.S. Federal Reserve Board and U.S. presidential theatrics are scaring investors away from the facts once again. Yet, with all this uncertainty, we are very close to new highs. To be sure, these are confusing times, with many negatives including Brexit, negative interest rates, Trump uncertainties, protectionism, immigration, U.K. recession risk, ISIS, employment rates, Middle East instability, central banks out of ammunition, high frequency trading, ETF’s and China risks, etc.

1 Apr 2016

Market Overview

After underperforming the U.S. for five consecutive years, the Canadian market is finally starting to outperform… at least for now. While pessimism towards both Canadian equities and the economy is still quite pervasive, we believe that we may have seen a bottoming out on a handful of commodities, which typically bodes well for Canada. Any positive news from emerging markets, Europe or commodities will likely provide positive momentum for Canadian stocks as well.

1 Apr 2016

Market Overview

To say that U.S. stock market performance has been volatile and disappointing during the early part of 2016 would be an understatement. The main culprit seems to be ongoing weakness in commodity prices and emerging markets performance. While these challenges are not new, for some reason both investors and the Fed were spooked.

1 Apr 2016

Market Overview

After underperforming the U.S. for five consecutive years, the Canadian market is finally starting to outperform… at least for now. While pessimism towards both Canadian equities and the economy is still quite pervasive, we believe that we may have seen a bottoming out on a handful of commodities, which typically bodes well for Canada. Any positive news from emerging markets, Europe or commodities will likely provide positive momentum for Canadian stocks as well.

1 Apr 2016

Market Overview

To say that U.S. stock market performance has been volatile and disappointing during the early part of 2016 would be an understatement. The main culprit seems to be ongoing weakness in commodity prices and emerging markets performance. While these challenges are not new, for some reason both investors and the Fed were spooked.

1 Jan 2016

Market Overview

As we start the new year, we advise sticking with 2015’s leading sectors and stocks. We believe the Fed will take a dovish interest-rate path, which should extend the current equity cycle... However, we do believe that higher rates will increase volatility and thus, increase the range of returns for the S&P 500 in 2016.

31 Dec 2015

Market Overview

As we start the new year, we advise sticking with 2015’s leading sectors and stocks. We believe the Fed will take a dovish interest-rate path, which should extend the current equity cycle. While rising rates historically portend lower equity returns, initially it makes little difference to equity fundamentals, as average debt duration of S&P companies is 9.9 years, and 85% of companies have fixed debt. However, we do believe that higher rates will increase volatility and thus, increase the range of returns for the S&P 500 in 2016.

31 Dec 2015

Market Overview

It is not with any regret that we say goodbye to 2015. It was a very tough year for the Canadian stock market. The S&P/TSX Composite Index dropped -11.1% for the year. Top performing sectors were information technology (+14.8%) and consumer staples (+11.0%), the only two sectors that registered a gain. The worst performers were the energy (-25.7%), materials (-22.8%) and health care (-15.8%) sectors.

31 Dec 2015

Market Overview

It is not with any regret that we say goodbye to 2015. It was a very tough year for the Canadian stock market.

16 Oct 2015

Market Overview

Over the last six years, doubt and fear have seemed to always be just around the corner. So-called experts and media talking heads continue to prognosticate the market’s imminent demise. As such, we continue to believe that the recent weakness and volatility is nothing more than a normal part of a healthy bull market. More importantly, when we look at North American markets, we see no change in economic conditions over the last few months, the last year or, for that matter, the last three years.

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The opinions expressed herein reflect those of the individual portfolio manager. These opinions are subject to change at any time based on market or other conditions, and Front Street Capital disclaims any responsibility to update such views. These opinions may differ from those of other portfolio managers or of Front Street Capital as a whole.

These views are for informational purposes only and are not intended to be a forecast of future events, a guarantee of future results or investment advice. All data referenced herein are from sources deemed to be reliable but cannot be guaranteed.

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If specific securities are referenced, they have been selected by the portfolio manager on an objective basis to illustrate the views expressed herein. Such references do not include all material information about such securities, including risks, and are not intended to be recommendations to take any action with respect to such securities. Referenced securities may not be representative of the portfolio manager's current or future investments and are subject to change at any time.