Commentary

15 Oct 2015

Market Overview

It was a very difficult quarter for Canadian equities, as the TSX fell into correction territory. Bearish sentiment reached an extreme level as the ‘sell Canada’ theme was quite evident.

While government banks outperformed, equities underperformed as commodities got slammed. The Canadian dollar dropped to a decade-low during the quarter. The economy echoed the markets, as bearish growth forecasts kept being released, to the point where the ‘R-word’ (recession) crept into the conversation. On the energy front, ‘lower for longer’ is becoming the consensus.

15 Oct 2015

Market Overview

It was a very difficult quarter for Canadian equities, as the TSX fell into correction territory. Bearish sentiment reached an extreme level as the ‘sell Canada’ theme was quite evident.

While government banks outperformed, equities underperformed as commodities got slammed. The Canadian dollar dropped to a decade-low during the quarter. The economy echoed the markets, as bearish growth forecasts kept being released, to the point where the ‘R-word’ (recession) crept into the conversation. On the energy front, ‘lower for longer’ is becoming the consensus.

1 Jul 2015

Market Overview

Over the first half of the year, the underlying weakness of commodities was not unexpected, but another market segment was also surprisingly weak: Canadian banks. The Canadian Bank Index has had a negative total return of -350 basis points (bps), which is approximately 440 bps below the broader market’s total return. Since 1970, the Bank Index has underperformed the S&P TSX Composite Index in the first half of the year 22 times, and 11 of those times, it has gone on to outperform on a full year basis

1 Jul 2015

Market Overview

Macroeconomic events have preoccupied markets for the past several months. At the end of the quarter, we saw another chapter added to the Greek debt drama and then, it was followed by a scare in China. It seems economic growth fears are mounting with the impact of the rout in stocks. In an unprecedented move to stabilize markets, Chinese authorities imposed trading halts on half the stocks in the A-listed shares, curbed short selling, and banned stock sales by major shareholders.

1 Jul 2015

Market Overview

During the second quarter, markets were challenged by various forces at play in the bond market: fear of rising interest rates and the timing of the first rate hike by the U.S. Federal Reserve, and the demand for safety amid concerns about the potential default by Greece and the ensuing crisis. Rate fears won out as the 10-Year U.S. Treasury yield moved from 1.92% at the beginning of the quarter to a low of 1.84% during the first week, before rising to a high of 2.49% in early June and ending the quarter at 2.35%. Over this period, markets were extremely volatile as investors reacted to Greece headlines, stronger than expected payroll numbers and a modest recovery in the price of oil. Economic data rebounded from a weak first quarter, leading interest rates higher in the face of concerns in Europe.

1 Jul 2015

Market Overview

Over the first half of the year, the underlying weakness of commodities was not unexpected, but another market segment was also surprisingly weak: Canadian banks. The Canadian Bank Index has had a negative total return of -350 basis points (bps), which is approximately 440 bps below the broader market’s total return. Since 1970, the Bank Index has underperformed the S&P TSX Composite Index in the first half of the year 22 times, and 11 of those times, it has gone on to outperform on a full year basis.

1 Jul 2015

Market Overview

Macroeconomic events have preoccupied markets for the past several months. At the end of the quarter, we saw another chapter added to the Greek debt drama and then, it was followed by a scare in China. It seems economic growth fears are mounting with the impact of the rout in stocks. In an unprecedented move to stabilize markets, Chinese authorities imposed trading halts on half the stocks in the A-listed shares, curbed short selling, and banned stock sales by major shareholders.

1 Jul 2015

Market Overview

For the second quarter of 2015, master limited partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), were down 7.5% on a price basis and down 6.1% on a total return basis, or including the impact of distributions or dividends. Midstream MLPs, as measured by the Alerian MLP Infrastructure Index (AMZI), fell 7.5% on a price basis and lost 6.2% on a total return basis. For context, the broader market, as measured by the S&P 500, returned 0.2% on a price basis or 0.3% on a total return basis.

The energy sector experienced significant weakness over the last month of the quarter as the crude price recovery began to stall and crude oil futures prices began to exhibit weakness.

1 Jul 2015

Energy Overview

North American stocks traded lower during the second quarter. In the U.S., the S&P 500 Index was down -0.2%, led by the interest rate sensitive utilities group, which dropped -6.7%, and the energy sector, down -2.6%. It was a similar story in Canada, as the S&P/TSX Composite Index gave up -2.3%, with weakness led by the industrials (-9.8%), utilities (-8.7%), and energy (-5.2%) sectors.

While capital markets continued to discount some of the weather-related weak economic numbers reported during the period, markets did begin to incorporate the probabilities of U.S. Federal Reserve interest rate hikes. And while some U.S. economic statistics were somewhat subdued, employment growth and—importantly—wage gains began supporting the higher interest rate views, adding volatility to the fixed income and interest-sensitive stock groups.

10 Jun 2015

Innovation & Technology Commentary
by Frank Mersch, CIO & Senior Portfolio Manager

It’s been about 30 years since the internet became mainstream. Only 3% of U.S. households were online back then, averaging less than one hour of usage per week. No one thought about communicating, transacting or information-gathering back then. Online services were pricey, slow and complicated. It was actually illegal for commercial entities to connect to the internet until 1991.

1 Apr 2015

Market Overview

For the first quarter of 2015, MLPs, as measured by the Alerian MLP Index (“AMZ”), were down 6.6% on a price basis and down 5.2% once distributions or dividends are considered. Midstream MLPs, as measured by the Alerian MLP Infrastructure Index (“AMZI”), fell 6.5% on a price basis and lost 5.1% on a total return basis. For context, the broader market, as measured by the S&P 500 Index, provided a return of 1.0% with price performance contributing 0.4%.

1 Apr 2015

Market Overview

The U.S. capital markets have received a dose of reality so far this year, primarily because of two major events: weakness in commodities and U.S. dollar strength. After six years of mostly positive performance, stocks and the economy have taken a breather, which is healthy.
We believe both to be temporary.

Looking at the U.S. economy over the last few months, we saw a few of the following indicators roll over:

1 Apr 2015

Market Overview

While U.S. economic growth is becoming more entrenched, Canadian fundamentals continue to be inconsistent. The highlight—or lowlight—for the past quarter was a surprise rate cut announcement from the Bank of Canada (BoC). This move sealed the downward spiral of the Canadian dollar. The weakness in oil prices caused the Bank of Canada to surprise the market. The BoC Governor painted a gloomy picture and emphasized that he wanted to get ahead of the curve. It is still early days but we are already seeing pronounced weakness in the Alberta economy. The question is; how will it translate to the rest of Canada.

1 Apr 2015

Energy Overview

The drubbing of the Energy Sector in the latter half of 2014 that witnessed oil prices drop a staggering $40/bbl led many to wish for a fresh start in 2015. Action in the commodity and related equities in the first quarter of 2015 reminded us of an old saying: “Be careful of what you wish for!” After registering one of the sharpest declines over a 3 month period in Q4 last year, WTI action began the New Year where it had left off—lower.

Oil dropped a further 11% in Q1 2015, closing the quarter at U.S. $47.60/bbl.

The energy industry’s response to lower prices shifted from aggressive to harsh. Rig utilization in North America has declined well over 50% from their levels last summer.

1 Apr 2015

Market Overview

While U.S. economic growth is becoming more entrenched, Canadian fundamentals continue to be inconsistent. The highlight—or lowlight—for the past quarter was a surprise rate cut announcement from the Bank of Canada (BoC). This move sealed the downward spiral of the Canadian dollar. The weakness in oil prices caused the Bank of Canada to surprise the market. The BoC Governor painted a gloomy picture and emphasized that he wanted to get ahead of the curve. It is still early days but we are already seeing pronounced weakness in the Alberta economy. The question is; how will it translate to the rest of Canada.

1 Apr 2015

Market Overview

The U.S. capital markets have received a dose of reality so far this year, primarily because of two major events: weakness in commodities and U.S. dollar strength. After six years of mostly positive performance, stocks and the economy have taken a breather, which is healthy.
We believe both to be temporary.

Looking at the U.S. economy over the last few months, we saw a few of the following indicators roll over:

1 Jan 2015

Market Overview

For the fourth quarter of 2014, MLPs, as measured by the Alerian MLP Index (“AMZ”), were down 13.5% on a price basis and down 12.3% once distributions or dividends are considered. Midstream MLPs, as measured by the Alerian MLP Infrastructure Index (“AMZI”), fell 11.5% on a price basis and lost 10.3% on a total return basis. For context, the broader market, as measured by the S&P 500, provided a return of 4.9% with price performance contributing 4.4%. As a result, for the year-ended December 31, 2014, the AMZ and the AMZI generated total returns of 4.8% and 7.6%, respectively, compared to the S&P 500’s 13.7% return.

1 Jan 2015

Energy Overview

The energy price weakness that began in Q3 of last year continued on in the fourth quarter, but with greater intensity. The West Texas Intermediate price gave up a whopping $45 / barrel in the quarter, registering one of the sharpest declines over a three-month period on record. The collapse in energy prices has left much carnage in its wake. Share prices of energy companies worldwide fell precipitously. Bond prices of energy issuers also felt the pain, particularly of the heavily indebted companies. The carnage extended well beyond the energy companies, to the energy nations that are heavily reliant on the energy sector to fund their budgets.

1 Jan 2015

Market Overview

From the start of 2014, the S&P/TSX Composite Index went up pretty much in a straight line for the entire year, until the end of August. At that point most Canadian funds pretty well hit their peaks for the year. Beginning in September, the market entered a period of greater volatility. In fact, with only nine and half trading days left, it appeared the market would be down on the year. Thankfully, Santa did come, and a rally ensued, ensuring that 2014 would end with an almost double-digit return.

1 Jan 2015

Market Overview

From the start of 2014, the S&P/TSX Composite Index went up pretty much in a straight line for the entire year, until the end of August. At that point most Canadian funds pretty well hit their peaks for the year. Beginning in September, the market entered a period of greater volatility. In fact, with only nine and half trading days left, it appeared the market would be down on the year. Thankfully, Santa did come, and a rally ensued, ensuring that 2014 would end with an almost double-digit return.

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Disclaimer:

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.

These views may not be relied upon as investment advice and, because investment decisions are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of Front Street Capital. Any discussion of any of the funds’ holdings are as of the podcast interview date, and are subject to change.

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.