Still in the midst of a bear market…

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Half the year has gone by and we are still in the midst of the only recognized bear market of the 90’s. However, the second quarter has seen stock markets performing better:

INDEX IN LOCAL CURRENCY IN CANADIAN $
TSE-300 +2.1% +2.1%
S&P 500 (U.S.) +5.9% -1.8%
Nasdaq (U.S.) +17.5% +13.0%
Bloomberg Europe +6.1% -1.79%
Nikkei (Japan) -0.2% -3.5%

The technology sector has rebounded from its depressed level but it is still far from the euphoria of the last quarter of 2000.

Long-term interest rates have inched up a bit during the quarter but short-term rates (reflected by the Fed Fund Rate) have gone down 22.3% (from 5.29% to 4.11%) and, they are still going down. Since the beginning of the year interest rates have dropped just as we expected.

One observation from the table above is the strength of the Canadian dollar. It went from $1.5715 to $1.5225 during this quarter, and has weakened since trading at around $1.54. The Euro continues its disastrous descent to end the quarter at $0.849. An anecdote that we picked up in our readings will help explain the Euro’s problem: « On May 11, eleven bricklayers in Milan completed 11 years on full pay doing absolutely nothing» reports the Guardian … «They sit playing cards and drinking coffee on a half finished building site after the builder who employed the men forgot to dismiss them when the site was condemned. Now, under Italian law, they cannot be sacked without a union agreement ».

Oil prices are basically unchanged at around US$26.00. As we said in the last quarter, oil prices will not bide well if the economy continues to weaken. Besides, there is a tremendous amount of refined gas supplies coming on stream in 2002 and 2003. All in all, we are not bullish on the sector.

Please refer to the portfolio valuation in the next section of the report for a complete list of securities you own. You will find a transaction report that includes descriptions of selected securities that have been purchased.


It is always darkest before dawn. This phrase best describes the current situation in the stock market. Following the burst of the technology bubble, a malaise has been slowly spreading to the different sectors of the economy to the point that Mr. Alan Greenspan, the powerful Federal Reserve Board Chairman and a fanatic anti-inflation fighter, decided to slash interest rates six times in a row, and added, that if need be, there would be more cuts to come.

Staying too bearish at this juncture is equivalent to « fighting the Fed » which we have always strongly sounded against. History has taught us that whenever interest rates fall by this magnitude, stock markets are about to turn around and put up a powerful rally - although to pinpoint the exact timing is difficult. Then again, we would rather be vaguely right than exactly wrong.

Timing the market is more an ego-enhancing exercise than a moneymaking one. Having a good methodology and applying it with good discipline allows us to read and to take the analysts’ recommendations « with a big grain of salt ».

Forbes recently published some very interesting statistics regarding Wall Street’s analysts (working for brokerage houses). A study examined 160,000 ratings on 9,600 companies over 15 years. For example, if you bought stocks in 2000 that these analysts were pushing, you would have lost 42%. However, if you bought stocks not recommended by those same analysts, (i.e. « hold » they seldom recommend selling due to the undermining relationship between their employer and the companies they cover), you would have gained +23%!!!!!

During the last several quarters, our model has guided us toward stocks that are overlooked by Wall Street. For example, we have recently increased our holdings in Nortel. Note: when Nortel was above $100 everybody recommended a « buy » with a target of $150. Now that it is trading at $12.00 nobody wants it.

A question that is often raised regarding the Canadian dollar over international investing, is the following: “Taking into account the recent strength and the strong fundamentals of our Canadian dollar, would it be worthwhile to keep looking at non-Canadian investments?” Our answer has always been and continues to be the same; we are trying to buy companies that have financial strength with good upside potential that are mispriced by the market-- where ever they are. The exchange impact will become secondary if we do our job well. However, for clients who are income oriented, we will avoid exposing that portion to exchange fluctuation and stay within Canadian denominated fixed income securities.

As to the future, we are fairly optimistic for 2002 and 2003, but for now we still emphasize caution and prudence. Our model keeps us disciplined in our stock selection process in order to avoid, above all, bad surprises.

The Claret Team