The global economy is behaving reasonably well

Comments

Most markets have moved up nicely in the first 3 months of 2006. Resources and metals continue to lead the bandwagon with oil prices breaking above US$ 70.00 a barrel and gold above US$ 600.00 an ounce, a level not seen since 1981.

The following table summarizes the price performance of the main indices for the first quarter of 2006.

  First Quarter
  In local Currency In Canadian Dollars
S&P/TSX (Cnd) +7.44% +7.44%
S&P 500 (U.S.) +3.73% +4.31%
Nasdaq (U.S.) +6.10% +6.70%
Europe (Euro) +8.80% +11.89%
Nikkei (Japan) +5.89% +6.46%

The global economy is behaving reasonably well. Asia keeps moving forward at a scary pace, with China’s GDP growth topping 10% in the first quarter of the year. The US GDP growth rate is expected to be around 4% with Canada’s not too far behind.

The Loonie has been fairly stable at around US$ 0.86 – 0.87 and we think it will stay there for the foreseeable future. While the Canadian economy is benefiting from rising resource prices, the strength of our Dollar is decimating our manufacturing industry. This phenomenon is better portrayed by the employment report last February showing what we would call the “East-West divide”: Alberta and B.C. accounted for most of the employment gains whereas Ontario and Quebec continued to struggle to create jobs.


As money managers, a good portion of our time is spent reading and we do read a lot – basically everything in sight. At every year end, we reprint excerpts and comments from other people that we think are worthwhile mentioning regarding a multitude of topics, be it financial markets, mass psychology or any other business matters.

We believe we have learned a lot through these readings and we would like to share some with you. As Michel de Montaigne says so well: “ I quote others in order to better express myself “.

For those who read this quarterly letter “religiously”, you have probably noticed that our section of quotes was missing in the last letter. So, with our apology, here it is:

General Worldly Wisdom

  • “ Patience is the companion of wisdom”. (Saint Augustine).

  • “ Failures are like skinned knees, painful but superficial”. (Ross Perot).

  • “ It is better to know some of the questions than all of the answers”. (James Thurber).

Portfolio management and investment strategy

  • “ Our goal is to construct portfolios that have the potential to outperform the market over an investment time horizon of 3 to 5 years without assuming undue risk. If we achieve that goal, we believe we will be doing our job, whether we beat the market each and every year or not.” (Bill Miller).

  • “ …You can’t do something every day. You can learn every day, but you can’t act every day…”. (Warren Buffett).

Regarding forecasting

  • “ If you’re in the forecasting business, you’d better forecast often.” (anonymous).

  • “…There is always a list of reasons why the country will have problems tomorrow. But there is always a list of opportunities, which don’t get mentioned quite as often. So we don’t sit down and make a list of the bad things that are happening in the economy and the good things that are happening – and, therefore forecast the stock market. Such forecasts will often fail, even if you correctly forecast some of the bad things or good things.” (Warren Buffett).

Regarding GM and Ford’s pension problems

  • “…Back in the ‘60s, you did not have to account for pensions on an accrued basis. And up ‘til the early ‘90s, you didn’t have to account for healthcare on an accrued basis. So people said: “Well, if we don’t have to count it, it isn’t real”…It is a terrible mistake for managers to think in terms of accounting numbers than reality. “…Just because it hasn’t happened yet doesn’t mean that the problem isn’t real. If you jump out of a window on the 42nd floor and you’re still doing fine on the way down when you pass the 20th floor, it doesn’t mean that you don’t have a serious problem.” (Charlie Munger).

Regarding derivative contracts [known as a zero-sum game because it is a transfer of risk from one party to another]

  • “ …It’s always fascinated me how people are able to write a derivative contract – and on both sides of it, the trader will show a profit by the end of the month…“ …If you can have a $5 billion mismark in one direction, while at the same time the other one has a $9 billion mismark in the other direction, I would say we’ve come a long way from Jimmy Stewart in “It’s a Wonderful Life”. (Warren Buffett).

Claret Asset Management