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July 2004 Newsletter
Thursday, July 01, 2004
"An economist is like a cross-eyed javelin thrower, they are seldom accurate but they keep the crowd's attention"
- Anonymous
Dear Investors,
The North American stock markets have a lot to chew on at present, rising rates, elections, Iraq, economy. Both in the US and Canada, the markets rose moderately over the month, less than 2% in both cases .The recent early turnover of power in Iraq and the 1/4 point rise in the Fed Funds Rate has had little effect. This is the first rise in the Fed Funds Rate in four years and bear in mind, when the Fed changes direction they always do more than one move in rates. In Canada, the fact of a minority government was not big enough news to move the market.
New Home Sales in the US rebounded in May, up 14.8% for the month. We think the rise was fueled by fence sitters jumping in before the Fed raises interest rates, and strong demand in the second home market influenced by the same reason. Remember that mortgage interest in the US is tax deductible for up to two houses and/or $1 million of mortgage debt. (If it has a bathroom, it is considered a house; therefore, RVs and boats etc are second homes)
Durable Goods Orders in the US (goods lasting more than three years) fell, for the second month, by 1.6% surprising many economists, who forecasted a rise of 1.4%. Consumer sentiment rose 5.0% to 95.2%, surprising economists, who expected a modest 0.3% increase. US Industrial Output was up 1.1%and Capacity Utilization rose to 77.8% from 77.1%, the highest level in three years. Economists were expecting increases of 0.8% and 0.3% respectively.
Once again economists were surprised by the rise in the Producer Price Index (PPI) of 0.8% in May, the largest monthly increase in over a year. The Core PPI (excluding food and energy) rose 0.3%. Most forecasts were 0.6% and 0.2% rise respectively. The US Commerce Department reported consumer spending rose 1% in May, the largest increase since October, 2001.
This commentary is not meant as a slight to economists, but as an example of how uncertain things are at present.
US PORTFOLIO HIGHLIGHTS
The Van Arbor US Advantage Fund (US Fund) was down marginally over the month. Since inception, the US Fund has generated a 3.68% return. Big contributors to the performance are HarleyDavidson (HDI:NYSE) having generated a 13% return and Pulte Homes (PHM:NYSE) up 11%. Last month's biggest underperformer, Medtronics Inc. (MDT:NYSE) has displayed a positive run of 3% lately. Another event was a 2 for 1 stock split by CR Bard (BCR:NYSE). We are monitoring Commerce Bancorp Inc. NewJersey (CBH:NYSE) closely as two of the bank's executives have been indicted in an ongoing investigation in Philadelphia. Our methodology generated a sell signal for NY Bancorp (NYB:NYSE), and NYB was replaced with Dentsply International (XRAY:NYSE), a distributor and manufacturer of dental equipment, which is currently one of the top ranked stocks in the US Fund.
CANADIAN PORTFOLIO HIGHLIGHTS
During the month, the Van Arbor Canadian Advantage Fund (Canadian Fund) has shown a small increase. In the last four weeks, numerous companies in the Canadian Fund have reported healthy earnings while others have reported acquisitions. For example, Petro-Canada (PCA:TSX) has entered into an agreement to purchase all of the outstanding shares of Prima Energy Corporation (PENG:NASDAQ), while Jean Coutu Group (PJC.A:TSX) is planning to sell additional common stock to finance its purchase of 1500 Eckerd pharmacies from J.C. Penny. In early June, due largely to earnings underperformance, a sell signal was generated for George Weston (WN:TSX). The stock was replaced by Talisman Energy (TLM:TSX), which currently is one of the fund's leading performers, having generated a 7% return in three weeks.
Van Arbor Asset Management is an independent Asset Management company dedicated to creating wealth using a disciplined, proprietary investment strategy with an emphasis on preserving capital while generating superior long-term returns.
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