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October 2007 Newsletter
Monday, October 01, 2007
MARKETS AT A GLANCE: QUARTERLY UPDATE
Fore! The Loonies' rise to par capped off a remarkable run for the Canadian dollar as the currency added another 5.5% on top of last quarter's 9.5% rise. Currency parity in such a short time span is fairly indicative of the state of the Canadian economy as well the disparity developing with the US economy. Moderate GDP growth, historically low unemployment and rising demand for oil and commodities have all contributed to the currency's rapid appreciation. The cutting of interest rates in the US relative to the steady/increasing rates in Canada also helped push momentum towards par. The combination of a stronger domestic currency and softness in the US should help ease inflation, thus giving room for the Bank of Canada to hold or ease interest rates in the medium term.
The third quarter of 2007 was a challenging one for credit markets as US sub prime mortgage lending created uncertainty in credit and equity markets. Credit concerns eventually subsided as companies and banks reported their exposure or non-exposure to 'bad' credit. The Federal Reserve's injection of cash into markets helped prevent a credit crunch from developing. On the economic front, GDP growth estimates for the second half of the year were revised downwards to the two percent range from the two and a half percent range. Economic data still points to modest growth and unemployment holding steady while the main weakness remains the housing sector. The Fed cut interest rates last month with the intention of reducing the risk of an economic downturn prior to it developing. The easing of core inflation gave the Fed some room to remove its inflation bias and focus on growth in the short term.
The Eurozone core economic picture remains solid with rising French consumer spending, solid Eurozone industrial production and declining unemployment. The weakening of the US dollar versus the Euro increased worries of slowing export demand from the US. The main argument against this sentiment is that current export growth in the Eurozone is driven mainly by Russia, Asia and the Middle East. The European Central Bank moderated its stance on increasing interest rates as the effects of a stronger Euro will help cool inflation. GDP growth cooled from its three percent rate last quarter to a more moderate two and a half percentage rate of growth.
CANADIAN ADVANTAGE FUND
The Canadian Advantage Fund ended the quarter relatively flat with volatility ruling the markets. The summer pullback began to ease in the second half of the quarter as investor's regained confidence that the worst of the credit problems have occurred. As sentiment shifted from uncertainty to reality, markets rallied closer to earlier record levels. Energy and Materials sectors led the rebound while most other sectors remained flat for the month of September. Commodity and oil prices re-emerged to record levels as Global economic growth is driving increased demand. Less reliance on the US economy as well as strong growth from most corners of the world helped push oil to a record of almost $84 dollars a barrel. Canadian Western Bank saw a 10% return last month as the company benefited from a booming western economy. The company's record profits and 77th consecutive profitable quarter helped lift the company to a new 52-week high.
US ADVANTAGE FUND
The US Advantage fund followed up last month's solid return with a 1.9% return, closing the quarter on the positive side of a volatile market. The uncertainty created from credit weakness began to ease as investors anticipated that the worst may be over and that earnings growth will remain on track. The Fed's cutting of interest rates by fifty basis points helped lift the market back to its record levels in July. Easing of inflation and the possibility of interest rate cut's helped ease concerns of a possible recession. Last quarter's economic growth grew at a 3.8% quarter over quarter which matched expectations. Softer economic growth is expected in the second half of 2007 due to weakness in the housing sector; however, export producers look to benefit from increased demand due to a weaker dollar. Some of the winners this month were Proctor & Gamble and PepsiCo as these large multinationals look to benefit from international presence and strong currency cash inflows. 
EURO ADVANTAGE FUND
The Euro Advantage Fund finished the month down 4.3% as the summer pullback continued with investors mulling the effects of credit weakness and a softer US economy. Industrials faired the worst last month as the Euro appreciation versus the US dollar kept the sector from rebounding. The strength of the Canadian dollar contributed 1.6% to the decline as the loonies' momentum pushed the year to date currency loss to 7.1%. The Eurozone equity market remains the most undervalued as other developed markets have or are rebounding from their summer lows. The core economic picture remains sound in the Eurozone with stable domestic and international growth driving the economy. Semi-annual earnings will be reported in the next three months which should help remove some of the uncertainty surrounding earnings and growth prospects. 
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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