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July 2008 Newsletter
Tuesday, July 01, 2008
MARKETS AT A GLANCE: QUARTERLY UPDATE
The Canadian economy finds itself in a relatively advantageous position as the strength of the Canadian dollar has helped spurn inflation through cheaper import costs. Looking at inflation numbers across the globe, one can't help but envy the position of Canada as the demand for our country's resources has supported growth and tamed core inflation. The Bank of Canada has had a relatively easy time of cutting rates to an almost three year low as inflation remains in check; nonetheless, the rate cutting seems to be on hold as rising global inflation expectations will not be tolerated for too long by central banks. Fortunately, we have also benefited from domestic and resource based growth, which have helped mask weakness from our large neighbour. A resiliency we may be unfamiliar with relative to other more recent business cycles. It may be that the year ends with higher interest rates in Canada; however, the economy in general should be balanced from any slowing of export demand by domestic stimulus from relatively low interest rates and a healthy job market.
The slowdown/recession debate continues in the US as weakness in the housing and credit markets has slowed growth but so far mildly. It appears that the US economy is more in a state of disentangling from the credit and housing bubble. The bad news is that there is no quick fix and time will sort through the weakness. The good news is that the economy is not in a dire jobless or stagnate state and has two stimuli from a boom in export demand as well as aggressive interest cuts by the Federal Reserve. The US economy is by no means out of the woods, but rather balancing a shift in economic growth from the housing sector to the export sector. The largest concern now is not so much the housing market but the effects of high commodity prices on delaying a recovery. The second half of the year may actually see a rebound in the US dollar as an election focused on the domestic economy and a more hawkish Federal Reserve help stabilize the value of the dollar.
The European Central Bank (ECB) followed up on its threat to act on fighting inflation by hiking interest rates by 25 basis points this month. The monetary authority has been adamant in tackling inflation expectations and has diverged from US interest rates. The ECB's focus on inflation clearly stands in contrast to the US interest rate policy of focusing on growth and inflation. What is clear is that some regions of Europe are slowing at the same time as inflation is rising. The slower growth and the rising Euro currency's effect on lowering import costs will undoubtedly eventually lead to lower inflation; however, the ECB's intent on taming short term inflation will be the priority before concerns about growth. Where does that leave the Euro Zone? Possibly short term higher rates for the sake of preventing much higher rates if inflation got out of control. The wait and see approach should eventually benefit the Euro Zone as taking short term pain will help prevent a long term upward shift in inflation expectations.
CANADIAN ADVANTAGE FUND
The Canadian Advantage Fund ended the last month of the second quarter down 2.6%; however, the quarter still finished positively with a 2.9% return. Considering the volatility in markets so far this year, posting a modest gain was favorable relative to other World markets. June ended with narrow leadership once again as only two of the ten sectors in the market posted a positive gain. The portfolio has behaved very well lately as we establish positions in stable companies best suited for long term growth. As our holdings favor a more value style of appreciation, they have not yet moved much in either direction. We anticipate that those same holdings will eventually be the leaders as the broad market eventually shifts into recovery mode. In the meantime, we have found good opportunities away from the business cycle like cheese and dairy producer Saputo Inc, which rose 7.8% with another solid earnings report and a confidence boost from better than expected cost controls.
US ADVANTAGE FUND
The summertime blues hit Wall Street in June as equity markets gave back their gains since March. The US Advantage Fund continued its relative outperformance falling 5.8% as the S&P 500 dropped 8.6%. We thus ended the first half of 2008 down 6.3% while the S&P 500 index fell 12.8%, relatively decent considering what has faced the markets so far this year. The portfolio remains one of quality large cap names that have proven their earnings prowess even in uncertain times. As earnings season begins this month, we expect more of the same leadership from multinationals with diverse earnings and foreign demand. One of our best leaders last month was biotech Genentech which posted a 7.1% return as their cancer drug Avastin is becoming more widely used as a treatment option. 
EURO ADVANTAGE FUND
Euro markets also saw their gains since March being replaced by new lows. The Euro Advantage Fund was down 5.1% in June, while the S&P Euro Index fell 8.8%. Overall, the Euro fund ended the second quarter down modestly by 2% even as the Euro Index fell almost 9%. Much of the relative performance could be attributed to the consistent performance from our mostly large cap portfolio which favors more stable earnings from the health care and utility sectors. Shares of drug maker Stada Arzneimittel was our best performer in June, rising an impressive 9% as the market fell almost 9%. 
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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