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January 2009 Newsletter

January 1st, 2009

MARKETS AT A GLANCE: QUARTERLY UPDATE

2008 is now officially in the books as the worse year for markets since 1931. With the financial crisis turning into a panic of liquidity and confidence, almost every asset class moved down in tandem, from stocks to commodities to corporate bonds. Fear was by far the most powerful force in the latter half of the year as the yield on US treasuries trades near zero while equities, on a valuation basis, are at their cheapest levels this decade. 2009 begins with a new sense of optimism that fear has pushed prices too low and the reward relative to risk is now very favorable. The market has already discounted a fairly severe economic scenario for this year; therefore, 2009 begins with a focus on when the recovery will begin. The massive amounts of liquidity and government stimulus being directed towards the economy will at least act as a good cushion and platform for a larger recovery to take place eventually. Markets are forward looking and we expect that record low valuations in the market and a general easing of fear will help drive equity markets higher. On a valuation basis, a significant gain from here is reasonable given the low prices being placed on assets and earnings, regardless of the strength of the economy. For example, many of our holdings would need to double in value just to return to their 10 year average valuation.

In Canada, we expect the Bank of Canada to further cut interest rates from the already historic low levels. The fall in interest rates and the significant drop in gas prices cannot be overlooked as a great stimulus measure for most Canadians. Overall, we expect the Canadian economy to slow down as consumers and businesses reduce overall spending. This reduction in spending will slow the recovery process; however, a modest economic recovery is anticipated later in the year. The stock market has already discounted most of the slowdown that will occur at the beginning of the year and is now looking towards the end of 2009 to an improving economic landscape.

The scope of the US led economic downturn has officially reached almost every corner of the globe as the US, Europe and Japan are in recession. Emerging markets like China, India, and the Middle East are also showing signs of slowing down but still maintaining modest growth rates. The pervasiveness of the financial crisis was the main focus of the market last year and now the focus turns to the economy and the measures to re-ignite demand. Governments across the World are using past lessons of financial crisis and are not taking chances in doing too little. It has become clear that governments would rather take the risk of overinflating their economies rather than seeing their economy remain moribund. Thus, most economies around the World will begin to re-inflate and we may actually see inflation return down the road from all the proactive measures being undertaken, which bodes well for stocks and commodities.

CANADIAN ADVANTAGE FUND

The Canadian Fund ended December down 3.5%, capping off a very volatile year. For the year, the Canadian Fund was down 36.06% versus the 35.28% drop in the S&P; TSX Index. Our focus of capital preservation was hard pressed with panic selling effecting every stock and sector. 2008 was a large retrenchment year for equities and as a result there is now a plethora of extremely under valued companies throughout the Canadian equity landscape. Valuations for many growth companies are at their book values and some are trading at their cash levels! The economic landscape is likely to remain weak for most of 2009; however, the major benefit of the rapid panic selloff is that most companies are already discounting a severe recession. Given that equity markets are forward looking, we believe there is an opportunity in 2009 to see strong returns based on the current undervaluation and the global stimulus packages in the works. In terms of the portfolio, December some positive gains from Agrium, Pan American Silver and Methanex, on improving fundamentals.

WORLD ADVANTAGE FUND

The World Fund ended December up 3.5%, closing the year only down 4.3% versus the 24% drop in the MSCI World Index for the same period. We are satisfied with the performance of the World Fund in such a tough market and we hope to continue that success in 2009. Having the flexibility to hold companies and currencies outside of Canada continues to be a great benefit in terms of diversification. The opportunities outside of Canada and commodities in general are enormous and we have built a solid portfolio that we expect to continue to perform well again this year. Some of the best performing holdings last month were Aetna, China Mobile and American Electric Power.

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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