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July 2007 Newsletter
Sunday, July 01, 2007
MARKETS AT A GLANCE: QUARTERLY UPDATE
The second quarter of 2007 saw the Canadian dollar soar to a thirty year high, rising 9.4% against the US dollar in just three short months. The strength of the dollar has been mainly attributed to the growth in export demand from the energy and commodity sectors, expectations of higher interest rates and investment inflows. Economic growth grew at a modest pace last quarter but stalled in the last month as the higher dollar was having an effect on manufacturer's and the auto sector. The Bank of Canada is expected to raise interest rates by a quarter percent in July after holding steady on rates for the last thirteen months. The higher dollar should help temper inflation; however, this may or may not be enough without some interest rate hikes in the short term.
The US economy continues to feel the effects of the slowdown in the housing sector as home sales and construction remain soft. Economic growth slowed to its slowest level in four years as GDP grew at a moderate 1.9% pace. The Federal Reserve kept interest rates steady at its June 29th meeting, signaling that inflation pressure will be tempered by lower growth. Even with the troubles in the housing sector, the economy appears to be in for a soft landing as low inventories, a pick up in manufacturing and an increase in exports should all help lift economic growth in the second half of 2007.
The European Central Bank raised interest rates again last quarter as concerns that rising pressure on prices and wages were beginning to develop in the economy. The general forecast for the Euro Zone remains strong; however, the Central Bank maintains that further interest rate hikes may be needed. The Euro Zone grew by 0.6% last quarter with growth in the manufacturing and service sectors accelerating in June. The forecast for the second half of 2007 is for economic growth to maintain its strong pace with inflation easing.
CANADIAN ADVANTAGE FUND
The Canadian Advantage Fund ended the month down 2.78% to close at $19.25. The Canadian equity market had a mixed month with the energy and financial sectors down, while the telecommunication and information technology sectors ended up for the month. After a full year of steady interest rates, expectations of possible changes to the interest rate environment as well as yields rising in the bond market has helped increase volatility in North American equity markets. This has led to downward pressure on interest rate sensitive stocks, like financials and utilities. The pullback at the beginning of June eventually dissipated as the market rebounded on the last week of trading in June on rising oil prices and takeover activity in the telecommunications sector. This month saw shares of Cameco Corp (CCO:TSX) sold while a position was established in Rogers Communications (RCI/B:TSX).
Fund Performance Summary (Benchmark is S&P TSX Index)
US ADVANTAGE FUND
The Van Arbor US Advantage Fund ended the month down 4.00% to close at $12.88. Utilities and Financials were particularly down last month as housing and interest rate concerns dominated the market's direction. The continuing lag of mortgage bankruptcies and weakness in homes sales showed that the housing slump has not yet rebounded. The US market did show strength towards the end of the month as the Fed reiterated its positive outlook for economic growth in the second half of 2007 with inflation easing below 2%. This helped alleviate concerns of interest rate hikes in the short term. Shares of News Corp (NWS:NYSE) were sold this month and a position was established in Altria Group (MO:NYSE).
Fund Performance Summary (Benchmark is S&P 500 Index)
EURO ADVANTAGE FUND
The Van Arbor Euro Advantage Fund ended the month down 3.64% to close at $11.73. The European Central Bank raised interest rates early in June leading to equity markets pulling back on concerns that higher rates will crimp expansion. These concerns eventually diminished as the earnings outlook and continued economic expansion appear able to withstand higher rates. The energy and material sectors ended the month in positive territory after an initial pullback, while the main weakness in June came from the pharmaceutical sector as shares of Sanofi-Aventis fell as their hunger-suppressing pill being sold in Europe was delayed once again by the US Food and Drug Administration. This month saw shares of Bijou Brigitte sold while a position in German utility E.ON AG was established.
Fund Performance Summary (Benchmark is S&P Euro Index)
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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