Carl’s Comments

As we close in on our 30th year in the financial services industry, a few things remain the same. We move from one crisis to the next, each being more magnified than ever before. Things are bad in the U.S. but I am not sure they are as bad as they were in the early 80’s. Interest rates at that time were approaching 20%, unemployment and inflation were sky high and massive corporate layoffs dominated evening news broadcasts. People were depressed and there was no sign of hope or relief.

Where are we now? We are experiencing high volatility in North American stock markets. The reasons change from fluctuating oil prices, to sub-prime concerns, to retail sales to fluctuating interest rates. Although all of these can have a huge impact on the markets, most analysts feel that a U.S. recession will likely be avoided. The U.S. housing bust will no doubt slow the U.S. economy but many research firms do not expect it will result in a recession. In fact, the U.S. economic slowdown, combined with an expanding global economy, should help rebalance America's external imbalances with the rest of the world.

Things are not always as they seem. Liquidation during the summer effectively made security selection useless. This liquidation selling apparently began with large financial institutions re-pricing credit risks and participating in broad selling by banks and hedge funds, as well as long only credit funds with heavy exposure to declining and illiquid Collateralized Debt Obligation (CDO) positions. These firms needed to meet either margin calls or client redemptions or perhaps both. Therefore they sold whatever was liquid, thus resulting in a large equity market pullback.

We use very little leverage. Therefore we were easily able to avoid a forced sale of holdings which were pounded by panic trading, thus avoiding permanent capital loss. In fact, many managers were able to take advantage of opportunities that were left in the wake of the summer time meltdown and are well positioned moving forward.

Global portfolios were extremely hurt in the last six months with the surging Canadian dollar. It pretty much wiped out all of their gains. But recently the Loonie has pulled back and this will hold well for global funds.

So, in my 30 years in the financial field, I've seen a lot; 14% inflation, 20% mortgage rates, Black Monday, the tech wreck and now the sub-prime crisis. Although it is a huge problem, I'm not sure it will lead to an outright market collapse. Keep in mind that uncertainty and volatility are actually great friends to the long-term investor.

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