Roberts Nash Advisory Group

Market Comment

The stock market correction we saw from early May to late June had some wondering if the summer doldrums were simply the start of a new bear market. While we continue to believe that this market is likely to have another pullback before the year is up, August was a much stronger month then expected.

There has been a huge amount of press around inflation and interest rates. In Canada (aside from Alberta) inflation appears to be under control, and the government may be done raising rates, at least through 2006. Recent changes, such as the GST cut and the considerable increase in the value of our currency, should help to keep inflation in check near term.

Over the past years we have often been underweight fixed income, and are looking to bring this back up to the target levels. For those with maturities in the next 2-3 years, where the capital is not required at maturity, we will be looking to roll the positions out to 5-10 years maturities.

South of the boarder the picture is quite different, and it is one of the biggest reasons for our defensive stance toward the markets going into the fall. The reduced value of the US dollar against other global currencies can help make their industries more competitive. Unfortunately, it also makes any imports more expensive, and adds pressure to inflation. The Federal Reserve may have to raise rates further in an effort to curb inflation, but it is unclear if the American consumer can handle this. If rates continue to increase:

  1. Falling real estate prices may continue, forcing more Americans out of home ownership.
  2. The US dollar may rise against some global currencies.

The Roberts Nash Group continues to focus on increasing foreign exposures to a slight overweight position in portfolios. Our preference is to use managers with the broadest possible mandates so that they can select the companies, and countries, with the best growth potential. Buying into any weakness over the next couple of months should prove to be a good strategy.  The chart from The Gartman Letter below shows an amazing progression with negative consequences for markets over the next few months.

There is little that hits closer to home then the price at the gas pumps. Oil has seen a new high this summer, but has not appreciated to the degree many predicted ($100/bbl oil?). Supply is rising, and in the near term it would seem that some softening of the price is likely. Few deny that the age of fossil fuels must end at some point. As the developing world requires more energy, the developed world must move to a more sustainable model then the one currently used. This biggest question we face is what form will this evolution take?

Over the last 6 months The Roberts Nash Group has looked to take a slightly over-weight position in Uranium. This appears to be a likely direction for the worlds energy needs mid-term. As more and more governments look to nuclear power to meet demands, the spot price of Uranium continues to reach new highs. However, the real change may be a source yet to be discovered.

“Scarcity, Mother of Invention” Stephen L. Sass, a professor of materials science and engineering at Cornell, is the author of “The Substance of Civilization: Materials and Human History from the Stone Age to the Age of Silicon”. The book examines periods of shortages in raw materials throughout history and postulates that the impact is a positive one for civilization because it leads to the discovery of new and innovative approaches to the task at hand.  Given the recent run up in oil prices and the growing concern about the consequences of our dependence on fossil fuels, it is a timely theory. While many fear the lifestyle and economic impact of high oil prices, Dr Sass sees this as a driver of innovation.  The book details as an example, how the discovery of the process of smelting, which heralded the Iron Age was an innovation that followed a shortage of tin from which to make bronze.  Shortages of wood lead to the discovery of coal and then coke for heating and smelting. The steam engine was first developed to pump water from flooded coal shafts and eventually became the new source of power for the industrial revolution.

The process of developing alternative sources of energy to replace fossil fuels could result in benefits still unimagined.  History tells us that we need to face the harsh reality of fossil fuel scarcity and concentrate on developing alternatives.  Just as we need to ensure that these alternatives create sustainable new sources of energy. In some periods in history, civilizations took the course of last resort and pulled up stakes to move on to more fertile ground when the resources had all been depleted.  Today, we have no place else to go.



** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **