Security prices throughout the month of February remained extremely volatile with conflicting economic, political and investment news.  Continuing concerns of an American economic recession, sub-prime mortgage problems, lack of a resolution of the $33 billion Canadian asset-backed commercial paper (ABCP) impasse, etc. confront the market.  As a result, day-to-day stock trading has been remarkably erratic, emotional and irrational as considerable negative investment sentiment overhangs the securities markets.

As a contrarian indicator this extreme negativity is a longer term investment positive.  For instance, in a number of cases panicky investors are liquidating perfectly sound companies in their haste for portfolio liquidity.  In a sense, they are “throwing out the baby with the bathwater.”  In spite of the general market volatility we are heartened by the price recovery and/or comparatively good quarterly operating results of a number of our ABC shareholdings.  These include: Saxon Energy Services, Nexen, Inc., Western Areas, Fortress Paper, Seaspan and Jo-Ann Stores.  As a result, four of our ABC Funds improved during the month of February and the fifth, ABC American-Value, would have improved except for a late surge of the Canadian dollar.

With regard to the Canadian dollar, we believe that with yesterday’s 1/2% Bank of Canada interest rate reduction and a more aggressive policy under governor Mark Carney to mitigate the effects of the U.S. economic slowdown, we sense that the Canadian dollar could weaken to as low as 95¢ U.S.  Moreover, with last week’s announcement of a $513 million Canadian current account deficit (the first time since early 1999) the overvalued Canadian dollar is finally biting into Canadian manufacturing and exports.  As a result, we could see the Canadian dollar trade in a 95¢ - $1.02 U.S. range until the American dollar sorts itself out.

In summary, with declining North American interest rates, respectable corporate earnings, spreading negative investor sentiment and improving comparative equity valuations (due to significant price declines) we are now uncovering a number of undervalued stock selections.  In the context of a 12-18 month investment horizon, we remain optimistic.  On a final note, as a measure of my own personal and professional commitment to the ABC Funds, I have just made my full 2008 RRSP and RESP contributions on behalf of my wife, myself and children.

Irwin A. Michael, CFA