The month of June was an extremely difficult month for equities. Although the month started on a positive note a mid to late month sell-off due to increasing concerns about rising inflation, recession, a change in North American central bank policy and thin summer trading markets resulted in meaningful monthly declines of : TSX300 -1.4%, Dow Jones 30 -10.2%, Russell 2000 -7.8% and the NASDAQ -9.1%. The TSX aided mostly by firming oil, gas and gold prices mitigated the declines of other sectors such as the Canadian banks which declined 13-20%.

The five ABC Funds suffered June capital depreciation of between 3.85%-5.43% largely due to weaker small capitalization stocks; they include Canwest Global Communications, Norbord Inc., Morguard Corp., Essential Energy Services, Fortress Paper and Polaris Minerals. All these stocks, incidentally, trade significantly below their net asset and replacement values.

Clearly the general market has not favoured severely underrated value stocks, but instead, remains focused on momentum and growth stocks such as Research In Motion, Potash Corp., BCE, Google et al. Although this trend has resulted in languishing and volatile prices we believe that these severely underpriced small capitalization value shares should lead to more mergers, acquisitions and takeovers. As a matter of fact, three ABC Funds holdings – Saxon Energy, Gentry Resources and Ithaca Energy are presently the object of opportunistic corporate takeover bids. These proposed takeovers, which immediately precipitated price jumps of about 20%, give us cause for optimism due to the following factors:

1. if the market does not recognize undervalued equities then opportunistic corporations will precipitate accretive takeovers, mergers and acquisitions.

2. drastically undervalued stocks will encourage more company share buybacks and insider purchases

and

3. with the recent market decline and relatively low interest rates it is now cheaper to buy a public company trading on the TSX, NYSE or NASDAQ rather than starting that same company from scratch.

In summary, although summertime trading tends to be volatile and thin, which ultimately tests investors’ patience, we remain very patient, fundamentally optimistic and opportunistic.

Irwin A. Michael, CFA