The market weakness of June has continued into the month of July.  The TSX Composite declined approximately 6.0% and the CIBC World Market Small Cap Index fell 9.4% (now -12.5% year to date).  Although the U.S. Russell 2000 Index climbed to +3.6% and the S&P 500 lost 1.0% in July, both of these indices are down respectively -6.7% and -13.7% year to date.

With worldwide investor psychology at an extremely low ebb and a spreading consensus that the equity markets will continue their descent, many common share prices remain weak and are increasingly out of favour.  On the other hand, from a contrarian point of view, this escalating negativity is providing an expanding number of investment opportunities.  As a result of this weakness, we are uncovering more and more common stocks that are trading significantly below net asset value and/or replacement cost.  Accordingly, we are drawing up a list of attractive purchase candidates and will initiate our buying when the time is propitious.

While markets do not turn on a dime, the fact is that numerous stocks are now trading at “dirt-cheap” levels.  Clearly, investor fear has overtaken the investor greed of the previous 12-18 months.  Moreover, it is our opinion that due to the current adverse financial conditions we expect a growing number of mergers, acquisitions, takeovers as well as increasing insider buying and corporate share buybacks.

Overall, we continue to emphasize investor patience, stamina and tenacity in this very challenging market environment.  In the end, we expect this extreme undervaluation to be recognized by the marketplace and would not be a bit surprised to witness a significant share price snapback from the market lows.

Irwin A. Michael, CFA