The month of September confronted investors with extraordinary economic, financial and political events.  These included: bankruptcies and near bankruptcies such as Lehman Brothers, AIG, Merrill Lynch et al; a botched up $700 billion US government financial bailout plan and mushrooming international economic fears.  The resulting price volatility, investor anxiety and unprecedented financial uncertainty for common stocks, bonds and commodity prices has been nothing short of inconceivable.

Unfortunately, there have been few places to hide.  Price volatility has affected small, medium and large capitalization stocks as well as oil & gas, gold and base metals.  This price instability has been compounded by margin calls, mutual fund redemptions, hedge fund difficulties and a general desire by investors to raise cash reserves due to mounting uncertainty.  Motivated selling of common stocks has been substantial, intense and unrelenting as panicky investors rush to raise cash.  They are selling whatever is liquid and most often at excessively low prices.  These prices frequently bear little relationship to a company’s fundamental or intrinsic value.  Interestingly, it should be remembered that stock markets frequently overshoot on the upside just as they are now overshooting on the downside.

Due to the current market instability many deep values are starting to appear as growing investor emotion has caused “the baby to be thrown out with the bathwater.”  Value investors, including ourselves, are left to scratch our heads as stock valuations have plummeted to extraordinarily low levels.  As a result of these depreciated price levels we expect to see a growing number of mergers, acquisitions, takeovers, privatizations and special private financings.  The Warren Buffett $5 billion investment in Goldman Sachs is a typical example.

As disciplined stock pickers, while we are cognizant of the spreading negativity relating to the much-needed $700 billion US bailout, bankruptcies and growing negative newspaper headlines, we continue to concentrate on security analysis.  In the course of our search, amidst emotional markets, we have purchased several new undervalued positions such as Onex Corporation, Pioneer Natural Resources and Northbridge Financial and have added to a few existing holdings on price weakness such as EL Financial, Equitable Group, and Precision Drilling.  At the same time we have taken advantage of market volatility to opportunistically sell out holdings of Standard Life PLC, Unum Group, Superior Industries and partial sales of Jo-Ann Stores.  Presently the 5 ABC Funds collectively hold a cash reserve of over $135 million.
                                                                                         
Currently, our overall strategy has been to upgrade our portfolios, where possible, by increasing dividend yield and liquidity.  We have also taken the odd capital loss in our attempt to be tax effective.  In spite of the market weakness we are retaining our value favourites such as Addax Petroleum, Canam Group, Fortress Paper, Migao Corporation, Nexen, Talisman and Equitable Group.

While we recognize that many investors, including our fellow ABC Funds unitholders, are shocked by the market’s recent decline, we are reminded that many present valuations are not indicative of true or intrinsic worth.  As a result, patience, discipline and staying the course are key in this highly-emotional environment.  Although it is uncertain how long the present market volatility will last, it is our strongly-held view that deep-value equities will provide excellent returns over the next 12-18 months.

Irwin A. Michael, CFA