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The extraordinary run-up of natural resource
stocks continues to fuel the TSX 300 index. Interestingly, the oil & gas
and mining sectors now comprise over 45% of the TSX index causing many
investors to question whether the current market boom is akin to the
high technology boom (and bust) of six years ago. In fact, for these
investors who cannot recall, one TSE stock out of 300, Nortel, comprised
at its peak price of $124½ over 35% of the TSX 300 index. Is the present
resource boom reminiscent of the high tech mania of 1999-2000? Probably
not, however, we are becoming increasingly concerned about the
spectacular price rise in metals prices such as copper, nickel and zinc.
For instance, one couldn’t give away copper at 80¢/lb several years ago
and now copper is being snapped up at almost $3.50/lb.
The point is that trees, like metals resources, do
not grow to the sky. The ultimate question is: at what point do high
metals prices negatively impact the economy and, as a result, sink
metals prices? One just doesn't know. As a result, we have been
prudently trimming certain holdings and are realizing profits. We
are utilizing these proceeds to invest in new undervalued securities in
other sectors which have not participated in this resource-led rally.
It is interesting to note that if one reviews the TSX performance over
the past year and subtracts the oil & gas, metals and gold sectors, the
Toronto Stock Market would show virtually flat or unchanged results.
This fact is well-worth remembering.
Surprisingly, economic growth has moved ahead in
spite of skyrocketing oil and base metals prices, rising U.S. and
Canadian interest rates, tumultuous international currency markets,
mid-east, Iraq and Iran uncertainty, etc. Clearly the worldwide
economies continue to climb a formidable wall of worry and are
impervious to a multitude of global economic and political problems.
Notwithstanding these concerns, we believe that both the US and Canadian
economies and, by extension, the North American stock markets will
continue their upward, albeit volatile, advance for the rest of 2006.
Thank you,
Irwin A. Michael, CFA |