The month of October justified its reputation as being very dangerous for markets. Equity markets around the Globe declined sharply, some indices setting records for one month declines. The NexGen Global Value Fund performed well versus relative indices and competing funds. The NexGen Global Resource Fund declined roughly in line with competing funds, but retains its strong relative performance since its inception in June.

The economic backdrop continues to deteriorate, despite the unprecedented efforts of Central Banks around the world. The injection of trillions of dollars into the financial system, the bailout of numerous financial institutions, and aggressive interest rate declines has averted a complete meltdown of the current financial system. However, it has, as yet, proven unable to act as a lubricant to the seized credit markets or to forestall the onset of a sharp economic recession. Human psychology will ultimately determine the length of the current credit crisis and the depth of the recession. The level of fear in the marketplace has sustained itself at levels last seen in the 1930s. Banks remain reluctant to lend, fearing counter party risk and a further weakening of their already battered balance sheets. Capital spending by corporations is declining precipitously. An economic precept Lord Keynes coined the “paradox of thrift” will exert an effect not seen since the 1930s. In effect, the efforts of all market participants to become more efficient and conserve capital in a difficult economic time will exacerbate the economic slowdown through the multiplier effect e.g delaying vehicle purchases causes auto plant closures which increases unemployment which decreases consumer spending etc. This vicious circle will continue until the current level of fear is replaced with a sense of optimism. Hope is a most precious commodity, and is essential to a growing economy. I don’t believe that the current crisis will result in replay of the 1930s, but the recession will likely be more severe than any most of us remember. The leveraging of the world economy that likely began with the conception of the great bull market that started in 1982 will have to be substantially unwound to rid the system of its many excesses. This cleansing process will not be painless because not only has the corporate sector engaged in profligate ways but consumer debt is at historically high levels. These distortions will have to be substantially addressed before the foundations of the next bull market can be put in place. This will be accomplished but won’t occur in just a few months.

The Markets will remain under pressure until the fear level subsides. We remain in a Bear Market. Equity valuations have certainly become more attractive but are not yet at levels associated with the beginning of a substantial Bull Market. I suspect a great opportunity to purchase common stocks will emerge from this current great unpleasantness, but it remains at some future point and at lower levels. I expect we will see sharp Bear Market rallies before the major market bottom occurs. We have yet to see what I regard as a real capitulation day, despite the great volatility we have seen. A day with an enormous decline on great volume would be a useful marker of a long term bottom in the markets.

The Global Value Fund continues to adopt a defensive stance to the marketplace. Cash balances are higher than is typical and the Fund’s holdings have been concentrated in North America to preserve capital. Emerging markets have been particularly impacted by the events of the past year, with some declining 80% from their all time highs. The Global Value Fund will re-enter these markets when the reward/risk balance becomes more favourable.

The Global Resource Fund has also maintained a defensive strategy, maintaining high levels of cash. The Fund’s holdings continue to be largely in the petroleum and precious metals sectors, as they have the most compelling long term balance between supply and demand. The Global Resource Fund has experienced a greater decline than the Global Value given its restriction to the resource sector and, hence, lesser flexibility. The prospects for the resource sector once we emerge from recession is particularly bright.

The markets will likely remain given the stream of negative news concerning the general economy and corporate earnings. There are attractively price securities emerging and more will come to light as the Bear Market performs its role. I take comfort in anticipation of the next Bull Market.