SmallCapPower (SCP): After experience a bout of euphoria during the first 4 months of the year, the markets are experiencing one of the worst routs. What do you attribute this despair to?
Steve Palmer: There are lots of debt problems around the world and people are worried that the current economic slowdown will turn into another recession. This is surprising even though an economic slowdown at this stage of the recovery would be typical. I wouldn’t call the recent market activity “one of the worst routs”. We have come a long way from the low in 2008. The low was 7480. The TSX Composite is currently around 12,500. This period of consolidation and weakness should not be unexpected. At the low point last week markets have merely retraced 38% of the gains from the 2008 low.
SCP: Stock markets are lead indicators and they seem to be pricing a potential recession or at least a severe downturn in the US Economy. Do you believe that US might slip into a recession and if yes, what impact that will have on stock markets?
Steve Palmer: We believe that it is unlikely that the US will experience a recession within the next 12 months. However, at this stage, even if that were to occur it is largely priced into stocks as many people already believe that will be the case and equities already trade a significant valuation discount to their long term average price to earnings multiple.
SCP: What is your outlook for the remainder of the year?
Steve Palmer: We believe equity markets will perform very well over the balance of the year. It wouldn’t surprise us if equity indices were setting new highs within 6 months.
SCP: Gold has soared recently and so have other precious metals. Are you looking to increase your exposure to these so-called “havens”?
Steve Palmer: No, I don’t consider gold a haven. It is a cost center. Gold pays no dividend or interest payment but rather costs investors to hold it whether it is a storage fee or ETF management fee. Investors who buy gold are gambling that it will appreciate in value. Tangible demand for gold in electronics and for jewelry is far below current supply. The difference in the supply/demand equation is driven by investor demand. This psychology around this demand component is not unlike trading in old paintings or hockey cards. Gold in our view is largely a bet on a decline in the US$. We are short Comex gold.
SCP: TSX Venture Index, the barometer of health for small companies is down by 22% since the beginning of March. Clearly, markets have not been kind to small cap stocks lately. What is your take on how small caps will fare in coming months?
Steve Palmer: Small caps are typically more volatile than large caps. If the overall market does well as we expect in the coming months, small caps will outperform to the upside.
SCP: You had mentioned in the past that you reduced your exposure to the resource sector at the beginning of the year and moved more into sectors such as technology. This must have paid dividend during the recent months as junior resource stocks got pummelled. Do you find valuations attractive again for junior resource stocks or you continue to seek investments in other sectors?
Steve Palmer: Yes, the AlphaNorth Partners Fund has benefitted from that call as reflected by its 31.6% gain year to date while the indices are both negative. At the present time we have no particular sector preference as we believe resource shares currently offer more attractive risk/reward characteristics than they did several months ago.
SCP: Can you share a few names that you have liked in the past or continue to like?
Steve Palmer: Functional Technologies (TSXV:FEB) and Zecotech Photonics (TSXV:ZMS) remain among are favourite names. Primary Petroleum (TSXV:PIE) also remains a significant holding within our energy weightings.
Mr. Palmer’s Disclosure: I personally and/or my family and/or AlphaNorth Asset Management may own shares of the companies mentioned in this interview.