April Comment
April Comment Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund Royal Bank Plaza, South Tower 200 Bay Street Suite 2700, P.O Box 27 Toronto, Ontario M5J 2J1 T: 416 943 6707 F: 416 362 4928 Toll Free: 866 299 9906
Performance Returns for the period ending April 30, 2009
0.15%
-0.11%
0.54%
-1.54%
6.47%
21.27%
Since Inception* 20.97%
3.73%
2.45%
-4.99%
-25.24%
-10.68%
-7.21%
-6.85%
-
-
0.32%
-17.87%
-1.46%
4.55%
4.25%
YTD
1 Year
3 Year*
Since Inception*
1 Month 3 Month Sprott Opportunities Hedge Fund L.P. (Series A) S&P 500 Index (CAD) CSFB-Tremont HFI L/S Equity Index**
ww.sprott.com
1 Month 3 Month Sprott Opportunities RSP Fund S&P 500 Index (CAD) CSFB-Tremont HFI L/S Equity Index**
YTD
1 Year
3 Year*
5 Year*
0.14%
-0.21%
0.49%
-1.71%
6.31%
10.64%
3.73%
2.45%
-4.99%
-25.24%
-10.68%
-8.33%
-
-
0.32%
-17.87%
-1.46%
2.07%
*Annualized **Figures updated as at March 31, 2009 (one and three month returns are excluded as the one-month lag makes the comparison unjustified) Inception Date of Sprott Opportunities Hedge Fund L.P.: April 2004 Inception Date of Sprott Opportunities RSP Fund: October 2005
On April 7, 2009, the Sprott Opportunities hedge fund strategy proudly celebrated its 5-year anniversary. The Sprott Opportunities Hedge Fund LP has realized a 5-year return of 21.27% since April 30, 2004, and now boasts the second best 5-year return of all investment strategies listed on Globefund.com. We are grateful for the support our investors have given us over the past five years and we hope for continued success in 2009. This past February, we wrote a piece highlighting industrialized (Western) nations’ penchant for running budget deficits during the boom years between 2002 and 2007. With the sole exception of Canada, no other single Western country managed to save a dime during the years that coincided with the largest synchronized global economic boom in history. That failure is now having repercussions, as those same countries have now drastically increased their respective budget deficits in a matter of months. The deficit-to-GDP numbers forecasted for 2009 are significantly higher than normal. The UK has already announced that they expect their budget deficit to reach 12.6% of GDP this fiscal year. The United States deficit is expected to be 10.2% of GDP in 2009 (we believe it will be higher). Germany’s deficit is expected to soar to 4.5% of GDP in 2009, and Japan’s budget deficit is also projected to be close to 10%. This situation is getting worse every month, and it represents real money. Real, borrowed money - that will have to paid back eventually. The question is, given the sustained economic weakness that has now pervaded the entire global economy, how are these countries ever going to pay their deficits back down?
Page 1 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund There are only three ways to pay down deficits: 1) increase taxes, 2) cut spending, or 3) monetize debt. The first two options are clearly detrimental to a country’s long-term GDP growth. The third option is very ugly, and leads to dramatic loss of purchasing power/hyperinflation, along the lines of 1920’s Weimar Republic Germany, or the tragic experience that played out last year in Zimbabwe. Whatever option the governments choose, (we suspect they may choose a combination of all three), it seems unlikely that the world economy will resume a sustained growth trend with their collective deficit repayment efforts underway. All of which brings us to the current rally. For those of you who believe we have already bottomed, like Sumner Redstone, Chairman of CBS Corp., who recently announced publicly that we are in the beginning of a new bull market, (thanks Sumner), we would like to show you the following chart:
Chart #1: S&P 500 Index (December – April)
Huge Winter Decline
Strong Spring Rally
It’s all here – the sell-off, the trough, and the sustained recovery. Look familiar? The chart is from 2008. It depicts last year’s bear market rally. In mid-March 2008, the market began to rebound following a surprise government report citing increased home construction in February. Later in the month, Fed Reserve Chairman Ben Bernanke told Congress that the impact of the subprime markets on the broader economy was “likely to be contained”. The press began calling a new bull market and renewed optimism quickly followed suit. We all know what followed shortly thereafter:
Page 2 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund
Chart #2: S&P 500 Index (April – December 2008)
- 47% Decline
With the last two charts in mind, here’s a chart of the most recent rally in the S&P 500: Chart #3: S&P 500 Index (January – May 2009)
Huge Winter Decline Strong Spring Rally
Page 3 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund
The similarity between Chart #1 and Chart #3 is certainly notable. While we are not calling for another 47% decline in the S&P 500 this year, we would urge investors to keep last year’s sell-off firmly in mind when considering any new purchases in the long portfolio. We collect and study piles of market data at Sprott Asset Management, and the data that we have seen does not bode well for corporate earnings. The future of Western government balance sheets also looks bleak, as we discussed above. The market has rallied significantly over the last two months for reasons that seem to be based more on hope than on any real fundamentals, and as we have said in the past – we are not in the hope business. Interestingly, it should be noted that as we write this, Bernanke is back in his usual form, announcing that the economy should pull out of a recession and start growing later this year. Caution is advised. We believe 2008 may play itself out once again. The month of April was challenging for the Sprott Opportunities strategy. It is evident from our latest monthly returns that we were not positioned aggressively enough to profit from the recent rally. (We were also, fortunately, not positioned to experience a 45% drawdown at the end of last year.) We cannot guarantee this rally will end soon, but investors should know that we are preparing the Fund for renewed market weakness, and will make portfolio decisions accordingly. We have mentioned in previous comments that we expect market volatility to continue for some time. We intend to buy on extreme weakness and sell into strength. It is our view that we have many years of significant up and down trends ahead of us, and with that in mind we will maintain our focus on flexibility and profit-taking.
Jean-François Tardif, CFA Senior Portfolio Manager
Page 4 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund
Sprott Asset Management Inc. is the investment manager to the Sprott Canadian Equity Fund, Sprott Gold and Precious Minerals Fund, Sprott Energy Fund, Sprott Growth Fund, Sprott Global Equity Fund, Sprott Hedge Fund L.P., Sprott Hedge Fund L.P. II, Sprott Bull/Bear RSP Fund, Sprott Opportunities Hedge Fund L.P., Sprott Opportunities RSP Fund, Sprott Opportunities Offshore Fund, Ltd., Sprott Offshore Fund, Ltd. and Sprott Strategic Offshore Gold Fund, Ltd. (collectively, the “Funds”). Important information about these Funds, including their investment objectives and strategies, purchase options, and applicable management fees and expenses, is contained in their prospectus or offering memorandum. Please read these documents carefully before investing. Commissions, trailing commissions, management fees, other charges and expenses all may be associated with investing in the Funds. The indicated rates of return for [series A] securities of the Funds for the period ended April 30, 2009 are based on the historical annual compounded total returns including changes in unit/share value and reinvestment of all distributions or dividends and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
Page 5 of 5
Performance Returns for the period ending April 30, 2009
0.15%
-0.11%
0.54%
-1.54%
6.47%
21.27%
Since Inception* 20.97%
3.73%
2.45%
-4.99%
-25.24%
-10.68%
-7.21%
-6.85%
-
-
0.32%
-17.87%
-1.46%
4.55%
4.25%
YTD
1 Year
3 Year*
Since Inception*
1 Month 3 Month Sprott Opportunities Hedge Fund L.P. (Series A) S&P 500 Index (CAD) CSFB-Tremont HFI L/S Equity Index**
ww.sprott.com
1 Month 3 Month Sprott Opportunities RSP Fund S&P 500 Index (CAD) CSFB-Tremont HFI L/S Equity Index**
YTD
1 Year
3 Year*
5 Year*
0.14%
-0.21%
0.49%
-1.71%
6.31%
10.64%
3.73%
2.45%
-4.99%
-25.24%
-10.68%
-8.33%
-
-
0.32%
-17.87%
-1.46%
2.07%
*Annualized **Figures updated as at March 31, 2009 (one and three month returns are excluded as the one-month lag makes the comparison unjustified) Inception Date of Sprott Opportunities Hedge Fund L.P.: April 2004 Inception Date of Sprott Opportunities RSP Fund: October 2005
On April 7, 2009, the Sprott Opportunities hedge fund strategy proudly celebrated its 5-year anniversary. The Sprott Opportunities Hedge Fund LP has realized a 5-year return of 21.27% since April 30, 2004, and now boasts the second best 5-year return of all investment strategies listed on Globefund.com. We are grateful for the support our investors have given us over the past five years and we hope for continued success in 2009. This past February, we wrote a piece highlighting industrialized (Western) nations’ penchant for running budget deficits during the boom years between 2002 and 2007. With the sole exception of Canada, no other single Western country managed to save a dime during the years that coincided with the largest synchronized global economic boom in history. That failure is now having repercussions, as those same countries have now drastically increased their respective budget deficits in a matter of months. The deficit-to-GDP numbers forecasted for 2009 are significantly higher than normal. The UK has already announced that they expect their budget deficit to reach 12.6% of GDP this fiscal year. The United States deficit is expected to be 10.2% of GDP in 2009 (we believe it will be higher). Germany’s deficit is expected to soar to 4.5% of GDP in 2009, and Japan’s budget deficit is also projected to be close to 10%. This situation is getting worse every month, and it represents real money. Real, borrowed money - that will have to paid back eventually. The question is, given the sustained economic weakness that has now pervaded the entire global economy, how are these countries ever going to pay their deficits back down?
Page 1 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund There are only three ways to pay down deficits: 1) increase taxes, 2) cut spending, or 3) monetize debt. The first two options are clearly detrimental to a country’s long-term GDP growth. The third option is very ugly, and leads to dramatic loss of purchasing power/hyperinflation, along the lines of 1920’s Weimar Republic Germany, or the tragic experience that played out last year in Zimbabwe. Whatever option the governments choose, (we suspect they may choose a combination of all three), it seems unlikely that the world economy will resume a sustained growth trend with their collective deficit repayment efforts underway. All of which brings us to the current rally. For those of you who believe we have already bottomed, like Sumner Redstone, Chairman of CBS Corp., who recently announced publicly that we are in the beginning of a new bull market, (thanks Sumner), we would like to show you the following chart:
Chart #1: S&P 500 Index (December – April)
Huge Winter Decline
Strong Spring Rally
It’s all here – the sell-off, the trough, and the sustained recovery. Look familiar? The chart is from 2008. It depicts last year’s bear market rally. In mid-March 2008, the market began to rebound following a surprise government report citing increased home construction in February. Later in the month, Fed Reserve Chairman Ben Bernanke told Congress that the impact of the subprime markets on the broader economy was “likely to be contained”. The press began calling a new bull market and renewed optimism quickly followed suit. We all know what followed shortly thereafter:
Page 2 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund
Chart #2: S&P 500 Index (April – December 2008)
- 47% Decline
With the last two charts in mind, here’s a chart of the most recent rally in the S&P 500: Chart #3: S&P 500 Index (January – May 2009)
Huge Winter Decline Strong Spring Rally
Page 3 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund
The similarity between Chart #1 and Chart #3 is certainly notable. While we are not calling for another 47% decline in the S&P 500 this year, we would urge investors to keep last year’s sell-off firmly in mind when considering any new purchases in the long portfolio. We collect and study piles of market data at Sprott Asset Management, and the data that we have seen does not bode well for corporate earnings. The future of Western government balance sheets also looks bleak, as we discussed above. The market has rallied significantly over the last two months for reasons that seem to be based more on hope than on any real fundamentals, and as we have said in the past – we are not in the hope business. Interestingly, it should be noted that as we write this, Bernanke is back in his usual form, announcing that the economy should pull out of a recession and start growing later this year. Caution is advised. We believe 2008 may play itself out once again. The month of April was challenging for the Sprott Opportunities strategy. It is evident from our latest monthly returns that we were not positioned aggressively enough to profit from the recent rally. (We were also, fortunately, not positioned to experience a 45% drawdown at the end of last year.) We cannot guarantee this rally will end soon, but investors should know that we are preparing the Fund for renewed market weakness, and will make portfolio decisions accordingly. We have mentioned in previous comments that we expect market volatility to continue for some time. We intend to buy on extreme weakness and sell into strength. It is our view that we have many years of significant up and down trends ahead of us, and with that in mind we will maintain our focus on flexibility and profit-taking.
Jean-François Tardif, CFA Senior Portfolio Manager
Page 4 of 5
April Market Comment cont’d Sprott Opportunities Hedge Fund LP Sprott Opportunities RSP Fund
Sprott Asset Management Inc. is the investment manager to the Sprott Canadian Equity Fund, Sprott Gold and Precious Minerals Fund, Sprott Energy Fund, Sprott Growth Fund, Sprott Global Equity Fund, Sprott Hedge Fund L.P., Sprott Hedge Fund L.P. II, Sprott Bull/Bear RSP Fund, Sprott Opportunities Hedge Fund L.P., Sprott Opportunities RSP Fund, Sprott Opportunities Offshore Fund, Ltd., Sprott Offshore Fund, Ltd. and Sprott Strategic Offshore Gold Fund, Ltd. (collectively, the “Funds”). Important information about these Funds, including their investment objectives and strategies, purchase options, and applicable management fees and expenses, is contained in their prospectus or offering memorandum. Please read these documents carefully before investing. Commissions, trailing commissions, management fees, other charges and expenses all may be associated with investing in the Funds. The indicated rates of return for [series A] securities of the Funds for the period ended April 30, 2009 are based on the historical annual compounded total returns including changes in unit/share value and reinvestment of all distributions or dividends and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
Page 5 of 5
