Third Eye Capital
Tel: (416) 601-2270
Fax: (416) 981-3393
Email Third Eye Capital

Brookfield Place
Bay Wellington Tower
181 Bay Street, Suite 2830
Toronto, Ontario, M5J 2T3

CEO Insights

CEO Insights

Risk Provacateur (Q2-14)

Risk Provacateur (Q2-14)

Jun 30th, 2014

The following was excerpted from Third Eye Capital Management Inc.’s Q2 2014 Investor Letter.

Canadian equities were stand-outs among developed stock markets in the second quarter with the S&P/TSX Composite Index gaining 6.4% in total returns (and 12.9% for the first half of the year). Earnings among Canadian publicly-listed companies have shown strong momentum this year, with growth up 14% over 2013 after relatively flat performance since 2012. A key driver has been the stronger U.S. economy and improved business confidence, factors we predicted would lead to higher Canadian corporate profits. Exports to the U.S. are up 11% year-over-year, reflecting mainly higher energy prices. As logistical constraints that have impeded the flow of Canadian oil to the U.S. get alleviated (in part due to leading companies like Banister Pipelines, which we have financed in the past),we expect Canadian energy exports to continue to grow. A further tailwind supporting Canada’s overall pace of export growth is the weaker Canadian dollar, which most economists expect to fall further for the remainder of the year. Canadian GDP is now on track to rise 2.5% this year given firmer U.S. demand.

In the United States, real GDP rebounded in the second quarter after contracting at the start of the year due to severe winter weather. The 4% annualized pace of expansion in the U.S. economy was broadly supported by business spending, exports, and employment. The U.S. economy created 816,000 jobs in the second quarter, the strongest quarter for job creation since the low point of the recession. The Institute for Supply Management (ISM) Purchasing Managers Index (PMI) combines five manufacturing indicators (new orders, production, employment, deliveries, and inventories) to create a composite of U.S. manufacturing activity. The ISM PMI Index posted a 55.3 reading for June 2014 (a PMI reading above 50 generally indicates manufacturing expansion), with all categories rising. The most recent U.S. Industrial Production Index also gained 4.3% over the prior year, and the non-manufacturing PMI jumped to 58.7 in July 2014, the highest reading since December 2005. Expectations for a rise in U.S. GDP for the balance of the year seem well supported by the data, and this is good news for Canadian businesses.

The Bank of Canada’s Summer 2014 Business Outlook Survey shows that Canadian firms are now more confident about the positive direction of the economy and plan to increase investment in machinery and equipment over the next 12 months, with a focus on efficiency gains from upgrades. The accommodative interest rate environment and generally favorable borrowing terms, are also making investment decisions easier to make. Companies are likely to invest in order to alleviate capacity constraints since Canada’s industrial capacity rate reached 82.5% in the first quarter, just 2% below its prerecession peak in 2005. Companies do not make capital expenditures for its own sake – it is only when they see rising demand for their goods and services that they undertake new investment spending. We believe the pent-up demand for machinery and equipment is high and that this will underpin the cyclical recovery in commercial credit.

Strong economic fundamentals, low rates, and easy money will continue to provoke demand for risk assets. Although rockets in Gaza, US airstrikes in Iraq, crisis in Ukraine, Ebola in West Africa, and stagnating European growth have returned volatility to markets in recent weeks, the corrections in stock and corporate bond markets have been neither severe nor broad-based. The bounce in second quarter U.S. GDP has reignited expectations for rising interest rates, which should keep investors attracted to yield paying asset classes such as dividend stocks and corporate credit. Investors need to be careful about compounding their equity exposure since certain types of corporate credit, such as high-yield bonds, have a high correlation to stocks and will reduce any diversification benefits if unexpected shocks cause a broader market correction. As our clients know, we believe investors should adopt a more guarded posture toward traded corporate credit, where leverage levels and covenant-lite structures are on the rise while coupons and downside protections are on the decline. Investors need to select their exposures to credit in terms of valuation and risk, focusing on investments that preserve capital and generate returns through consistent execution rather than taking on higher risk. With weaker borrowers accessing credit markets, and more loan proceeds applied to unproductive uses (such as share buybacks and dividend payments), investors must put manager selection ahead of asset class exposure.



Domestic (Canadian) Advisor registration form:

If you are an advisor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

Personal Information

I consent to receive information from Third Eye Capital.

Domestic (Canadian) Investor registration form:

If you are an existing or prospective accredited investor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

Personal Information

YesNo
I consent to receive information from Third Eye Capital.

International Investor registration form:

For US persons
If you are an existing or prospective accredited investor or an advisor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

Personal Information

I consent to receive information from Third Eye Capital.

Address Information

Investor Information

An IndividualA Company
U.S.Other (specify)
Fund of FundsFamily OfficeBankOther (specify)
$

Instructions for the following sections: Individuals please answer Part A of Sections I and II; Institutions please have an authorized person answer Part B of Sections I and II.

Section I - Accredited Investor Threshold Questions:

Part A - For Individuals:

1. I certify that I have an individual net worth, or my spouse and I have a combined net worth in excess of $1,000,000.

2. I certify that I am highly a sophisticated investor who routinely invests sums of $250,000 or more.

Part B - For Institutions:

1. The submitter certifies that it is a bank, insurance company, registered investment company, business development company, or small business investment company.

2. The submitter certifies that it is a charitable organization, corporation or partnership with assets exceeding $5 million, and that was not formed to invest the Fund.

3. The submitter certifies that it is a corporation, partnership or trust with assets of at least $5 million, that was not formed to invest in the Fund, and whose purchases are directed by a sophisticated person.

4. The undersigned certifies that all of its equity owners are “accredited investors” as defined in United States Securities and Exchange Commission Rule 501(a) and who can satisfy the higher criteria for the same set forth in Section I, Part A above.

Section II - Qualified Purchaser Questions:

Part A - For Individuals:

1. I certify that I own not less than $1,000,000 in securities investments.

Part B - For Institutions:

1. The undersigned certifies that it is a bank, insurance company, registered investment company, business development company, or small business investment company

2. The undersigned certifies that it is a "family owned company" (as defined below) that owns not less than $5,000,000 in securities investments. A "family owned company" is defined as a company that is owned directly or indirectly by or for two or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendents by birth or adoption, spouses of such persons, the estate of such persons, or foundations, charitable organizations, or trust established by or for the benefit of such persons

3. The undersigned certifies that it is a trust that was not formed to invest in the Fund, the trustee or decision-making authority of which, and every person contributing assets to the same, is a “Qualified Purchaser” under one of the other definitions of this Section

4. The undersigned certifies that it is a person acting for its own account or for the accounts of other Qualified Purchasers who in the aggregate own and invest on a discretionary basis at least $5,000,000 in securities investments.

Questionnaire Submission:

Thank you for your patience in completing this questionnaire.

If you have any questions, please contact Chris Vokes, VP of Investor Relations at Third Eye Capital:

T 416-601-2270 ext 242
E chris@thirdeyecapital.com