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Friday, July 3, 2009 12:10 PM
At noon: Canadian stocks...trade
David Berman
Canadian stocks remained modestly higher at midday Friday, with investors unwilling to make any dramatic moves while U.S. markets closed ahead of Independence Day.
At noon, the S&P/TSX composite index was up 35 points, or 0.3 per cent, to 10,281.
Materials enjoyed the biggest gains, rising 0.9 per cent, due mostly to Potash Corp. of Saskatchewan Inc.'s 2 per cent bounce. Financials rose 0.7 per cent and consumer discretionary stocks rose 0.6 per cent.
Among the laggards, energy stocks and telecom services were down 0.2 per cent each. Utilities fell 0.1 per cent.
Link to this postFriday, July 3, 2009 11:39 AM
Bernstein sounding bearish
David Berman
Richard Bernstein popped up on Clusterstock on Thursday – a welcome appearance since the well-regarded former strategist at Merrill Lynch opened his own shop, Richard Bernstein Capital Management.
He argued that Thursday’s disappointing payroll numbers should not be dismissed as lagging indicators, in part because they contained at least one leading indicator, which was ignored by most commentators: The length of the workweek is falling.
“This is generally considered a leading indicator because employers will tend to adjust the number of hours their employees work before hiring or firing them,” Mr. Bernstein said. “For example, it would be normal for companies to begin to pay existing workers overtime before they hire additional workers because of the uncertainty related to the initial upturn in a production or service cycle.”
At the same time, it would be normal for companies to shrink workweeks before laying anyone off. Mr. Bernstein pointed out the workweek has been hitting all-time lows over the past two months, an ominous sign for an economy that is expecting to show signs of turning around.
Friday, July 3, 2009 10:52 AM
Developing markets bigger than ever
David Berman
Bloomberg News has an interesting article about the rise in the equity value of developing markets. These markets, dominated these days by Brazil, Russia, India and China, constitute 24 per cent of the world’s total equity value – a record high, and up from just 18 per cent at the start of the year.
Part of the increase is due to the fact that developing markets have been performing far better than developed markets this year, as investors embrace riskier markets where economic growth is stronger. The MSCI emerging markets index has risen 35 per cent this year, versus a 2.9 per cent gain for the MSCI world index.
More specifically, Brazil’s benchmark index has risen 35.9 per cent, India’s index has risen 54.6 per cent and China’s Shanghai stock exchange composite index has risen nearly 70 per cent.
In the developed world, Japan’s Nikkei 225 has risen 10.6 per cent, the S&P 500 has fallen 0.8 per cent and Germany’s DAX index has fallen 2.3 per cent.
What are the implications here? There was a time when developing markets were seen as a small, high-risk corner of the equity universe where you dare not plonk too much cash. But as the markets grow in importance, they could benefit from a virtuous cycle: They grow larger, they attract more cash, and they grow larger still.
Of course, this is also the way bubbles develop.
Friday, July 3, 2009 09:52 AM
At the open: Killing time 'til Monday
David Berman
No U.S. news, no worries. That appears to be the plan on Friday, with the U.S. stock market closed ahead of Independence Day celebrations on Saturday.
At the start of trading, the S&P/TSX composite index rose 21 points or 0.2 per cent, to 10,266.
Teck Resources Ltd., which announced a deal to sell 17 per cent of the company to China’s sovereign wealth fund to relieve some debt stress, rose 2.7 per cent. Other materials stocks were also higher, with Barrick Gold Corp. up 0.4 per cent and Potash Corp. of Saskatchewan Inc. up 1.4 per cent.
Energy companies rose modestly after crude oil remained relatively unchanged, at $66.68 (U.S.) a barrel. Suncor Energy Inc. rose 0.2 per cent and Canadian Oil Sands Trust rose 0.1 per cent.
Financials barely budged. Bank of Nova Scotia fell 0.7 per cent, Toronto-Dominion Bank rose 0.1 per cent and Manulife Financial Corp. fell 0.3 per cent.
Friday, July 3, 2009 09:13 AM
Premarket: Teck loves China
David Berman
U.S. stock markets are closed on Friday, so there won’t be a lot of news driving stocks elsewhere. In the early going, global stock market indexes didn’t stray too far from their starting positions – a shift from the sharp selloff on Thursday following disappointing U.S. payroll numbers.
In Europe, the U.K.’s FTSE 100 was up 0.7 per cent and Germany’s DAX was down 0.2 per cent in afternoon trading. In Asia, Japan’s Nikkei 225 fell 0.6 per cent in overnight trading.
In Canada, Teck Resources Ltd. sold a 17 per cent stake in China’s $200-billion (U.S.) sovereign wealth fund, China Investment Corp. The $1.74-billion (Canadian) deal will help Teck reduce its debt load – an effort that began late last year when crushing debt sent its share prices tumbling nearly 90 per cent. Since then, following successful efforts to raise cash, the shares have tripled.
Thursday, July 2, 2009 04:44 PM
The close: Three down...and counting
David Berman
The U.S. stock markets are closed on Friday, ahead of Independence Day, but that doesn’t spare investors from a sobering fact: Major indexes have fallen for three consecutive weeks after rebounding more than 40 per cent from their March lows, underscoring widespread anxiety over whether the economy can show real signs of turning around.
On Thursday, there was little evidence of any rebound after the Labour Department reported a drop in June payroll numbers that was far worse than economists had been expecting. Payrolls fell by 467,000, or 102,000 more than expected.
President Barack Obama attempted to put the dismal numbers in context. “It took years for us to get into this mess,” he said, “and it’s going to take us more than a few months to turn it around.” But investors, fearing that the recession will linger longer than they had originally believed, had other thoughts.
After an extended trading session in New York, the Dow Jones industrial average closed at 8280.74, down 223.32 points, or 2.6 per cent. All 30 stocks in the index ended the day lower. The broader S&P 500 closed at 896.42, down 26.91 points, or 2.9 per cent.
Alcoa Inc. fell 4.7 per cent, JPMorgan Chase & Co. fell 4.4 per cent, General Electric Co. fell 2.7 per cent and Microsoft Corp. fell 1.9 per cent.
For the week, the S&P 500 fell 2.5 per cent, bringing its total decline to about 5.7 per cent since hitting 950 in June.
All 10 subindexes fell during the week, led by a 4.2 per cent drop by financials. Materials fell 3.3 per cent, industrials fell 3.2 per cent and energy stocks fell 2.8 per cent – suggesting that investors are particularly averse to cyclical sectors of the market that had been primed for an economic recovery.
On the other hand, defensive sectors declined at a more modest pace. Consumer staples fell 0.2 per cent and utilities fell 1.4 per cent.
In Canada, the S&P/TSX composite index closed at 10,245.91, down 129 points, or 1.2 per cent.
Energy stocks were by far the biggest drags after the price of crude oil sank to $66.73 (U.S.) a barrel, down $2.58 – its lowest level since the end of May. Suncor Energy Inc. fell 6.3 per cent and Canadian Natural Resources Ltd. fell 4.6 per cent.
Financials were relatively unchanged, with Royal Bank of Canada falling just 0.2 per cent and Bank of Nova Scotia falling 0.4 per cent.
Gold producers rose even though the price of gold fell about $10, to $931 an ounce. Goldcorp Inc. rose 2.3 per cent and Kinross Gold Corp. rose 3.8 per cent.
Thursday, July 2, 2009 03:44 PM
Can Manulife outshine the banks?
David Berman
Canadian bank stocks and Manulife Financial Corp. have been moving in opposite directions recently, with banks rising higher and higher (Thursday’s setback excepted) and Manulife in full-on correction mode.
For Michael Goldberg, an analyst at Desjardins Securities, this divergence suggests investors should take a cautious approach to the banks but buy Manulife.
The insurance company has fallen by about 13 per cent since June 19 – a move that was initially blamed on an investigation into the firm by the Ontario Securities Commission, but is now being blamed on a potential move by Manulife to bolster its reserves.
“We believe that the recent decline in Manulife’s stock price has been an overreaction by investors,” Mr. Goldberg said in a note. “As we have said in the past, we expect any reserve strengthening next quarter to be minimal on a net basis....”
He has a price target of $26.50 on the stock, based on his belief that it will trade at 9.5-times estimated 2010 per-share earnings. On Thursday afternoon, the stock traded at $19.85, down 34 cents.
At the same time, Mr. Goldberg is growing wary of Canadian bank stocks, now that they are trading at their highest valuations (on a price-to-earnings and yield basis) since Lehman Brothers Holdings Inc. went bust in September.
“On a quarter-over-quarter basis, they have increased by 35 per cent, as represented by the Canadian bank index,” he said. “This potentially makes them riskier, more susceptible to economic events that deviate from the positive trend.”
Thursday, July 2, 2009 02:46 PM
Another down quarter for dividends
David Berman
Dividends are still going nowhere in the United States. The latest look by Standard & Poor’s found that just 233 companies of the 7,000 companies that report dividend information raised their payouts in the second quarter of 2009 – down about 49 per cent from the 455 increases in the second quarter of 2008.
At the same time, there were 250 dividend decreases during the quarter, the highest number since 1957. Among the higher profile cuts in June, Black & Decker Corp. cut its dividend by 71 per cent, KeyCorp cut by 84 per cent and Eastman Kodak Co. cut by 100 per cent.
Among those companies that increased in June: Costco Wholesale Corp. (12.5 per cent), Exxon Mobil Corp. (5 per cent), International Business Machines Corp. and Procter & Gamble Co. (10 per cent each).
“The current trend to conserve cash and cut dividends has become defensive, with even relatively healthy companies choosing to reduce payouts,” Howard Silverblatt, senior index analyst at Standard & Poor’s, said in a statement.
Even the fact that dividend decreases outpaced increases during the quarter is something new. Since 1995, the average ratio has been 15 increases for every decrease. Now, the ratio is five increases to six decreases
Mr. Silverblatt noted that the next test for dividend payers will arrive in August and September, when companies review their expenses for 2010. If executives see dark days ahead, the dividend story will remain grim.
Curiously, the stock market hasn’t cared much about this story. According to S&P data, non-dividend paying stocks in the S&P 500 have vastly outperformed dividend paying stocks in 2009, even after dividend payments are included in the performance. Dividend payers have fallen an average of 2.4 per cent this year, while non-payers have surged 24.4 per cent -- a difference so incredible that we've called S&P to find out if there's an error here.
Either way, it suggests that investors are wary of any company paying a dividend these days, while those that don't pay a dividend have nothing to lose.
Thursday, July 2, 2009 12:18 PM
At noon: Ugliness persists
David Berman
Thursday’s stock market activity certainly demonstrates what happens when expectations for an economic recovery are suddenly called into question. Before markets opened, the U.S. Labor Department reported a sharp drop in payrolls in June, countering expectations for a modest decline, and stock markets were still in a tizzy by midday.
At noon, the Dow Jones industrial average was down 177 points or 2.1 per cent, to 8327. The broader S&P 500 was down 21 points or 2.3 per cent, to 902.
All 10 subindexes in the S&P 500 were down – and while defensives generally fared better than cyclicals, everything got whacked substantially.
Consumer discretionary stocks were the hardest hit, falling 3.3 per cent. Energy stocks fell 3.1 per cent, tracking the decline in the price of crude oil. Industrials fell 2.8 per cent.
Consumer staples were the best off, but only in a relative sense: These stocks, whose earnings tend to hold up when the economy is crumbling, were down 1.1 per cent. Health care stocks and financials each fell 2 per cent.
In Canada, the S&P/TSX composite index was down 101 points or 1 per cent, to 10,274.
Energy stocks were by far the worst off, falling 2.8 per cent. Industrials fell 1.5 per cent and consumer discretionary stocks fell 0.8 per cent. Financials fell 0.7 per cent.
Surprisingly, two subindexes moved higher. Materials rose 1.3 per cent, driven by gold producers (even as the price of gold sagged with a rising U.S. dollar). Telecom services rose less than 0.1 per cent.
Thursday, July 2, 2009 11:44 AM
Feeling good about defensives
David Berman
With North American stock market indexes struggling on Thursday, investors are no doubt wondering if the much-anticipated economic recovery in the second half of the year – along with market gains – is toast.
Two prominent Canadian stock market observers weighed in on how the current bout of volatility will play out. Both argued that the near-term could be rough.
At BMO Nesbitt Burns, Ben Joyce believes that investors are awaiting clear signals of an economic upturn later this year – and this waiting should translate into a so-called consolidation/correction phase that will last throughout the summer. As a result, he has shifted more money into defensive sectors at the expense of cyclical stocks.
Beyond this choppy phase, though, he remains upbeat.
“Over a 12-month horizon, we believe a new bull market is under way that will carry stock markets to targets of 11,000 for the S&P/TSX and 1,000 for the S&P 500,” Mr. Joyce said in a note. “Stock market valuation remains attractive relative to competing yields on fixed income.”
At Royal Bank of Canada, Ray Hanson believes that momentum has begun to top out at the index level – and that means a similar consolidation/correction phase that could last for the next two-and-a-half to four months.
“Consensus seems to favour a relatively mild pullback in the range of 10 per cent that will give ‘everybody’ a chance to ‘buy the dip,’” he said, in a note. “As you know, we are still agnostic on the outcome of the bull/bear debate, and do not believe we can start a sustainable new up-cycle until late 2010. There is still a real possibility for a reprise of the first-quarter white knuckle market action in the weeks ahead.”
He recommends reducing exposure to typically volatile groups of stocks that rely on an improving economy, such as metals stocks and energy producers. At the same, he recommends boosting exposure to defensive groups, such as utilities, telecommunications, consumer staples and health care companies.
Markets Blog Contributors
David Berman
David Berman has been writing about business and investing since 1995. He began his career at Canadian Business magazine, where he wrote full-length features on a range of topics, from goose slaughterers to broadcasters. Later, he moved to MoneySense magazine, where his emphasis turned to investing. More recently, he worked at the Financial Post as an investing writer and daily columnist. He has a bachelor of arts degree from the University of Toronto and studied journalism at Ryerson University.
David Parkinson
David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics.
Steve Ladurantaye
Steve Ladurantaye wrote about technology companies in Ottawa before reporting for the Peterborough Examiner and Kingston Whig-Standard, where he won a National Newspaper Award for explanatory journalism. After joining the Globe and Mail in 2007, his work has regularly appeared in Report On Business and Globe Investor Magazine.
