News

North American equity markets waffled Thursday as investors mulled the implications of higher crude prices and Motorola's profit warning one day after euphoria about U.S. interest rates spurred a rally.

The TSX edged 15.91 points lower to 13,139.64, weighed down by telecom, technology and financial stocks but boosted by metal, mining and energy stocks.

Crude oil for May delivery rose $2.08 (U.S.) to close at $61.69 a barrel on the New York Mercantile Exchange while gold futures added $4.20 to $664.20 an ounce.

Wall Street, meanwhile, finished mixed one day after the U.S. Federal Reserve suggested interest rates may not climb any time soon. On Thursday, the Dow Jones industrials added 13.62 points to 12,461.74, consolidating gains of the past three days. The Nasdaq and S&P 500 both closed essentially flat.

Technology shares were weak, after Motorola's profit and outlook warning. That has prompted some analysts to recommend loading up on Texas Instruments, which is unlikely to follow Motorola into a restructuring.

Shares of Motorola, which was downgraded by BMO Capital Markets to “market perform” from “outperform” and by RBC Dominion Securities to “sector perform” from “outperform,” dipped $1.24 or 6.62 per cent to $17.50.

Biovail, which was cut by Goldman, fell 67 cents (Canadian) or 2.6 per cent to $25.08 while Nexen lost 62 cents to $69.05 and Yamana Gold lost 31 cents or 1.8 per cent to $16.90.

Cineplex, the subject of a bullish analyst note, rose 3 cents to $15.67.

Roma Luciw

_____

CINEPLEX PICTURE STILL BRIGHT

The sun is not setting on the Cineplex empire, even though the moat around its movie castles is narrowing from the attack of DVDs and Internet downloading of films.

So contends Blackmont Capital, where analyst Barbara Gray has initiated coverage of Cineplex Galaxy Income Fund with a “buy” rating and target price of $19.50. The fund is quoted at $15.69 on the TSX Thursday afternoon.

She figures the chain can withstand risks to its cash flow coverage and debt covenants because it generates double-digit growth in its high-margin cinema ad business and has a cushion to absorb a 10-per- cent drop in attendance before financial concerns kick in.

And starting next year, the movie studios will finance an estimated $150-million roll-out of digital technology across Cineplex's 1,300 screens. She expects the conversion to digital cinema will “increase Cineplex's operating flexibility and act as a key growth catalyst for both its cinema advertising business and expansion into alternative entertainment.”

_____

PRAISE FOR DRILLERS

For one thing, there's a mammoth contract backlog among offshore oil services and drillers and for another, Merrill Lynch contends, investors aren't adequately crediting the sector for its ability to be a defensive play during episodes of market volatility.

The seven offshore drillers in Merrill's universe have a combined contract backlog of some $57-billion (U.S.), which equates to 74 per cent of their combined market capitalization and provides “unmatched protection against weakening market conditions,” writes analyst Alan Laws.

“If equity markets don't see value there, expect industry to react. We think M&As, including LBOs, will and should be the story of the offshore group this year,” he suggests.

The major benefit of bulging contract backlogs of course is that it insulates operators from economic cycles, which Mr. Laws points out is exactly what prowling private equity firms devour.

When he crunches numbers to assess the group against any downside in fundamentals, there are two clear winners: Transocean, which is head and shoulders above the group under the harshest of circumstances, and Noble Corp., one of the least expensive in the group, he concludes.

_____

CRUDE, METALS POWER TSX

Riding higher crude oil and base metals prices on Thursday, the Toronto composite is firmly in positive territory, with the index posting a 42-point gain at mid-day.

Wall Street, on the other hand, is digesting a powerful rally on Wednesday, driven by U.S. Fed hints of an easier money policy soon. The Dow Jones industrials are down 12 points, consolidating gains of the past three days.

U.S. energy shares are higher as crude futures are up strongly, but technology shares are weak, after Motorola's profit and outlook warning. That has prompted some analysts to recommend loading up on Texas Instruments, which is unlikely to follow Motorola into a restructuring.

Oil prices on Thursday have climbed more than $1 (U.S.) to $61.17 a barrel on the New York Mercantile Exchange, giving the TSX energy index a 1.3 per cent gain.

Mining stocks have also jumped nearly 1 per cent on the TSX as copper and nickel prices firmed in overseas trading.

_____

YAMANA NEAR THE END OF ITS RUN?

Yamana Gold's stock price has nearly doubled in the past six months on the back of an aggressive acquisition binge. But UBS warns that based on higher bullion prices, it now may be harder for the gold miner to find “accretive opportunities” in the marketplace. That's okay with Yamana boss Peter Marrone, who has now set his sights on running the profitable miner.

Nevertheless, analyst Tony Lesiak has downgraded the stock to “reduce” from “neutral,” holding his target price at $16, citing on a multiple of 1.75 times (slightly above the group average) to the operating net asset value. Prior to Yamana's 1.8 per cent price drop on the TSE Thursday, Mr. Lesiak says the stock was trading at a 44 per cent premium to its peer group, which is “unsustainable.”

His numbers, including lower per-share profit in 2007 and 2008 to reflect higher depreciation and taxes, assume Yamana will make good on delivering its significant growth targets over the next few years.

Raymond James analyst Paul O'Brien also downgraded the stock to “outperform” from “strong buy” after updating his financial model and reviewing relative implied returns to targets in his gold coverage universe. He sliced $1 from its previous target price of $23.

But Genuity analyst Chantal Gosselin hiked her target price to $19.50 from $18.75, sticking with a “buy” rating. She pegs first quarter cash flow at 19 cents (U.S.) a share, up from 2 cents in the fourth quarter of 2006, reflecting production from the Chapada mine.

_____

A TIP OF THE HAT FOR NEXEN

There's nothing like a marketing trip with a company CEO to get the juices flowing. That's what happened when Nexen boss Charlie Fischer tripped around Toronto and Montreal this week with Desjardins Securities analysts Adam Zive and Peter Yoon.

In a new report, they upgraded the oil-leveraged senior producer to “top pick” from “buy” and raised their target price to $83 from $75. That sent the stock price to a 1 per cent gain at $70.41 on the TSX Thursday morning.

“Nexen has significant near-term catalysts and remains fundamentally undervalued,” with some of the most “impressive world-class reinvestment options” of any North American oil and gas explorer and producer, the analysts say.

They also believe it is the “most likely M&A target in our large capitalization oil and gas universe.” Among other catalysts, they list production growth of 15 per cent-plus in 2008 and the potential of a stock buyback program and-or an increased dividend.

_____

BIOVAIL CUT BY GOLDMAN

Goldman Sachs has removed drug maker Biovail from its “America's buy list,” downgrading the stock to “neutral” after a 28 per cent advance since the end of the November. That compares with a 4 per cent gain by the S&P 500 index.

Moreover, Goldman says the stock is trading within 8 per cent of its 12-month target price of $24 (U.S.). Biovail is down 1.7 per cent at $21.86 on the NYSE Thursday morning.

Analyst Randall Stanicky says the shares should see support from current levels because of 6.7 per dividend yield, or 9 per cent, including a special dividend.

Despite that support, “we believe more meaningful gains will be linked to the emergence of a growth story where visibility remains limited.” Nevertheless, he expects Biovail to announce a distribution partnership for one of its drugs in the near-term.

_____

TSX POWERS HIGHER

Stock prices on the TSX shot ahead at the opening Thursday, refusing to bend to a mildly weaker tone on Wall Street, where technology sector concerns outweighed Wednesday's euphoria on interest rates.

The Toronto composite jumped 73 points at the opening bell, spurred by commodity price advances in Europe and Asia on Thursday.

Despite the weaker tone on Wall Street, Merrill Lynch economist David Rosenberg says the U.S. Fed dropped its reference to “additional firming” in the statement yesterday, and that's all that matters.

“So the explicit threat of another rate hike was deleted . . . we would consider that to be pretty important,” he writes in a research note. “For the first time in this rate cycle, the Fed has left itself in a position where it can cut rates if conditions warrant such a move.”

_____

MOTOROLA LEFT RINGING

The busy signal at Motorola is ringing across Wall Street on Thursday, with a growing list of brokerage downgrades and price target cuts.

The stock is trading at $17.80 before the opening bell after closing at $18.74 on the NYSE Wednesday. The world's No. 2 phone maker warned it would post a loss in the first quarter and that it would fall short of its prior full-year forecasts.

The stock was downgraded by BMO Capital Markets to “market perform” from “outperform” and by RBC Dominion Securities to “sector perform” from “outperform.”

Goldman Sachs analyst Brantley Thompson's “bottom line message remains avoid the shares.” He cut his 12-month target price to $16 from $18, “which we believe discounts most of the risk ahead.”

In a new report, he says Motorola's long-term market share prospects in Britain and China “appear vulnerable.” The company's stronghold in the U.S. market also “carries risks,” not only because it is the least attractive globally, but the United States is also the market where both Apple and RIM's Blackberry are likely to see the greatest success.”

_____

FED RATE CUTS AHEAD, SAYS UBS

Strategists at UBS like the chances of the U.S. Fed cutting interest rates by 100 basis points this year, with the obvious impact it would have for stock prices.

Looking at seven episodes since 1984 when the Fed cut rates, UBS notes that the S&P 500 index rose on average by 8 per cent in the next six months and 13 per cent in the next 12 months.

And, drawing a line in the sand, UBS points out that less than 3 per cent of the S&P 500 profit is driven by housing, which is grinding in low gear, compared with 40 per cent of index profits exposed to robust foreign economies.

As a result, it suggest using dips in the market to buy U.S. equities with high exposure to foreign economies. Its list of “global growers” includes Autodesk Inc., Avon, Cisco, Coca-Cola, FedEx, Franklin Resouces, GE, Praxair, Proctor & Gamble and Thermo Fisher Scientific.

_____

STATIC FROM MOTOROLA AFTER FED'S ‘ALL CLEAR'

North American stocks may again move in opposite directions at the opening Thursday, with Motorola's profit warning and rising oil prices offsetting optimism about a possible cut in interest rates weighing on Wall Street.

The commodity-laden TSX, on the other hand, should firm on higher prices for base and precious metals in Europe and Asia.

“Motorola is clearly one of the items putting pressure on the market,” Paul Mendelsohn, chief investment strategist at Windham Financial Services, told Reuters. “The technology sector has been one of the areas of the market that's been holding up fairly well. Their comments were a disaster for the stock,” which dropped 4 per cent in Europe on Thursday.

And there's more trouble in the technology sector.

Alcatel-Lucent was downgraded to “neutral” from “buy” at Goldman Sachs, which said the French-American telecom equipment carrier's revenue was “in free fall” because of integration issues. Goldman doesn't see a sales recovery before the third quarter.

And chip maker RF Micro Devices was downgraded to “sector performer” from “sector outperformer” by CIBC World Markets, which also removed its $9 (U.S.) price target. “We believe RFMD's story outside of Motorola remains strong and consistent, yet given Motorola's contribution to RFMD's top line we see downside to our fiscal 2008 targets,” CIBC concludes.

The U.S. Fed's long-awaited reading on the state of the economy, which drove the Dow Jones benchmark up 159 points on Wednesday, will be followed by a Conference Board report on its index of leading indicators, a widely followed economic forecasting gauge, for February.

Crude oil has edged above $60 a barrel on Thursday, following a larger-than-expected decline in U.S. gasoline inventories, which fuelled concerns of tight supplies ahead of the summer driving season.

The price of U.S. oil has climbed from a 20-month low of $49.90 in January, partly because of OPEC supply cuts, but remains below a record $78.40 reached last July. It was trading up 92 cents at $60.53 a barrel on Thursday, while London Brent crude was up 98 cents at $61.75.

Stock markets in Asia and Europe posted gains of around 1-to-1.5 per cent on Thursday in the wake of the U.S. Fed's view on rates. “It was surprising just how strongly the markets reacted, as the Fed was mildly dovish,” Patrik Schowitz, strategist at HSBC, told Reuters. “ It does have the feel now that the stock sell-off is over.”

Copper for three-month delivery and nickel prices firmed overseas on Thursday, with copper ahead $47 at $6,657 a metric ton. Nickel rose $200 to $44,100 a metric ton.

Gold rallied to a three-week high on firmer oil prices and a weaker dollar, but pared its gains as the U.S. currency subsequently steadied. Spot gold rose as high as $665.75 an ounce, its best since March 1.

“The market is just telling us how much gold is linked to the rest of the markets nowadays,” said Jeremy East, head of metals trading at Standard Chartered Bank. “It's not operating on its own.”