News

The Toronto stock market tumbled almost 100 points Friday as the energy and financial sectors posted steep declines while the New York markets weakened, closing out a volatile week.

The shift came Friday as good U.S. economy reports in the morning turned to investor worry in the afternoon when the U.S. Commerce Department imposed trade sanctions against China.

Toronto's S&P/TSX composite index closed down 92.52 points to 13,165.50 after dropping as much as 114.97 points near mid-day. For the week it was down 72.16 points.

The Canadian dollar was 0.25 of a cent (U.S.) higher at 86.61 cents.

The news of economic sanctions, intended to protect U.S. paper producers from Chinese government subsidies, hit equity markets on both sides of the border.

The energy sector headed losses on the TSX, off 1.43 per cent after running up sharply this week.

Crude prices rose by 5.75 per cent this week amid concerns about supply disruptions with Iran refusing to release the 15 Royal Navy crew captured a week ago.

On Friday, the May crude contract on the New York Mercantile Exchange slipped 16 cents to $65.87.

The TSX Venture Exchange gained 5.11 points to 3,186.83.

On Wall Street, the Dow Jones industrials was up a bare 5.6 points to 12,354.35 — down 126.66 points for the week — after the Chicago purchasing managers index logged a record month-to-month gain, rising to 61.7 per cent from 47.9 per cent in February. It was the highest reading since April 2005 for the measure of Midwest factory activity, confounding analyst expectations of a contraction.

The report is considered a good indicator for Monday's national manufacturing report from the Institute for Supply Management.

“Inflation is a worry, so the market is reacting in a tepid way to what I considered fairly good economic news,” said Richard Hoyt, market strategist for KDV Wealth Management in Minneapolis.

The Nasdaq composite index rose 3.76 points to 2,421.64 and the S&P 500 index slipped 1.67 points to 1,420.86 after consumer spending and personal income figures for February moved up more than expected.

In all, it was a down week for North American markets as investors grappled with data showing more deterioration in the U.S. housing sector and falling durable goods orders.

There was also a reminder from U.S. Federal Reserve Board chair Ben Bernanke that core inflation remains a serious problem, which disappointed investors looking for the central bank to cut interest rates soon to offset economic damage from the housing sector.

On Friday, the Commerce Department said consumer spending and personal incomes both rose 0.6 per cent last month — double what had been expected.

An inflation barometer that excludes energy and food shot up by 0.3 per cent in February, the biggest increase since last August. That left 12-month core inflation at 2.4 per cent, above the Federal Reserve's one to two per cent comfort zone.

Meanwhile, Statistics Canada reported Friday the economy grew more slowly than expected in January, rising 0.1 per cent against the 0.2 per cent reading that economists were anticipating.

However, “despite the slowing in January, the three-month running rate clocked in at a 2.4 per cent annualized pace, a solid pickup from the sub-two per cent pace recorded in the previous seven months,” noted RBC economist Dawn Desjardins.

The TSX financial sector dropped 0.91 per cent.

On the TSX, declines beat advances 832 to 734 with 242 unchanged as 356.8 million shares traded worth $5.8-billion (Canadian). Canadian Press

_____

WHICH WAY FOR BLACKWATCH

Blackmont Capital is questioning whether BlackWatch Energy Services Trust's limited cash cushion is sufficient to meet its financial covenants with lenders, especially given its debt-to-trailing EBITDA ratio.

And with the ratio expected to remain relatively high this year, “this could restrict the trust's ability to commit capital and better position itself ahead of a recovery,” writes analyst Roy Ma.

As a result, he doubts the oil industry services fund will return to paying distributions to unitholders in 2007 in light of its negative cash flow in the fourth quarter. And with “industry conditions expected to worsen after the first quarter, there is a lack of visibility on what the trust can do differently to achieve its guidance,” he says.

Besides searching for a new CEO, BlackWatch “lacks strategic direction,” Mr. Ma warns. BlackWatch went public last August as a growth-oriented trust, but is “currently struggling to conserve its cash position and pay down debt, a far cry from its initial business plan,” according to the analyst. He has a “sell” rating on the units, with a 12-month target price of $2.25.

_____

BIOMIRA IN VACCINE UPDRAFT

Shares of cancer vaccine developer Biomira Inc. are attracting speculative buying following a U.S. FDA panel approval of Dendreon Corp.'s prostate cancer vaccine.

Biomira has long been dogged by clinical failures and investor skepticism. But its Stimuvax vaccine is now being tested in patients with lung and pancreatic cancer by its German partner. The stock is up 13 per cent to $1.37 on the TSX Friday.

U.S. cancer vaccines developers are also in seventh-heaven on the Dendreon news, with Antigenics Inc. up 8.1 per cent to $2.14 (U.S.), Cell Genesys Inc. up 23.4 per cent to $4.32, Genitope Corp. up 8.6 per cent to $4.03 and Favrille Inc. up 19.5 per cent to $3.13.

The surprise FDA panel ruling could pave the way for approval of the first-ever cancer vaccine. Dendreon shares have more than doubled to $13.54 on Friday.

_____

MARTINREA STEPS ON GAS

Martinrea International Inc.'s strong fourth-quarter results and a bullish outlook have earned an $18 price target from Jennings Capital, up from $12.

Analyst Rich Morrow has also bumped up his 2007 profit target for the auto parts maker to 90 cents a share from 80 cents and has introduced a 2008 forecast of $1.20. The major driver for profits over the next two to three years will be the integration of recently acquired Thyssen Krupp Budd, which had sales of $1-billion (U.S.) in 2006 and will more than double Martinrea's sales this year.

While Mr. Morrow suggests the addition of Thyssen will weaken Martinrea's gross margins in the first quarter, he forecasts it will also add to the bottom line.

Shares of Martinrea have touched a 52-week high of $15 on the TSX Friday and are sitting at $14.85, up $1.69 or nearly 13 per cent.

_____

COMPUTER HARDWARE A SELL

Sell computer hardware stocks is the verdict of BCA Research, noting that the sector is heavily dependent on consumer spending, which should stay weak as long as U.S. housing woes persist. And companies typically stop buying computers first when they're pruning overall business and investment spending.

Moreover, new orders for computers have been locked in a “zero-growth mode” for nearly a year, BCA writes, dulling prospects for future sales growth. And inventories are still building, which suggests profit margins are set to compress. All of this points to a drop in expected profit growth and a “downward adjustment in relative stock prices is not over.”

_____

LOSSES PILE UP FOR INVESTORS

North American stock markets are in retreat at mid-day on Friday, with widespread losses in the financial and energy sectors taking the TSX composite to triple-digit dip.

Wall Street, which had been in positive territory for most of the morning on largely positive economic data, is also sliding with the Dow Jones industrials down 35 points on profit-taking. Analysts attribute the volatility to investors cleaning up their portfolios ahead of the next quarter.

Crude oil prices pulled back from six-month highs, taking heavily weighed Canadian Natural Resources Ltd., EnCana Corp. and Suncor Energy Inc. to losses of 1-to-2 per cent.

Banking stocks in Toronto are also under pressure, led by the banks Bank of Nova Scotia, Royal Bank of Canada and Bank of Montreal and Canadian Imperial Bank of Commerce.

Resisting the sell-off is Quadra Mining, which has climbed 12 per cent to $10.22, after unveiling plans for a takeover offer for International Molybdenum PLC.

_____

MORE PET FOOD PAIN

Shares of Menu Foods Income Fund are falling again after scientists uncovered chemicals used to make plastics and fertilizer, and wheat gluten, in recalled pet food.

The units are 1.8 per cent lower to $3.82 on the TSX Friday morning.

Menu Foods recalled 60 million containers of cat and dog food earlier this month, involving nearly 100 brands of “cuts and gravy” style dog and cat food, and covering major brand-name and private-label products sold across North America.

It is not clear how many pets may have been poisoned by the apparently contaminated food, but the U.S. FDA alone has received more than 8,000 complaints from pet owners.

_____

CANCER VACCINE LIGHTS UP DENDREON

And this is why retail investors love biotech so much. Shares of Dendreon Corp. have more than doubled Friday after a U.S. FDA panel opted to clear the company's experimental therapeutic cancer vaccine Provenge.

The green light caught investors, many sitting with short positions, by surprise and sent the stock price up $8.83 (U.S.) to $14.05 on the Nasdaq Friday morning.

“This is a significant step not just for Dendreon, but for the biotech industry as a whole,” Steve Brozak, an analyst at WBB Securities, told Reuters. “However, it remains to be seen what the practical applicability of this vaccine will have, what physician adoption rates will be and how the company will monetize its momentum.”

While the FDA may require additional data on the vaccine, Jonathan Aschoff, an analyst at Brean Murray Carre, writes in a research report that Dendreon “is banking more on the dire need for safer prostate cancer therapies given the large and growing incidence of the disease and less on the merits of its trials' results.”

_____

DOING THE MATH FOR DELL

The headlines are pretty scary: “accounting errors, evidence of misconduct and deficiencies in the financial control environment.”

So says computer giant Dell Inc. as an accounting probe continues to drag on. But Goldman Sachs, which put the stock on its “buy” list at the beginning of the week, is reading between the lines and sees “more opportunities than setbacks” in the latest results.

The big negative is that Dell won't make its deadline of April 18 to file its financials with regulators. The upside is that the probe is focused on the 2001-to-2005 time frame, suggesting less risk to restate more recent results. And a raft of management changes could have already addressed the probe's findings.

Analyst Laura Conigliaro still views Dell as a turnaround story with a 12-month price target of $28 (U.S.) on the stock. It is down 1.6 per cent to $23.01 on the Nasdaq Friday morning.

_____

MEDISYS SLASHES DISTRIBUTIONS

In a surprise move, Medisys Health Group Income Fund slashed its distribution by 50 per cent to 47.5 cent a unit from 94.5 cents, prompting Blackmont Capital to put the rating and price target of the units under review.

Operationally, fourth-quarter results were largely in line, with revenue missing by 4 per cent and operating profit ahead by 5 per cent, writes analyst Trevor Johnson. “Hence, we believe the weakness is a function of high corporate G&A,” which is not included in operating profit.

He admits to being “suspect” of Medisys' cash generating capabilities, “but even so, the 50-per-cent cut came as a surprise.”

The units have tumbled 4.8 per cent to $8.09 on the TSX Friday morning.

_____

SEARCHING FOR DIRECTION

Stock prices on Wall Street held steady at the opening Friday but plunged on the TSX, even though oil prices reached six-month highs on the political standoff between Iran and the West.

The Dow Jones industrial stocks moved slightly positive in the first few minutes of trading as higher-than-expected U.S. consumer spending and personal incomes should help to alleviate recession fears that have been growing because of a deeper-than-expected slump in housing and troubles in the domestic auto industry.

The TSX composite quickly dropped 25 points as energy and financial stocks slumped.

_____

DRAWING A BEAD ON IPSCO

Steel maker Ipsco Inc. is a hot takeover target as consolidation in the North American industry accelerates, analysts say. Indeed, Thursday's 12 per cent spike in the stock price was all about United States Steel Corp. dealing to buy Lone Star Technologies Inc.

UBS has raised Ipsco's stock price target to $134 (U.S) from $106 based on a new forecast of higher steel prices and M&A remaining a key theme and driving the shares higher. Indeed, analyst Peter Rozenberg writes that the company “has value in a consolidating market.” Notwithstanding his “neutral,” rating, his new target price comes from lifting the multiple on 2008 EBITDA to 5.8 times from 5.3.

Dejardins Securities analyst John Hughes goes further, upgrading Ipsco to “buy” from “hold” and hardening his target price to $185 (Canadian) from $130. The new target, which represents 23 per cent upside, is based on comparing five financial metrics of four recent steel acquisitions.

_____

ANALYST VOTES FOR A BCE-TELUS UNION

Notwithstanding Thursday's buzz about the deal for BCE Inc., Desjardins Securities analyst Joseph MacKay contends that the “most value-surfacing transaction” is not selling the giant to private equity, but “finding a way to merge Bell and Telus.”

Specifically, he points to the level of competition that exists in the consumer wireline market as a reasons to combine their wireline operations as a way to “harvest synergies.” And the potential to merge wireless operations could pop up if regulators mandate “tower sharing and roaming relationships to new wireless entrants.”

As for the next big event at BCE — how to use $3-billion plus from the planned sale of Telesat — Mr. MacKay figures the bulk of the money will go towards share buybacks.

And he doesn't put a lot of faith in BCE's denial of talks with private equity. “We have no doubt that over the past two years, BCE has had numerous discussions and conversations with private equity about a number of matters” as it restructured Bell Globemedia, spun off rural lines to an income trust, and unloaded Telesat.

_____

BLACK GOLD, THE REAL THING, AND THE MARKET

Lehman Brothers strategist Fred Goodwin raises an interesting argument about linking oil and gold to gauge swings in equities.

The traditional theory is that gold tends to move in line with oil because high oil leads to inflation, which drives people to buy gold as a hedge. But analysts are wary of linking gold, oil and stock prices, because shares have risen in the recent past despite a rise in oil prices, which should be bad for companies and hurt growth.

But Mr. Goodwin suggests that by viewing gold as a proxy for product prices, and oil as an indicator of input costs, the gold-to-oil ratio takes on a different significance. The link could be predictive, if the past four years are any indication: a dip in gold-to-oil has coincided with a fall in share prices.

“In periods of risk aversion, the gold-to-oil ratio tends to go down, in line with share prices,” his charts show. “In equity corrections since 2003, gold tended to go lower with equities. When markets rallied, gold went up faster than oil; when they fell, gold went down faster.”

For example, when global stock markets fell 6.5 per cent between Feb. 27 and March 5, gold fell 7.5 per cent, while oil moved down 2.2 per cent.

On the Feb. 27 sell-off, the gold-to-oil ratio slid to 11.05 from 11.19, and it slipped below the 11-mark in following days, recovering to that level only on March 12, the day a stuttering stock recovery peaked, he says.

The bigger trend here is that gold has started moving in line with shares, diluting its traditional image as a hedge.

_____

CRUDE SETS THE TONE

North American stock markets will likely focus on the impact of firming oil prices at the opening Friday as gains across Asia and Europe were capped by ongoing tensions between Iran and the West.

On tap Friday is inflation-sensitive data on U.S. personal income and spending for February, which could set the future direction for the greenback and gold, crop plantings, construction and manufacturing.

Evidence of misconduct and financial errors at computer giant Dell may also pressure the technology sector when trading begins. “It's probably company specific . . . but if a company like Dell is caught, it makes you wonder who else is doing it,” Barry Ritholtz, chief market strategist at Ritholtz Research, told Reuters.

Markus Reinwand, equity strategist at German bank Helaba, suggests that recent profit warnings from the semiconductor sector might reduce investor appetite for higher-risk securities. “With the quarterly reporting season drawing towards its close, the earnings outlook theme could take centre stage in the coming weeks.”

In a morning commentary, Bank of Montreal notes that the TSX composite is up 1.6 per cent since the start of the month, led by a 4.4 per cent spike in energy and despite a 7.5 per cent slide in tech. And, since the start of the year, the TSX is up 2.7 per cent, led by industrials, telecom and consumer discretionary stocks.

If the index hangs in on Friday, it will mark the sixth consecutive monthly gain, including a slight rise during turmoil filled February. On a quarterly basis, it would mark the third consecutive rise for the TSX and the 10th increase in the past 11 quarters, the bank adds.

Oil prices, which jumped $2 a barrel (U.S.) on Thursday to a six-month high above $66, took a run at $67 on Friday because of global supply worries in the Middle East and a strike in France that threatens to crimp summer fuel supplies in the United States.

The price jump “shows the underlying tightness in the market despite a period of seasonally low demand,” warns Gerard Burg, an analyst with National Australia Bank.

U.S. crude is trading up 18 cents at $66.21 a barrel overseas, with London Brent up 46 cents to $68.34, its eighth day of gains.

Bullion prices rebounded on Friday on safe-haven buying, buoyed by firmer oil prices. After easing on Thursday, the yellow metal rose as high as $663.50 an ounce overseas.

“I hate to speculate on the price range but I think very easily we can see $700 gold,” Stephen Orr, chief executive officer of Australia-listed Oceana Gold, told Reuters. “We think that all the fundamentals that have supported the price over the last couple of years are still in place.”

Copper traded higher on the last trading day of the month supported by strong Chinese demand even though worries about economic growth persist, analysts say.

The U.S. housing market is expected to see fewer homes built in 2007 than in 2006, analyst Andrew Keen at investment manager Sanford C. Bernstein said in a report. A 20 per cent downturn in residential building activity would result in a loss in demand of 0.56 per cent for copper, 0.24 per cent for aluminum and 0.12 per cent for steel, he predicts.