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Bubble talk percolates as value of S&P 500 nears size of U.S. economy Add to ...

These are stories Report on Business is following Monday, Jan. 20, 2014.

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Bubble talk bubbles
Talk of a stock bubble continues to percolate as global markets post gains after gains.

Such fears have been bubbling for a while now, but are heightening as U.S. stocks set new highs and amid warnings from some policy makers.

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“With equity markets showing no sign of letting up, you can almost hear the murmurs about valuations growing louder,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

“One such example is the market value of the S&P 500, which is now within earshot of eclipsing the value of the U.S. economy for the first time on record outside of the tech bubble,” Mr. Kavcic said after markets closed Friday, as the benchmark ended the week having lost 0.2 per cent but having touched another high earlier.

The value of stocks that make up the S&P 500 is about $16.5-trillion (U.S.).

“True, the index is more global than it was 20 or 30 years ago, but other metrics like the forward p/e ratio and Shiller’s cyclically-adjusted p/e are also closing in on non-tech bubble highs.”

He was referring to what’s known as the price/earnings ratio, which looks at the value of a stock in relation to the per-share profit of a company.

Other observers have also warned that stocks appear to be getting ahead of themselves given recent corporate earnings and the economic outlook, driven instead by the easy money policies of central banks. Others fear no bubble.

Mr. Kavcic also noted the comments last week of Richard Fisher, chief of the Federal Reserve Bank of Dallas, who referred to the term “beer goggles,” which means, basically, that things look better when you’ve been drinking.

“The fact that stocks are rallying isn’t itself worrisome,” Mr. Kavcic said.

“The fact that valuations are expanding is also perfectly acceptable at this stage of the cycle,” he added.

“But if those valuations continue to expand at the rate they have over the past year, then by later this year we could be looking at levels topped only by those seen during the heated days of the tech bubble – not entirely impossible with the [Federal Reserve] not expected to tighten for almost two years, and a scenario that would become tougher for policy makers to brush off.”

Bets against loonie rise
Also nearing a milestone are bets against the Canadian dollar.

According to the latest data from the U.S. Commodity Futures Trading Commission, short positions for the loonie, as Canada’s dollar coin is known, now stands at $6.2-billion (U.S.), close to the spring record of $7.4-billion.

Osisko says no
Osisko Mining Corp. today unveiled a lengthy and harshly worded formal rejection of Goldcorp. Inc.’s hostile $2.6-billion bid for its smaller rival, The Globe and Mail's Bertrand Marotte reports.

Montreal-based Osisko’s board of directors is unanimously recommending that shareholders reject the offer Vancouver-based Goldcorp launched Jan. 14, calling it “financially inadequate” and saying it “significantly undervalues” Osisko’s main asset, the Canadian Malartic gold mine in northwestern Quebec.

Osisko also says the timing of Goldcorp’s offer is opportunistic because it is just before Canadian Malartic enters what Osisko expects to be its most productive years.

China growth slows
Economic growth is slowing in China, and is projected to continue slowing as the 2014 moves on.

According to official numbers today, gross domestic product expanded in the fourth quarter by 7.7 per cent, compared to 7.8 per cent in the third quarter of last year, but still a better showing than observers had expected.

On a monthly basis, “momentum” was still eroding, said Capital Economics, which forecasts more of the same going forward.

“With credit conditions likely to remain relatively tight, we expect investment spending and economic growth to slow even further in 2014,” said Mark Williams and Julian Evans-Pritchard of Capital Economics.

“It makes sense to focus on the monthly rather than quarterly data to assess the current state of growth,” they added.

“In each case, industrial output, fixed investment and retail spending weakened in December.”

Bombardier orders slip
Bombardier Inc. saw the number of orders for its aircraft fall last year and blames the decline on a longer-than-expected economic recovery.

Montreal-based Bombardier said today it received orders for 388 planes, net of cancellations, in 2013, compared with 481 orders in the previous year.

“The global economy has remained persistently sluggish, and with its recovery taking longer than originally anticipated, 2013 continued to be a challenging year for aviation,” said Guy Hachey, president and chief operating officer of Bombardier Aerospace.

CNOOC eyes boost
Chinese energy giant CNOOC Ltd. is targeting an increase in production of up to 5.6 per cent in 2014, helped by its $15.1-billion (U.S.) takeover last year of Calgary-based Nexen Inc., The Globe and Mail's Bertrand Marotte reports.

Beijing-based CNOOC said today it expects to produce between 422 and 435 million barrels of oil equivalent this year, including about 69 million barrels from Nexen.

The company estimates its net production for 2013 at about 412 million barrels, including 61 million from Nexen.

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