These are stories Report on Business is following Monday, Oct. 1, 2012.
How it's shaping up
Not that this should surprise anyone, but David Rosenberg is taking a dim view of the U.S. economy.
"Big economic slowdown" is how the chief economist of Gluskin Sheff + Associates sums it up in a report today.
Mr. Rosenberg was wrapping up the facts after reading an article in The Financial Times on the weekend, citing among other things, the poor showing of sales of durable goods, or big-ticket items, and the revision down of economic growth in the second quarter.
Among his points:
1. Last week's durable goods report for August was "simply horrible." Orders plunged and, for the first time in three years, cancellations outpaced new orders. (Having said that, today’s ISM manufacturing report showed U.S. industry expanding in September, the index hitting a four-month high.)
2. Gross domestic product in the third quarter was revised down to "stall speed."
3. Real personal disposable income eroded by 0.3l per cent in August.
4. Rail car loadings slipped by 7.3 per cent in August from a year earlier.
5. Earnings forecasts called for annual gains of 10 per cent at the beginning of the year, and now are calling for just 4 per cent.
"Yet the stock market is up more than 14.6 per cent," he said.
"The Fed's increasingly bloated balance sheet has allowed for multiple expansion and for a 'trial separation' between the economy and financial assets ... Time will tell if it's a permanent divorce."
Third-quarter earnings season, by the way, kicks off next week when Alcoa Inc. reports, and it’s not shaping up well.
“The bar has been set so low for third-quarter S&P 500 EPS growth that some would say it is underground,” said chief equity strategist Sam Stovall of S&P Capital IQ.
“Indeed, Capital IQ consensus estimates project a 1.8-per-cent year-over-year decline in Q3 operating results.”
The question may be what happens after that.
“The primary focus, in our opinion, will be on whether Q3 results will indeed be the trough in this earnings cycle and if forward quarters will exhibit a gradual acceleration in growth,” said Mr. Stovall.
“Consensus forecasts point to a near-10-per-cent advance in Q4 estimates, along with an 11.6-per-cent gain in calendar year 2013.”
- Weak orders point to sharp slowdown in U.S. manufacturing
- U.S. economic growth cut to 1.3 per cent in second quarter
- U.S. factory sector grows for first time since May
- Euro zone factory data flag 'new recession'
- Greece recession to enter sixth year, budget shows
- China manufacturing in second month of contraction
A risky autumn
The next few months will not be for the timid, Bank of Nova Scotia warns, and investors should play it safe.
“While predicting the interplay between political events and fiscal policy can be a futile minefield, the very uncertainty surrounding how they can unfold merits caution by investors,” economists Derek Holt and Dov Zigler said in a report late Friday.
“That is particularly true with times like now when the global event risk calendar is so chock-full of key risks through to at least 2013.”
Among those events are everything from key central bank meetings and the U.S. presidential election to ongoing issues in Spain and Greece to changes in leadership in China.
This week alone brings meetings of the European Central Bank and the Bank of England, and the key jobs reports in the United States and Canada.
Mr. Holt and Mr. Zigler suggest investors stick to “safe haven” bonds such as those in the United States and Canada, tried-and-true stocks, and the U.S. greenback.
“We therefore think it’s advisable to maintain a bias in favour of the safe havens, including U.S. Treasuries, bunds, Canadas, gilts, gold, higher-quality and –yielding blue chips, and the [U.S. dollar] until further clarity may emerge toward year-end and into early 2013,” they said.
“Trading opportunities will abound given the sheer volume of critical events over coming months.”
U.S. won't see 'oil independence' in next few years
Analysts at Canada’s Desjardins today dismiss the idea that the United States will see “oil independence” by around 2020.
America has certainly been moving that way over the last 10 years, they said in a report, but the suggestion among some analysts and politicians that it will happen within the next several years “will likely prove premature.”
Obviously, there are huge issues here for Canada’s oil patch, given the huge U.S. market for our exports.
But that will take time, said the report by Allan Stepa, Chris MacCulloch, Tim Murray, Josie Ho and Jamie Murray.
“With flat to modestly declining consumption levels, U.S. crude oil imports appear set to decrease sharply in the upcoming years – a scenario which should provide a convenient sound bite for politicians, while raising a note of caution for traditional suppliers to the vast U.S. market, including Canada,” they said.
But in reality, the “long march to crude oil independence is still likely to be measured in decades rather than years.”
What’s more likely, they added, is North American crude independence, with hefty exports to the United States from Canada and Mexico adding to additional domestic production.
The Desjardins researchers plotted drilling in the U.S. against net imports since then-President Richard Nixon first began tossing around the idea of crude independence during the oil crisis of the early 1970s.
What they found, among other things, was that “there’s only so much rockin’ that can be done in the Bakken,” referring to the major U.S. play.
The Bakken has turned North Dakota into a “powerhouse,” and advancements in technology promise to drive development in other regions.
But “for the U.S. to continue marching toward crude oil independence, several repeatable resource plays – similar in size to the Bakken – will have to be identified and exploited with large-scale capital investment, which would provide strong support to the energy services industry.”
Xstrata backs bid
The massive merger of Glencore PLC and Xstrata PLC is back on track today.
Xstrata backed a revised bid of 3.05 Glencore shares for each share of Xstrata, saying in a statement that “the strategic rationale for the merger remains compelling and the transaction has the potential to create superior value for Xstrata shareholders.”
As The Globe and Mail’s Eric Reguly reports today, the proposed merger of commodities giant Glencore and miner Xstrata, owner of Canada’s Falconbridge, had been delayed because of issues including the price and executive pay.