Stock markets fell Wednesday with investors discouraged by tensions in the Persian Gulf that sent oil prices higher, a disappointing read on U.S. durable good orders and fresh concerns about the timing of interest rate cuts.
Losses on the Toronto market were limited by a boost in energy stocks and the S&P/TSX composite index moved 21.61 points lower to 13,197.15.
But in New York, the Dow Jones industrials fell 96.93 points to 12,300.36.
Worries about possible supply disruptions sent the May crude contract on the New York Mercantile Exchange up $1.15 (U.S.) to $64.08 a barrel - the highest level so far this year, taking the energy sector up almost 1 per cent.
Nervous investors have sent oil prices up since last Friday, when Iran seized 15 British sailors and marines, alleging they were in Iranian waters. British Prime Minister Tony Blair said it's time to increase pressure on Iran to free the crew members. "I think it's bringing into focus that it's a very unsettled market and any one of a different number of things could set this energy market off," said John O'Connell, portfolio strategist at RBC Dominion Securities.
"It just highlights how tight supplies are and how risky this whole business is right now."
The Canadian dollar was down 0.15 of a cent to 86.27 cents.
The TSX Venture Exchange added 2.27 points to 3,170.5.
The Nasdaq composite fell 20.33 points to 2,417.1 and the S&P 500 index gave back 11.38 points to 1,417.23 after the U.S. Commerce Department reported that demand for durable goods rose by 2.5 per cent last month after plummeting by 9.3 per cent in January.
That disappointed investors, who were expecting a rise of 3.5 per cent.
Unease deepened when U.S. Federal Reserve Board Chairman Ben Bernanke told Congress that while he is sticking by the Fed's forecast for moderate economic growth, core inflation remains "uncomfortably high."
The comment left investors with the impression that a rate cut won't happen any time soon.
Stocks rallied sharply last week after the Fed changed its stance from tightening to neutral, raising hopes for a rate cut.
"I think what the Fed is trying to tell us is that it is between a rock and a hard place. And when you're between and a rock and a hard place you just can't move," said Drew Matus, senior economist at Lehman Brothers Holdings Inc.
The financials sector was the major decliner on the TSX for a second session, down 0.65 per cent.
Investors looking for a safe harbour sent gold prices higher. The April bullion contract on the Nymex advanced $4.30 to $666.80 an ounce. The TSX gold sector rose 0.2 per cent.
On the TSX, declines beat advances 908 to 686 with 214 unchanged as 380.8 million shares traded worth $5.9-billion (Canadian). Canadian Press
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MOLY MAJOR COULD BE DEBT-FREE
Hot molybdenum prices show no signs of crumbling over the next couple of years, driven by strong steel-related demand and production problems in China. So UBS analyst Brian MacArthur predicts that Blue Pearl Mining's rising cash flow could make the moly maker debt-free by the end of 2009.
It had $334-million (U.S.) of long-term debt at the end of 2006 following the acquisition of Thompson Creek Metals Co. of Colorado, which turned Blue Pearl into a moly major. Earlier this week, it posted a 2006 loss, which Mr. MacArthur says is not indicative of the future because results reflected only 67 days of operations of the combined entity.
Applying a 10 per cent discount to the average of three multiples for 2008 gives shares of Blue Pearl a blended target price of $13.25, up from $11, Mr. MacArthur writes. The stock has jumped 4.4 per cent to $12.15 on the TSX Wednesday afternoon in heavier than normal volume of 2.5 million shares.
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REACTION MUTED TO CHIP
Not a lot of early speculative appeal in CHIP REIT, which goes by the formal moniker of Canadian Hotel Income Properties Real Estate Investment Trust. The board has set up a special committee to consider any idea to enhance value, including restructuring, amalgamation, acquisition or sale of some or all of the trust's assets.
The move prompted Canaccord Adams to lift CHIP's target price to $18 from $17, which implies a value of about $140,000 per hotel room and a slight premium to the brokerage's one-year forward net asset value of $17.75 a share. CHIP owns a portfolio of hotels mostly in Western Canada.
The units are up 33 cents or 2 per cent to $16.01 on the TSX Wednesday, with turnover of 86,000 units. They have traded in a range of $12.05 to $17.50 in the past 52 weeks.
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DATA PROCESSING AS HEDGE
Data processing shares like a soft economy and BCA Research is urging investors stay "overweight" in the sector, especially as the economy enters a phase where investment on information technology should begin to outpace overall capital spending.
Outsourcing, it explains, should see a pick-up in this economy as companies attempt to preserve profit margins by farming out non-core operations. That helps explain why data processing shares often become popular when the economy goes south, BCA points out.
Some popular names in the S&P data processing index include Electronic Data Systems, Paychex, Computer Sciences and Fiserv.
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GOLD RESERVE GETS NOD
Junior miner Gold Reserve has hit the motherlode after winning a mining permit in Venezuela to begin construction of its gold-copper Brisas mine. The stock has soared 44 per cent on Wednesday, vaulting $2.27 to $7.40, on TSX volume topping one million shares.
The Brisas project has reserves of 485 million tonnes of ore grading 0.67 grams a tonne gold and 0.13 per cent copper, containing 10.4 million ounces of gold and 1.3 billion pounds of copper. Gold Reserve expects to finance the construction of Brisas with a combination of debt and equity.
Crystallex International, which is also developing a major gold project in Venezuela, is getting plenty of investor attention as well, with more than 6.7 million shares already traded on the TSX. The stock is up 22 per cent to $4.30.
Its Las Cristinas property holds almost 14 million ounces of proven and probable reserves. But after spending millions of dollars getting ready for production, the company is still waiting for an environmental permit from Venezuela.
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OIL HELPS TSX EDGE INTO GREEN
Higher oil prices are helping the TSX withstand Wednesday's economic downdraft, which is threatening to turn into a full blown hurricane on Wall Street.
U.S. Fed chairman Ben Bernanke, during congressional testimony, reignited investor concern that stubborn inflation could upend hopes for a reduction in rates, even as the U.S. economy continues to cool.
Drew Matus, senior economist at Lehman Brothers, told Associated Press that markets last week might have overestimated the Fed's ability to lower interest rates.
"In reality, there's a lot of uncertainty. You don't move forward unless you can see the path and I don't think they can see the path. You can't cut rates to try and spark growth and hope to contain inflation at the same time. That just doesn't work."
The Dow Jones industrial average, which fell 132 points after Mr. Bernanke began speaking, is now bouncing around a loss of 100 points. Shares of bellwether Boeing and GE are among the top decliners, along with shares of banks and retailers.
The energy component of the TSX is up more than 1 per cent on a better than $1-a-barrel (U.S.) jump in oil prices Wednesday. While consumer staples are marginally higher, the remaining 10 sub-indexes are in the red. Nonetheless, the TSX is just in the green, up 5 points.
Shares of Suncor are up 3 per cent after an upgrade by Deutsche Bank. Bombardier is up 2 per cent after better-than-expected fourth quarter results.
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SOFTWARE PLAYS THAT ADD UP
Looking for a Canadian software play? You have a choice: either large companies like Cognos, CGI Group and Open Text or a bunch of juniors. What you won't find, according to Versant Partners analyst Tom Liston, is a strong mid-cap software play, offering liquidity and significant upside.
His advice: three juniors - Absolute Software, Descartes Systems and Systems Xcellence - "offer a means of achieving meaningful software exposure when purchased in aggregate." And in total, they are comparable to a mid-cap with an attractive risk-reward profile.
His reason: the trio, as a "combined company," has a market capitalization of just over $1-billion. He is forecasting they will post an average of 61 per cent growth in forward 12-month free cash flow. And all three have "excellent" market positions.
He rates all three as "buys," with 12-month target prices for Absolute of $20, for an 18 per cent return; Descartes, with a target of $5.10 (U.S.), for a 16 per cent return; and Xcellence, $26, for a one-year return of 45 per cent.
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DOW TUMBLES ON BERNANKE COMMENTS
Not exactly what the market wanted to hear Wednesday: uncertainties around the economy have increased somewhat. So says U.S. Fed chairman Ben Bernanke.
In swift response, the Dow Jones industrial average plunged to sit near its low for the day, down some 125 points.
The TSX composite, which had been in positive territory, is now down more than 20 points. Only three of the sub-indexes are posting gains, led by energy stocks, which are reflecting a jump in international oil prices.
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MIRANDA STUMBLES
Shares of Miranda Technologies are being hammered on the TSX Wednesday morning after the company issued a revenue warning late Tuesday that is below consensus forecasts.
Raymond James downgraded the stock to "market perform" from "outperform" and slashed its six-to-12 month price target to $13 from $17.
"While we continue to believe that the broadcast equipment market has exciting potential for investors, the execution missteps by Miranda make us cautious to use this stock as the vehicle to participate in the space," the brokerage says.
Miranda expects first-quarter sales of $20-million to $22-million, reflecting a quarter-over-quarter drop of 31 per cent to 24 per cent, and a year-over-year decline of 9 per cent to 17 per cent, Raymond James contends. Consensus was $27-million.
The stock has lost nearly 20 per cent of its value, down $2.75 to $11.20, on heavy turnover of more than 1 million shares.
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STOCKS SLIP AT THE OPEN
North American stocks prices are opening in negative territory on Wednesday.
The TSX composite is down around 11 points after opening higher and the Dow Jones industrial benchmark has dropped more than 55 points after a weaker-than-expected U.S. reading on durable goods orders for February and higher oil prices on renewed tensions in the Middle East.
Investors are awaiting congressional testimony from the U.S. Fed chairman Ben Bernanke later this morning.
_____ BOMBER IMPRESSES UBS
The early take on Bombardier's fourth-quarter numbers is encouraging, with UBS saying progress was achieved on all fronts and Desjardins Securities highlighting a strong order backlog.
UBS analyst Fadi Chamoun continues to forecast margin improvement both of the company's segments - aerospace and transportation - going forward, but is concerned that increasing capital spending in aerospace fails to "offer a convincing risk-reward trade-off while valuation is optimistic."
While Bombardier did not update its new C Series aircraft program, Desjardins analyst Benoit Poirier writes that since Bay Street generally views the "program negatively, we believe the lack of a concrete decision will not hurt the stock price."
_____ BRACING FOR THE OPEN
Wall Street stock futures are continuing to lose ground ahead of the opening on Wednesday after weaker-than-expected U.S. government data on durable goods orders for February underscored concerns about the health of the economy.
Dow Jones industrial average futures are down 56 points, with the S&P 500 futures down 8 points, below fair value.
Orders for durable goods increased 2.5 per cent in February, buoyed by an increase in sales of commercial aircraft and autos, after a 9.3 per cent drop in January. Analysts had expected a reading of a 3.5 per cent gain last month.
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ALGOMA STEEL CUT AT UBS
For a company without a dance partner at the consolidation ball, Algoma Steel has held up pretty well. But not for UBS, which downgraded the stock to "reduce" from "neutral," with a new target price of $48, up from $42.
With no clear bidder ready to swallow Algoma and management suggesting that a merger deal would likely be below the mid-$50s level, UBS says "the risk-reward is no longer favourable. While we cannot discount the possibility of M&A, we continue to believe that Algoma is not a prime acquisition target."
The stock has been as low as $29.88 in the past 52 weeks, soaring to a recent high of $57.99 on takeover talk as steel consolidates globally. It finished at $52.14 on the TSX Tuesday. UBS' target is based on a multiple of four times EBITDA in 2008.
The brokerage suggests a $50-to-$55 valuation for Algoma could extend into the second quarter, assuming a steel prices of $580 a ton (U.S.). But UBS estimates Algoma at a "normalized value at $32-to-$52 (Canadian) at $500-to-$550 (U.S.) steel."
_____ SUNCOR SHINES FOR DEUTSCHE BANK
The threat of supply disruptions in the Middle East fuelling higher oil prices and economic turmoil is sweet music in the oil sands as Deutsche Bank has upgraded Suncor Energy to "buy" from "hold," citing the stock's valuation and the stock's status as a hedge against geopolitical risk.
"Since the start of the year, Suncor has been sidelined by investors worried about cost escalation in Alberta, fiscal and environmental legislation, operational mishaps and a poor fourth-quarter cash operating cost," the bank said.
"However, market tightness and rising geopolitical risk have oil on the move," it added. "Suncor's massive oil sands position are expected to generate sustained production growth with no declines over the next 50 years."
Suncor shares have been under pressure since touching a 2007 high of $90 in January. The stock rose 65 cents to $85.84 on the TSX Tuesday.
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ROCKY ROAD AHEAD
North American stock markets are headed south at the opening Wednesday as economic concerns from a housing slowdown and higher oil prices from geopolitical tensions in the Middle East are likely to keep investors jittery.
The one saving grace could be congressional testimony about 30 minutes after the opening from U.S. Fed chairman Ben Bernanke about the economy and any possibility of a reduction in interest rates.
Also on tap is new data on orders of durable goods for February, which run the gamut from washing machines to airplanes. January's reading helped contribute to the global sell-off in equities Asian stocks closed lower on Wednesday, setting the mood for a weaker tone across Europe as the price of crude rose $1.12 (U.S.) to $64.05 in early trading.
"The spike in crude oil rattled the markets and shows how volatile that market can be," Paul Mendelsohn, chief investment strategist at Windham Financial Services, told Reuters. But "the big event is Bernanke's testimony. There seems to be a lot of confusion over the Fed statement last week, so I think congressional leaders will try to get him to clarify what that statement meant."
Tensions in the Middle East helped spot gold prices, which rose $6 (U.S.) an ounce to $668.80. Gold in London traded at $665.60 an ounce, up from $664 late Tuesday.
But copper prices on the LME were under pressure on Wednesday, falling 1.2 per cent, as traders await the Fed chairman's testimony. Weaker sentiment also resulted from a drop in U.S. consumer confidence and U.S. new home sales for February.
"We have a situation where the signs of weakness from the housing market, and in other parts of the economy, suggest that interest rates might need to be cut, but the persistence of inflation suggests that interest rates might need to be raised," economist John Kemp at Sempra Metals told Reuters.