In this week’s issue: 1. Market closes for Friday, December 19, 2008 2. Is the tide turning? Managers think so 3. RCMP's IMET arrest Harrow man 4. Fed funds nearly free at 0.25% 5. Real estate funds lock the exits 6. Canadians bring their money home
1. Market closes for Friday, December 19, 2008:
Close Dow Jones 8,579.11 S&P 500 887.88 NASDAQ 1,564.32 TSX COMP 8,552.00 Change -25.88 or -0.30% +2.60 or +0.29% +11.95 or +0.77% +126.65 or +1.50% YTD -35.32% -39.53% -41.02% -38.18% Today 0.8176 1.2230 Previous 0.8288 1.2065 Previous 0.5810 1.7212
Nikkei Hang Seng SENSEX FTSE 100 CAC 40 DAX
Close Change 8,588.52 -78.71 or -0.91%
YTD Open BoC -43.89% Canadian $ US $ 15,127.51 -370.30 or -2.39% -45.61% 10,099.91 4,286.93 3,225.90 4,696.70 +23.48 or +0.23% -43.73 or -1.01% -8.25 or -0.26% -59.70 or -1.26% $Current 112.15 128.20 114.47 140.05 $Previous 112.23 128.22 114.97 140.74
-50.25% Spot Rate Today Euro -33.61% Cdn 0.5873 -42.54% Euro 1.7028 -41.78% %Yield Gold 2.78 London Gold Fix 3.44 ($US) 2.12 2.55 WTI Crude Future($US) AM
Bonds Cdn. 10-year bond Cdn. 30-year bond U.S. 10-year bond U.S. 30-year bond
Previous PM $839.00 $835.75
$42.94 +$1.27 or +3.05%
2. Is the tide turning? Managers think so
(December 15, 2008) It's far too early to say money managers believe the worst is over, but it certainly seems they have regained their resolve to buy stocks, a new report by Russell Investments suggests. More than 70% of Canadian managers expect positive returns for the S&P/TSX in 2009, according to the Russell Investment Manager Outlook poll for the fourth quarter. Further, 90% of managers surveyed believe the TSX is either fairly valued or undervalued. It's important to note bullish sentiment is not being born from any new developments in the Canadian market; rather, managers don't see how things can get any worse. Confidence is forming from a growing belief that if there's any more risk to Canadian equities, it's likely priced in.
"At the end of 2007, with the loonie above par and equities setting all-time highs on the back of record commodity prices, only 28% of investment managers were bullish towards Canadian equities. After all, how much higher could they go?" says Sadiq S. Adatia, chief investment officer of Russell Investments Canada Limited. "Fast forward to the closing months of 2008, and the pendulum has swung the other way. Oil is below $50 U.S., gold is dramatically lower, the loonie is struggling, and the TSX has hit bottom. Today, many managers seem to feel there's no way left to go but up." Does this mean investors can expect to recoup the damage this bear market has brought in 2009? Likely not, the poll concludes. Managers seem to be leaning toward a slow and methodical recovery over the next year. More than 40% of respondents expect the Canadian market to bounce back more than 10% — an impressive comeback — but this is against a backdrop of near 40% losses for 2008. Naturally, some of the most beaten-up sectors are now the most attractive for the coming year. More than half of the managers polled have bullish sentiment on Canada's dividendrich financial services sector and the materials sector. "Canada has the world's most sound banking system according to the World Economic Forum, and our banks' record of slow but steady growth and extremely reliable dividends is clearly attractive in the current environment," says Adatia. "Bullishness towards utilities is up sharply from 23% to 47%, likely for a similar reason: utilities offer steady dividend yield, which provides current cash flow and downside protection in unpredictable markets." The outlook for the materials sector has nearly doubled from 23% to 44%. "There is a serious valuation problem in this sector, with some gold-mining shares now trading below book value. Clearly, investment managers see opportunity in this situation," Adatia says. "In addition, fertilizer giant Potash is trading at a fraction of former levels, but global supply/demand fundamentals remain strong. Oil at $150 U.S. may have been too high, but oil below $50 may well be too low. Bullish sentiment towards energy is at 42% of managers, with bears dropping precipitously from 63% to 32%. Even if demand for oil is down, the current low price is likely to squeeze exploration and production activity and lead to an upward correction." A recent report from Merrill Lynch opines that 2009 may be marked by a lengthy rangebound market marked by heavy volatility. It's not an ideal market for investors, but unlike the devastating bear market currently being experienced, it does provide some opportunity to make money. Merrill Lynch's chief U.S. market analyst, Mary Ann Bartels, expects a range-bound global market, with U.S. equities likely leading the way and conservative outperformance over the rest of the world. The most important news is that the worst is likely over. Bartels highlights that historically a market bottoms five months prior to the end of a recession. The National Bureau of Economic Research says the U.S. has been in recession since 2007. If this recession goes 18 months — long by historical standards — that would suggest the market has hit bottom or will do so in the early part of next year. "By comparison, 2009 is likely to be more mundane (than 2008), but investors will probably maintain a conservative approach to the market," she says. "And well they should. In our view, the market began a basing process in October. We have maintained
that this process will take time (measured in months), will require patience and will likely involve exciting rallies that are followed by multiple tests of the lows." Bartels forecasts that large-dividend-yielding stocks will lead the way next year, as investors look to get paid to wait out market volatility. In addition, she expects U.S. companies to have relative outperformance of 11% to 18% over the rest of the world. She notes that the MSCI U.S. index made a "double bottom" relative to the MSCI World (excluding U.S.) index. From May to October, the MSCI U.S. index fell 30% while the world index fell by 43%. "This U.S. relative strength rally appears to be cyclical in nature; improving long-term relative momentum is still on the oversold side of neutral and appears to have the potential to maintain an overall bullish bias through most, if not all, of 2009," she says. "This U.S. relative strength has already decisively reversed the prior six year (2002– 2008) relative downtrend. In our view, the U.S. may be little better than halfway through its relative uptrend versus the rest of the world in terms of both price and time."
3. RCMP's IMET arrest Harrow man
(December 15, 2008) The RCMP's Integrated Market Enforcement Team ("IMET") has arrested a Harrow, Ont., man for stock market manipulation. Petar Vucicevich has been charged with two counts of fraud. Between July 31, 2006, and December 31, 2006, Vucicevich was interim president and CEO of Sulja Bros. Building Supplies Ltd., a small lumberyard located in Harrow that was traded on the Pink Sheets in the U.S. During that time, he is alleged to have issued misleading press releases in order to generate and sustain interest of prospective investors. He allegedly sold shares issued from the company's treasury, garnering $11.5 million US. Some of this money was used to buy 11 properties in southern Ontario. The company was depleted of assets and ceased operations earlier this year, putting its 30 employees out of work. A new location was opened under a different name in Calgary, Alta., but the business never became operational.
4. Fed funds nearly free at 0.25%
(December 16, 2008) The U.S. Federal Open Market Committee has cut its key lending rate today, slashing the target range for federal funds to a band of zero to 0.25%. The discount rate has reduced by 75 basis points to 0.50%. "Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined," the Fed said in its decision. "Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further." More ominous still, the Fed vowed to "employ all available tools to promote the resumption of sustainable economic growth." With the Fed funds rate just 25 basis point above zero, further rate cuts are virtually out of the question. "The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level," the committee said. "As previously announced, over the next few quarters the Federal
Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant."
5. Real estate funds lock the exits
(December 17, 2008) Real estate has been heralded as a fantastic portfolio diversifier, but direct holdings can have their downside. A pair of segregated funds, offered by Power Financial subsidiaries have imposed a moratorium on redemptions. The London Life Real Estate Fund 2.17G and Great-West Life's Canadian Real Estate Investment Fund No. 1 have both suspended redemptions effective December 15, 2008. The move was announced late in the day on December 16. The obvious problem with real estate funds is that a wave of redemptions will cause a liquidity problem. If the value of redeemed assets is high enough, the fund may be forced to sell property. "This segregated fund has performed well over many years," said Allen Loney, president and CEO, Great-West Lifeco. "It is important in today's difficult economic environment that we continue to manage the fund in a way which balances the long-term interests of all participants in the fund."
6. Canadians bring their money home
(December 18, 2008) Canadian investors were not just pulling money out of the domestic markets in October; they set a record $12.3 billion in divestment from foreign securities. The sale of foreign bonds totalled $6.2 billion, with U.S. government bonds being the primary target for disposal, and with selling concentrated in shorter maturity bonds. Canadians sold $1.7 billion in non-U.S. bonds in October, with the retirement of certain maple bonds being the primary cause, according to StatsCan. Canadians sold off $299 million worth of foreign money market paper in October, and pared back their investment in U.S. Treasury bills to $501 million. The StatsCan report points out that Canadian short-term interest rates stood 130 basis points higher than those in the U.S., creating the largest spread since January 2004. The 10-year bond dropped about $2 over the month, but on the long end of the curve, American Treasury bonds saw little change over the month. Both the 30-year and the 10year have rallied dramatically in November, benefiting from investors' flight to safety. Not content with cashing in foreign bonds, Canadians also unloaded $5.8 billion worth of foreign stocks in October. More than 60% of this activity came from the U.S. market, making it the largest sale of U.S. equities by Canadian investors on record. U.S. equity markets fell 17% in the month, following a 9% decline posted in September. Over the course of the month, the Canadian dollar dropped nearly 11 cents, giving investors an added bonus when they sold foreign-denominated assets. Not only did Canadian investors bring money home, but foreign investors continued to pump cash into Canadian securities to the tune of $2.8 billion. Bonds attracted $1.3 billion in net new cash, with a $2.9 billion shopping spree for government bonds being offset by retirements of provincial and corporate issues. Equity investment totaled $988 million. Foreign buyers eased up on their money market purchases, picking up just $513 million, or about half that of September.
Have a nice and fruitful week!