Author: David Pett

The addition of three failed banks to TD Dominion Bank's U.S. portfolio may not be as bad as it sounds.

Late Friday, TD said it had been selected as part of a Federal Deposit Insurance Corp. (FDIC) bidding process, the buyer of Riverside National Bank of Florida, First Federal Bank of North Florida and AmericanFirst Bank, also located in the sunshine state. 

"We view this development as likely a cost-effective expansion
of TD's franchise and as a positive development," Michael Goldberg, an analyst at Desjardins Securities, said in a note to clients.

With the purchase, TD Bank is acquiring about US$3.8-billion in assets, and operations including US$3.1-billion in deposits.

TD Bank is securing about 40 locations for future branches,
bringing its total in Florida to about 103 from 34. The assets being acquired
in the transaction include loans worth US$2.1-billion, which are covered
by a loss-share agreement.
In the unlikely event that all loans went to zero,the maximum cost to TD of the three banks would be roughly US$575-million. 

"The acquisition of these banks significantly expands TD's presence in
Florida–to #9 measured by the number of branches and #14 ranked by deposits in the state, Mr. Goldberg said. He left his top pick rating and $81 price target unchanged.

David Pett

Canadian banks trying to grow their wholesale businesses should benefit from the SEC's fraud case against Goldman Sachs, says John Reucassel, an analyst at BMO Capital Markets. But the growing hostility towards the U.S. financials sector may ultimately prove bittersweet.

"On the one hand, this development should continue to distract major competitors as some of the Canadian banks build out their non-Canadian wholesale banking businesses," Mr. Reucassel said in a note to clients.

"On the other hand, we do worry about valuations of wholesale businesses in this environment."

In particular, Mr. Reucassel said wholesale banking results of both Royal Bank of Canada and National Bank of Canada could be negatively impacted. 

Despite these concerns, the analyst remains confident that short-term bank earnings will remain healthy and that yields are attractive. He reiterated his Market Perform rating for the sector. 

David Pett

A short-term pullback may be imminent, but a "very rare, but very significant" technical indicator is pointing to higher stock prices over the next couple of months, says Ron Meisels, a technical analyst at Phases & Cycles Inc.

In a note to clients, Mr. Meisels highligted the 2-1 Advance/Decline indicator that occurs when the number of advancing issues on the NYSE outnumber the number of declining issues by a ratio of two to one for a period of ten consecutive trading days.

He said it usually occurs at major market lows and before March 2009 it had occurred only three times in 48 years. But over the past 13 months, the 2-1 Buy signal has been triggered three times: March 6, July 23, Sept 17. 

"The message from the markets has rarely been more obvious," the technical analyst said. "Following earlier 2-1 Advance/Decline Buy Signals, stock markets almost always rose to new all time highs, or within 10% of new highs, within 15 months or so."  

Having reached an 18-month high this week, the S&P/TSX composite exchange remains 20% of its record high. South of the border, the S&P 500 is still down 22%. 

"While the 2-1 Buy Signal and the number of stocks making new 52 week highs all suggest that a market top is at least six months away, a short-term dip could occur at any time," he said. 

"A short-term decline, which is likely to create more fear, could be just what is required to make stock prices rally once again, to fulfil what a host of other indicators have been suggesting for the longer term."

David Pett

Apple Inc. is expected to modestly beat expectations when it reports second quarter fiscal 2010 results next Tuesday and also provide in line guidance for the present quarter, says Mikel Abramsky, an analyst at RBC Capital Markets.

That won't be enough to lift shares higher, but no worries, the continued success of iPad launches around the world most likely will.

"Given runup in shares and largely in-line results, investors are expected to turn their attention forward on pending iPad 3G/international launches and updated iPhones, expected to drive additional upside," Mr. Abramsky said. 

Trading below its peers at 16x FTM price/earnings, Mr. Abramsky said Apple stock remains attractive.

He reiterated his Outperform rating and US$275 price target.

David Pett

U.S. equity index futures are lower this morning. S&P 500 futures are down 4 points in pre-opening trade. Futures are responding to overnight weakness in the Euro and corresponding strength in the U.S. Dollar. Commodities priced in U.S. Dollars including crude oil, gold, copper and silver are trading lower.

First quarter earnings reports released overnight continue to exceed expectations. Google, Advanced Micro Devices, General Electric, Genuine Parts and Bank of America significantly exceeded consensus estimates. However, stock price reaction to reports was mixed. Google and Advanced Micro Devices fell 4%. General Electric and Bank of America gained 1%.

 Responses by index futures to economic news released at 8:30 AM EDT were minimal. Consensus for March housing starts was 610,000 versus 575,000 in February. Actual was 626,000. Consensus for March building permits was 626,000 versus 637,000 in February. Actual was 685,000.

Analysts continue to upgrade equities in the energy and oil service sectors. BMO Capital upgraded Rowan Companies, Ensco and Cameron International from Market Perform to Outperform. Raymond James upgraded Exxon Mobil from Market Perform to Outperform.

Boston Scientific added 6% after receiving clearance by the FDA to resume distribution of its cardiac defibulator.

Cardinal Health slipped 1% after Goldman Sachs downgraded the stock from Buy to Neutral.

Domtar was downgraded by Scotia Capital from Outperform to Sector Perform. Target price is $75.

Don Vialoux, chartered market technician, is the author of a free
daily report on equity markets, sectors, commodities, equities and
Exchange-Traded Funds. For more visit Don Vialoux's Web site

Looking to boost the income from your portfolio? Morningstar recommends you take a close look at a new ETF that invests in closed-end funds.

These often ignored funds resemble ordinary mutual funds, but differ in that their number of shares is fixed. When you invest in an ordinary mutual fund, the fund simply creates more units to exchange for your dollars. But when you invest in a closed-end fund, you have to buy shares from an existing shareholder, just as you would if you were buying a piece of a company.

So why is that an attractive proposition? Depending on investor demand, the price of a share in a closed-end can be substantially higher or lower than the underlying assets it represents. If you buy a fund trading below its net asset value, you are presumably getting a discount on those assets. That can result in higher yields and better profits than you would otherwise receive.

The PowerShares Closed-End Fund Income Composite ETF holds 82 closed-end funds. It excludes funds with low trading volume, as well as ones that trade at more than a 20% premium to their net asset value.

Right now the PowerShares fund is yielding about 8.3%—an awfully attractive payout compared to bonds. But you should be aware of the downside. For one thing, the total fees come to about 1.8% a year, which is expensive. And there’s no guarantee that the underlying funds may not lose money.

Buying into closed-end funds make most sense during the early stages of a recession when discounts to net asset value usually widen. While this new ETF looks intriguing now, it could be an even better investment during the next downturn.
Freelance business journalist Ian McGugan blogs for the Financial Post.

In the spirit of economic name mashing that has spawned the terms, BRIC, PIIGS, and Chindia, in recent years, the folks at RBC Capital Market's have come up with "Chinadia," to describe the growing relationship between China and Canada. 

While the near-term future of the Canadian dollar will be dominated by the U.S. recovery and its impact on Canada's export activity, the future will feature China’s increasingly large footprint on the Canadian economy, already reflected in recent oil sands developments, said RBC's David Watt, a senior fixed income and currency strategist.

For some time, Mr. Watt and his colleagues have suggested Canada broaden it's customer base for energy products.

He said Petro China’s recent purchase of a 60% interest in two of Athabasca Oil’s projects for $1.9-billion and China Petroleum and Chemical Group bid to buy ConocoPhillips 9% interest in Syncrude Canada for C$4.65-billion, represent clear steps in this direction.

Although Canada’s exports of oil to China will remain inconsequential until greater pipeline capacity that can service the Far East is available, Mr. Watt said "China will not only become an important force on the price of oil received by Canadian producers and CAD, it will be an increasingly important customer."

David Pett

Think equity markets have come too far to fast? Think again, says David Bianco, the head of U.S. equity strategy and Bank of America Merrill Lynch.

In a note to clients Thursday, Mr. Bianco raised his 12-month target for the S&P 500 to 1350, after revising his earnings forecast higher. 

He raised his 2010 earnings expectation to US$80, from US$75 and his 2011 target to US$88 from US$85. In 2012, he expects profits to hit $94, up from $90 previously. 

"The most significant part of our revised S&P 500 EPS outlook is the US$3 boost to 2011 EPS," he said in a note to clients. 

"This boost reflects higher S&P 500 top-line growth with more margin expansion from lower credit costs and more operating leverage than we previously assumed."

Mr. Bianco said the S&P 500 will reach 1300 late in 2010, but added that his bullish stance rests upon two key outlooks:

First, the S&P EPS recovery has to outpace the US GDP recovery. Second, the Fed stays pat on interest rates until early 2011 and long-term treasury yields stay under 5% through 2011.

First quarter earnings will validate his first key outlook, he said, while the next several months should improve the clarity on outlook two.

"If 10yr treasury yields stay under 4% this summer then the market should grind higher led by mega-cap stocks," he wrote. 

David Pett

One of the most interesting new economic indicators says that the U.S. economy is growing faster than expected.

The Ceridian-UCLA Pulse of Commerce Index tracks diesel fuel consumption in the United States. It’s based on the notion that the usage of diesel fuel corresponds to trucking activity and that trucking activity, in turn, matches up closely with the real level of economic growth.

The nice thing about the index is that it provides a nearly instantaneous read on the state of business—and right now the reading shows the U.S. economy grew at a 4% rate in the first quarter, well above the 2.9% consensus of most economists.

This is good news, but Ed Leamer, chief economist for the index, says the growth should be put in context. GDP growth would have to reach at least 5% to drive meaningful change in unemployment. For now, though, the index does at least indicate that business activity is growing at a healthy clip.

Freelance business journalist Ian McGugan blogs for the Financial Post.

Banks around the world proclaim their eagerness to build a safer, more robust financial structure. But put any specific proposal in front of them and the reaction is likely to be outraged screams.

The screams are particularly loud these days as banks rush to deliver their responses to the latest proposals for a revamped Basel accord to regulate global banks. Why the fuss? Patrick Jenkins and Brooke Masters of the Financial Times say some of the latest Basel proposals are cutting a bit too close to the bone for some financial institutions.

For instance, many banks don’t like proposals that would force them to raise more equity and hold larger amounts of liquid funds. Particularly contentious is a proposal that would ban banks from counting deferred tax assets as capital for regulatory purposes.

A deferred tax asset, as you probably know, is really just a past loss. It can appear on the balance sheet as an asset because most countries allow companies to write off losses in past years against their income in future years. So a deferred tax asset is like a card that allows you to partly offset that loss by paying less tax when you do return to profit.

The problem is that a deferred tax asset is not money in the vault or even something that can be sold. It is only valuable if a bank actually produces a profit. During a financial crisis, when a bank’s survival is in doubt, a deferred tax asset becomes worthless because there’s no assurance there will be future profits. “The planned ban on most deferred tax assets…is particularly sensitive in Tokyo, where in some years [these assets] have accounted for the majority of bank capital,” write Jenkins and Masters.

If all the Basel proposals were put into place, banks say their returns on equity would be cut in half, to as little as 5%. But don’t be too afraid. As Jenkins and Masters point out, many of the dire forecasts are just posturing. “If all banks were burdened with the same additional regulatory overheads, they would simply pass them on to customers in the form of higher fees and charges.”
Freelance business journalist Ian McGugan blogs for the Financial Post.

First quarter earnings season is off and running and consensus expectations on both sides of the border are a little too cautious, says Vincent Delisle, an equity strategist at Scotia Capital Markets. 

Based on bottom-up forecasts, quarterly earnings per share for TSX companies should hit $169 in the first quarter. That represents a 38% year-over-year increase, but zero growth on a sequential basis. Revenues, meanwhile, are expected to grow 5% from the first quarter of 2009 and 4% from the fourth quarter of last year.

"We believe earnings expectations are running low and do not reflect recent economic and commodity performances, Mr. Delisle said in a note to clients. "The Canadian dollar strength may be capping expectations."

In the U.S., S&P 500 earnings are forecasted to grow 70% year-over-year and like Canada show no sequential improvement. Top line growth of 1.8% quarter-over-quarter an  7% year-over-year is expected.  

"Q1 earnings
could surprise on the upside, resulting in another strong beat ratio," Mr. Delisle wrote. 

As for sector performance, the strategist said telecom, energy, and utilities trading in Toronto should deliver sequential earnings growth while health care, industrials, and consumer staples should lag.

In New York, top performing sectors should include financials, utilities, and energy, with consumer discretionary, industrials, and technology expected to deliver the weakest results.

David Pett

After the market’s recent surge, everyone and her brother is keeping an eye on interest rates to divine what’s going to happen next. But that’s where the unanimity ends. It seems there are many ways to interpret a yield curve.

John Lonski of Moody’s Credit Trend Service points out that a rising stock market has usually been associated with a thinning of the spread between the interest rates on high-yield bonds and the interest rates on Treasuries.

This makes sense: when people are eager to take on risk they buy either stocks or high-yield bonds. The former drives up stock prices; the latter drives down the rates on high-yield bonds. Given the continuing shrinkage of the high-yield bond spread, it appears that investors’ appetite for risk is still strong. So Lonski concludes that stocks have more room to run.

But not so fast. Barry Knapp at Barclays Capital argues that the Federal Reserve is close to a change in policy. Knapp expects two-year Treasury rates to shoot upward. “If the Treasury curve bear flattens as we expect, equities will witness a typical Fed policy normalization-related correction of approximately 8%,” he says.

The folks at the Trader’s Narrative blog aren’t convinced. They argue that rising rates aren’t necessarily bad for the stock market: it all depends upon the speed with which the increases come. “If rates rise with a stealth bear market in bonds, that would be one thing. If they suddenly go haywire, the way we’re seeing, for example, in Greece…that woud be a very different thing.”

Ned Davis Research is willing to put hard numbers on its forecasts. It says that if the 10-year U.S. Treasury jumps from its current 3.8% to above 4.25%, stocks  will shudder. If 10-year rates go above 5.25%, forget about this bull market.

Freelance business journalist Ian McGugan blogs for the Financial Post.

Alimentation Couche-Tard's credit rating has been placed under review by Moody's Investor Services following the convenience store's hostile bid for Casey's General Stores Inc.

"The review for downgrade considers Moody's belief that Casey's would represent a relatively large sized acquisition which has the potential to increase ACT's initial adjusted pro-forma leverage from roughly 3x to over 4x, said the credit rating agency on Monday.

Couche-Tard said Friday that it has launched an unsolicited US$1.9-billion to take over U.S.-based Casey's. The offer, worth US$36 per share, was rejected
by Casey's management, who accused Couche-Tard of "trying to buy
U.S. companies on the cheap."

Shares in Couche-Tard have risen since the bid was made public. Casey's stock, meanwhile, has jumped to US$39.  

The Moody's review will focus on Couche Tard's plans to finance the potential transaction, including an assessment of its resulting balance sheet, liquidity profile and plans for future debt reduction.

The Quebec convenience store's rating would likely be downgraded if Moody's concluded that the company's adjusted debt/ EBITDA moved towards 4x, with cash flow relative to adjusted debt levels in the "low single digits."

"While ACT has a favorable track record of integrating acquisitions and
additional acquisitions are contemplated for in its current rating, the
proposed acquisition of Casey's has the potential to stretch ACT's key
credit measures beyond the bounds that Moody's currently expects," the
rating agency said.

Vishal Shreedhar, an equity analyst at UBS AG, said the Casey proposal marks a strategic departure for Couche Tard, noting in the past that it has acquired assets at low prices with significant opportunity for merchandising improvement.

"We view CASY’s operations as high quality, with a strong merchandising component," he told clients in a note to clients. 

"The strategic rationale for this deal: increased scale, entry into new territories, leveraging Casey's strong balance sheet and merger synergies."

Mr. Shreedhar said the deal could be accretive to Couche Tard, based on purchase price of between US$36 and US$45.

A successful bid would be paid for in cash, however Couche Tard's management will remain disciplined and not overpay, he wrote. 

David Pett

Shares in BHP Billiton plc are expected to jump nicely this year as higher iron ore and coking coal prices drive higher net profits, says Damian Hackett, an analyst at Canaccord Adams.

"In the current positive environment for mineral commodities and more certain global economic expansion, we suggest pricing of the “major miners” should at least match historical levels," Mr. Hackett said in a note to clients.   

"As such, we are moving our near-term target price up by £3.00/share to £28.00/share, a price that should see 2011 pricing multiples back in line with historical levels." 

The analyst estimated net profit to jump almost 100% for the financial year to June 2011 to US$22,538 million. He estimated that cash generation in the second half of this year will almost match the previous high from two years ago, delivering just over US$2-billion per month or US$69-million per day to the group. 

David Pett

The most honest commentary on what is working in the stock market may be a note this week from Matthew Rothman, an analyst with Barclays Capital, who had the unenviable job of explaining to clients why his firm’s U.S. equity quant model underperformed this past month.

Rothman writes that while the Russell 1000 was up nearly 6% for March, all three of Barcap’s main quantitative strategies lagged behind the benchmark. Market Sentiment fell 4.37% percent short, Quality underperformed by 2.83% and Valuation came up 1.99% behind the index. “None of the traditional styles for stock picking worked,” he points out. “One needed to be absolutely counterintuitive, buying expensive stocks of low quality that had recently underperformed to be successful.”

This is not a strategy to try at home. But what’s behind what Paul Murphy of the Financial Times calls “the dash for trash”? Rothman says it’s about a growing appetite for risk: stocks that appeared risky and unattractive at the start of the month rose strongly, while less risky stocks dropped. This does not sound like a sustainable trend.
Freelance business journalist Ian McGugan blogs for the Financial Post.

Call it a froth indicator. Sotheby’s
(BID) is a stock that shoots skyward when the mood turns bullish. It
did so in 1999, at the height of the dotcom bubble. It did so again in
2007. And right now, it’s once again repeating its levitation act.

The Money Game blog is not impressed. It calls the auction house “the
ultimate bubble stock” and notes that it’s “infamous for timing major
market peaks and troughs.” In early March, the blog noted that
Sotheby’s had regained its pre-Lehman levels. Since then the shares
have gained another 10%.

You can read Sotheby’s rise as a sign of irrational exuberance, but the Wall Street Journal’s Heard on the Street column
sees it as an opportunity. It notes that Sotheby’s derives much of its
profits from sales of art and that art sales “move in close tandem with
the global money supply.” Given the ultra-loose state of money supplies
at the moment, the column sees more gains ahead for Sotheby’s.

Freelance business journalist Ian McGugan blogs for the Financial Post.
 

As analysts scramble to downgrade shares in Shoppers Drug Mart Corp., in the wake of damaging proposals to change
how pharmacists are reimbursed, Canadian Tire Corp., one of Canada's other well known retailers, is quietly garnering praise from the Street  

Following the company's investor day on Wednesday, Keith Howlett, an analyst at Desjardins Securities increased his price target on Canadian Tire to $62 from $57 and maintained his Buy rating. 

"Our reaction to the company's strategic and operating plans is generally positive," he said in a note to clients.

"After the recent years of substantial investment in square footage growth and supply chain expansion, management is now squarely focused on maximizing productivity of its existing platform, and closing the gap between its best and worst performing stores."

Vishal Shreedhar, an analyst at UBS AG, also increased his price target on the stock, from $62 to $63. He left his Buy rating unchanged.  

He said write-offs have likely peaked, while same store sales growth and returns in retail are likely to improve based on lower sustainable capex, improving economic conditions and good early sales performance from Canadian Tire's new Smart store concept.

"We believe valuation is attractive in the context of improving performance," Mr. Shreedhar said in a note to clients.

David Pett

The euro is suffering due to a big fat Greek headache. Worries that the country will default on its debt, and stall a recovery on the continent, pushed the currency down to a two-week low against the U.S. dollar.

But one currency watcher says euro concerns might be a little overdone.

“The market does need to learn that Greece comprises just over 2% of the eurozone GDP. As such, at some point, we believe, the market will need to get used to Greece's woes,” said Axel Merk, president and chief investment officer at Merk Investments. “There's life beyond Greece; as a result, we are positive on the long-term outlook of the euro.

Mr. Merk’s company runs three currency funds, one of which – the US$440-million Merk Hard Currency Fund – counts the euro as its biggest holding (the Canadian dollar ranks a close second).

He noted the spread on Greek bonds over German equivalents hit a new high (peaking at 442 basis points), which he believes is appropriate. Nevertheless, he argued some market participants are failing to take into account some factors that are weighing on the euro. The whole note argument is here, but in short, he says:

• Should the International Monetary Policy get involved, the loans it would grant would be senior to outstanding government debt. “It is absolutely justified by the market to demand a higher premium on outstanding debt given the prospect of IMF involvement.”

• With IMF involvement, there's a high probability that existing debt may be restructured. “Policy makers don't like to call debt restructuring a default, but it is a partial default that may trigger payment under CDS rules. As a result, it is perfectly appropriate for credit default swaps to rise.”

Paul Vieira

The loonie may have drawn even with the greenback this week, but parity is not likely to be the new reality of the Canadian dollar, says George Vasic, a strategist at UBS AG.

"Given the UBS view of US$80 oil and 1.25 EURUSD in 2011, our outlook sees the loon on an eventually lower flight path, with the CAD averaging 0.95 this year and 0.91 in 2011," Mr. Vasic said in a note to clients. 

Even with oil hovering around US$85, the Canadian dollar is at least 10¢ overvalued based on the current level of commodity prices, he said.

"Stated otherwise, when the CAD last hovered around parity in the first half of 2008, the oil price averaged US$111, and commodity prices overall were about 30% higher."

David Pett