Author: David Pett

Simone Baribeau of the Financial Times of London wanted to help the Bank of Canada celebrate its 75th birthday this past week, so she delivered a special gift—a head slap to Bank of Canada Governor Mark Carney for daring to suggest that it’s possible to have your cake and eat it too when it comes to financial regulation.

Baribeau argues that Canada’s financial regulators are enjoying a brief moment of glory before the reality of a housing bubble hits. As she points out, home prices in this country have reached levels that appear remarkably similar to the bubble peaks in the U.S. housing disaster.  “If prices fall (as they did in the U.S. before the crisis) Canadians stand to face the kind of pain that Americans and Europeans have been facing over the past year, just with a time lag.”

Baribeau has a point. A new research article by the International Monetary Fund looks at home prices in different countries and shows Canadian real estate to be in extremely pricey territory. In terms of house prices-to-rents, Canada is the second-most expensive country among those surveyed. It lags only Sweden and is ahead of Spain, Australia, the U.K.—and, yes, the United States.

Canadian banks appear to be taking refuge in the notion that low interest rates will allow Canadians to carry bigger and bigger mortgages. This is patently absurd, of course—the only way that interest rates will stay low is if the economy stalls, which brings with it another range of problems.

You have to feel a twinge of sympathy for Carney in all this. It’s not his primary job to police Canada’s housing markets. And while it may be his job to put a lid on potential asset-price bubbles, the past couple of years have not been the ideal time to do so. Raising interest rates in the middle of a recession would have been regarded as lunacy.

With the economy looking much better these days, it will be interesting to see what action the Bank of Canada takes in the months ahead. The necessity of taming Canada’s lofty home prices argues for a faster, rather than a slower, rise in interest rates, beginning this summer. 

Freelance business journalist Ian McGugan blogs for the Financial Post. 

The number of TSX-listed firms raising dividends is no where near the level prior to the market collapse in 2008. But it is improving, says Peter Buchanan, CIBC market strategist.

"So far this year, 17% of TSX dividend announcements have provided increases, he said in a note to clients. "That’s nearly double the level that did so in Q4."

At the same time, the number of firms that are cutting payouts continues to fall.

Mr. Buchanan noted that over half of utilities have recently enriched their payouts.

"Looking ahead, retailers, capital goods manufacturers and non-energy resource firms (materials) all have unusually high levels of cash, suggesting possible room for dividend increases down the road," he said.

David Pett 

Dundee Securities has upgraded drug retailing, pointing to low historical valuation and higher industry margins.

“Owing to improved quarterly results and valuation metrics, we now believe that Canadian drug retailers such as Shoppers Drug Mart and Jean Coutu have become legitimate defensive candidates in the Canadian marketplace,” analyst Martin Roberge wrote in a report to clients.

The group has underperformed over the past several months even though the appetite for defensive stocks has revived, he noted.

That’ s despite regulatory uncertainties looming over the Ontario market

Industry margins have staged a strong rebound, thanks to a recovery in drug pricing and lower drug import costs resulting from a stronger Canadian dollar.

“We can see a positive correlation between relative industry margins, which recovered last year, and relative earnings-per-share strength,” he wrote.

“We can also see that much of the improvement in the industry net profit margin has come from Jean Coutu (from -45% in Q3/09 to -26% in Q4/09). Shoppers’ net profit margin has remained flat (5.9%).”

That might explain Coutu’s share price outperformance of Shoppers, he said.

As for valuation, the Canadian drug retailing index is trading at the bottom of its 10-year historical valuation range from the perspective of dividend yield (2%), price to cash flows (12.7 times), and price to earnings (18.4 time).

“Though these stocks offer less yield than other defensive stocks, we believe their cheap valuation metrics provide much downside protection for defensive investors,” he said.

Hollie Shaw

Just how pricey are real-return bonds these days? Insanely so, says Eddy Elfenbein of the Crossing Wall Street blog. He points to the yield curve for Treasury Inflation Protected Securities. These are the U.S. government bonds that carry an automatic adjustment for inflation. Thanks to investors’ thirst for safety, they’ve been bid up to nosebleed levels.

At current rates, TIPS are guaranteed to lose you money in real terms over the next two years. They won’t start to produce a 2% real return for at least four years. And, of course, that’s all before tax. “I can’t help but think it’s the Treasury equivalent of the Internet bubble from 10 years ago,” writes Elfenbein.

Freelance business journalist Ian McGugan blogs for the Financial Post.
 

U.S. equity index futures are higher this morning. S&P 500 futures are up 5 points in pre-opening trade. Index futures are responding partially to weakness in the U.S. Dollar. Commodities priced in U.S. Dollars including crude oil, gasoline, copper, gold, silver and platinum are trading higher.

Crude oil prices also were helped by news that the International Energy Agency has increased its estimate for global demand. Crude oil gained $0.80 per barrel. Energy stocks are expected to open significantly higher this morning. Tis the season for crude oil prices to move higher!il Futures (CL) Seasonal Chart

Index futures moved higher following release of February retail sales. Consensus was a gain of 0.2%. Actual was a gain of 0.3% despite two major snow storms during the month that curtailed sales. Excluding autos, retail sales gained 0.8%. Consensus was a gain of 0.6%.

Good news for Canada’s economy this morning! February employment rose 20,900. Of greater importance, the number of permanent positions rose 60,000.

The Canadian Dollar responded strongly on the employment report. The Canadian dollar rose .80 to 98.43 cents U.S. to reach a 20 month high.

Higher commodity prices set the stage for the TSX Composite Index to break above its January high at 12,070.20. Current intermediate upside potential on a break above resistance is to 13,250.

Potash Corp gained 8% after guiding first quarter estimates 50% higher than previous.

Agrium gained 5% after announcing withdrawal of its offer to purchase CF Industries. CF Industries fell 7%. Agrium is poised to break above resistance at $73.40 U.S.

Piper Jaffray initiated coverage of the Biotech sector with a series of Overweight stock recommendations including Rigel Pharmaceutical, Adrea Biosciences, Human Genome, Gilead, Alexion Pharmaceuticals and Affymax.

Deutsche Bank upgraded Southern Copper from Hold to Buy and raised its target price from $35 to $38. ‘Tis the season for copper stocks to move higher!

Society General initiated coverage of Goldman Sachs with a Buy recommendation.

Jefferies initiated coverage on Eli Lilly with a Buy recommendation. 

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

2010 could be the high water mark for gold prices, at least for the next couple of years, says a new report from Versant Partners.

"We forecast gold prices to average US$1,025/oz in 2010, US$975/oz in 2011, and US$800/oz on a long-term basis," analyst Anthona D. Curic said in a note to clients.

Noting that gold prices are driven by emotion as much as supply and demand, Ms. Curic said concerns about the US dollar combined with inflationary pressure and global economic weakness will continue to support the gold price through next year. 

Beyond that, however, she expects gold to fall as the economy recovers.

"This long-term price is a normalization to marginal costs of production," she wrote.

David Pett

Now here’s the way to tackle a downturn-—pretend it doesn’t exist. North Tyneside, a borough in the northeast of England, has decided that it’s better to have fake storefronts than empty storefronts.

In an effort to keep its shopping area looking prosperous, North Tyneside council has begun to replace some of the 140 empty shops within its jurisdiction with fictional businesses. The businesses consist of nothing more than colorful images of shop interiors. The images span “a range of different shop types, which are either taped inside the windows or screwed to the fascia so they can be removed and reused as required,” according to the BBC. Council bosses say the first such shop has been well received and more on the way.

No word yet on whether fake shoppers will also be part of the redevelopment scheme.

Freelance business journalist Ian McGugan blogs for the Financial Post. 

Canada's M&A market continues to heat up, but the number of deals remains well below the frantic pace set previous to the financial crisis.

In the fourth quarter of 2009, there were 254 announced transactions worth almost $33-billion, according to the Financial Post Crosbie: Mergers & Acquisitions in Canada database.

The latest results represented the third consecutive quarter of increasing activity for Canadian M&A markets and the highest level of activity in the last five quarters.

More specifically, the number of announcements in Q4 was 52% above the cyclical low seen in the first quarter of 2009 when there were only 167 announcements.

“Factors contributing to the higher activity included greater confidence in the economic outlook, improving valuations, and greater availability of financing in many market segments,” said Colin Walker, Managing Director, at Crosbie & Company.

Starting in the fourth quarter of 2005, M&A activity was routinely above 350 deals per quarter, reaching a record 416 transactions in the second quarter of 2007. The number of deals dwindled from there, hitting a bottom early last year.

International acquisition activity by Canadian buyers, increased acquisition activity involving government related entities (especially among larger deals),
and strong activity in energy related sectors, have been major themes in the 2009 rebound in M&A activity.

Of the ten largest transactions in Q4, seven were cross border deals, three were energy related, and three involved government related entities.

David Pett

Northern Tiger. 

That's what Derek Holt, economist, Scotia Capital Markets, is calling Canada these days, thanks to a long list of strengths that continue to make investing here a solid opportunity. 

"[The Canadian dollar's] 25% y/y appreciation against the USD has generated stellar returns to those who can take the currency risk in their mandates, before even getting into the massive rally in risk-adjusted assets that occurred over this same time frame," he said in a note to clients.

"The case for over-weighting Canada is still compelling," he said in a note to clients.

Even after a 25% year-over-year appreciation in the Canadian dollar against the greenback and the massive rally in risk-adjusted assets over the same time frame, Mr. Holt said Canada continue to have much of what one would want in a global portfolio.

He expects the Canadian dollar will strengthen further against the U.S. dollar and other world currencies. At the same time, it will remain the "poster child" for fiscal health over the next five year. 

Domestically, he expects corporate profits to rise in lockstep with the economic recovery and by 2012, he said Canada will "have a virtually unbeatable global corporate tax regime." Meanwhile, he anticipates productivity to improve and rival the U.S. in the coming years.

Other Canadian advantages cited by Mr. Holt include a best-in-class banking system, a relatively favourable regulatory environment, low political risk, and a highly educated workforce.

David Pett

Fortune magazine reports that fund manager Bruce Berkowitz has bought more than US$700-million of Citigroup shares. Berkowitz, who manages the Fairholme fund and was named Morningstar’s U.S. fund manager of the past decade, told Fortune he thinks the bank is cheap. It trades for less than its tangible book value. And the U.S. Treasury department has allowed Citi to repay its Troubled Asset Relief Program funds, which Berkowitz argues is an indication that regulators must think the bank has adequately recapitalized itself.

Before following Berkowitz’s lead, you should look at the bank’s income statements and cash flow statements for the past few quarters. The bank is losing money and cash flow from operations has turned hugely negative—to the tune of minus US$56 billion over 2009. Berkowitz is betting that the bank’s profits will revert to something like past glories, but that’s by no means certain. A turnaround could be a long time coming.

The strongest argument for an investment in Citi is that the U.S. government has demonstrated that it will not let the bank fail, no matter what. At its current valuations, and with the buffer of an implicit government guarantee behind it, Citi is worth a look for long-term investors—but only if you can handle some serious volatility.

Freelance business journalist Ian McGugan blogs for the Financial Post.

The world abounds with financial indicators that try to tell us where the economy is headed next, but the latest effort to devise such a forecasting device deserves more attention than most. For one thing, it’s the product of an all-star team of five academic and private-sector economists. For another thing, the index spans an amazing amount of data—44 indicators in all.

The index goes by the unlovely name of USMPF-FCI (for US Monetary Policy Forum Financial Conditions Index) and, unlike most such indicators, it shows that the U.S. economy is demonstrating renewed weakness after staging an initial recovery in the first part of 2009. While the index isn’t forecasting a double-dip recession, it suggests that GDP growth will be restrained during the rest of this year.

Much of its pessimism stems from the deviation between what is happening and what you would expect to be happening at this stage of a recovery. “Many indicators have not improved as much as you would expect given the return to GDP growth and the departure from a typical recovery pattern is viewed by the index as a highly pessimistic development,” says James Hamilton, a professor of economics at the University of California, San Diego.

Freelance business journalist Ian McGugan blogs for the Financial Post.
  

The recent pullback in Google Inc. shares will be shortlived, says Citigroup Capital Markets analyst Mark Maha

He reiterated his Buy rating and $640 price target based on four key updates to Google's long-term thesis. The first is the potential impact of new search advertising products.

"We believe Google’s four recently introduced Paid Search Ad Products (Sitelinks, Product Advertising, Local/Map Advertising, and Comparison Ads) not only reflect continued — and necessary — innovation at Google but also provide further evidence of Search’s growth runway and the potential for Paid Click growth reacceleration – a key investor focus – as well as further monetization growth," he wrote in a note to cleints. 

Mr. Mahaney is also bullish on Google's growing display ad opportunity and its increased traction for Google's YouTube property.

Lastly, he is attracted to the tech giant's strong cash adjusted P/E multiple of 17x that is in-line with Nasdaq's forward multiple. 

"Given GOOG’s growth outlook, competitive moats, biz model & management strength, we view this relative valuation as attractive," he said.

David Pett

Greater foreign investment in Canada's telecom sector strengthens the case for BCE Inc. and Telus Corp. to merge, says Jeffrey Fan, Scotia Capital Markets analyst.  

"This could happen earlier than envisioned," Mr. Fan said in a note to clients. "We believe BELUS would pose a threat to cables and we think cable
consolidation (Rogers, Shaw, and Cogeco) should be strongly considered."

Wednesday's throne speech said it would allow more access to foreign investment in Canada's telecom space in order to improve competitiveness. Telecom stocks fell following the news, but have since rebounded. 

Mr. Fan said that wireless new entrants like Wind Mobile, Public Mobile and Mobilicity will benefit most from greater access to foreign capital as they build out their networks.

From an investment perspective, he said potential acquisition targets including Telus, Manitoba Telecom Services Inc., Cogeco Cable Inc. and Shaw Communications Inc. stand to gain most.

David Pett

SXC Health Solutions Corp. is up 21% after Wednesday's earnings results beat expectations and guidance was also better-than-expected.

Scott Rattee, CI Capital Markets analyst, thinks the surge has legs, raising his rating to Outperform and target price to US$72 from US$54.  

"While FY10 revenue guidance was above consensus expectations, we believe earnings guidance is highly conservative as it only reflects business that SXC has already won, he said in a note to clients.

"We anticipate SXC to continue to win business during the year."

With a P/E multiple of 20.3x, SXC is trading above it health caer peer group average of 18.01x. However, Mr. Rattee continue to target a multiple of 25x for the company. 

"We believe SXC's 12% PE multiple premium to its peers is justified given the company's long-term organic earnings power, prospect of additional future growth by acquisition, debt free balance sheet and disciplined management team," he wrote. 

David Pett
       
 

It’s been an article of faith for years that the Chinese are manipulating their currency and keeping the yuan artificially low. But perhaps it’s time to bury that conspiracy theory. Goldman Sachs is now saying that by its currency valuation model the yuan is near parity.

The Money Game blog reports Jim O’Neil, head of Goldman’s global economic research, as saying there is evidence that import growth in China has made a spectacular recovery both in absolute terms and relative to exports. “It is not inconceivable that China might be close to the end of trade surpluses, O’Neil writes.
 
O’Neil says the strength of the Chinese currency is bullish for U.S. multinationals and Chinese consumer stocks. It is, however, bearish for gold, oil and possibly the euro.
 
Freelance business journalist Ian McGugan blogs for the Financial Post.

At just under $60-billion, the value of completed and pending M&A activity in the mining industry was close to rock bottom in 2009. Now it's time to cue the comeback.

"We expect to see a rebound in the dollar value of the transactions in the mining space in 2010, said Paul Burchill, analyst, Dundee Securities.

"Producing companies are currently enjoying healthy cash margins at their operations and in many cases balance sheets have been strengthened and share prices have recovered."

Mr. Burchell said most of the CEO's he has spoken to favour organic growth over acquisitions as a means to create shareholder value. But history shows that isn't always the quickest and best way to replenish depleting asset bases.  

Alternatively many producers are taking an equity stake in a basket of junior companies, a strategy known a trap-lining. Once again, Mr. Burchell believes this approach  is not as effective as M&A, saying it is time consuming and rarely turns into a something significant.

"So we come back to the obvious conclusion that as history has shown time and again – mining companies are big game hunters," he said.

"We declare that the signs are there that hunting season is open and it is simply a matter of time before we begin to see some sizeable deals take place."

In the gold industry, Mr. Burchill said Osisko Mining Corp., San Gold Corp. and Andean Resources Ltd. all have targets on their back, as do Allied Nevada Gold Corp., Gammon Gold Inc., Aurizon Mines Ltd. and Minefinders Corp.

Other base and precious metals companies that he said could attract interest from senior producers include Baffinland Iron Mines Corp., Noront Resources Ltd., Sabina Gold & Silver Corp. and Peregrine Diamonds Ltd.

"We remain sceptical that much will change in respect of M&A activity in socially or politically challenging jurisdictions," he said.

"Most producers will accept technical challenges over sovereign risk issues since the latter are extremely difficult to predict and often times impossible to manage."

David Pett

With industry fundamentals improving, the future looks much brighter for WestJet Airlines Ltd. shares. For now, however, investors should look elsewhere for exposure to the global airline sector, says a new report from Raymond James.

"We continue to encourage investors who can look outside Canada to consider some of the airline stocks that our Raymond James counterparts cover in the U.S. and other regions, where valuations appear more attractive and capacity has been more contained," said Ben Cherniavsky, Raymond James analsyt. 

"For those limited to Canada, we continue to recommend OUTPERFORM‐rated Air Canada shares as a better, albeit riskier, way to play the near‐term recovery trends because of its exposure to emerging markets, business travel, and cargo."

WestJet got a traffic boost from the Olympics and sun destination travel in February, however the demand came at a cost as management indicated Wednesday that revenue per available seat mile (RASM) in the first quarter of 2010 is tracking a decline of “less than 3%.”

"This marks a marginal upward adjustment from previous 1Q10 RASM guidance of a “less than 5%” decline. Nevertheless, we still harbour some concerns about WestJet’s RASM prospects for the year, especially for 2Q10 and 3Q10 when a chunk of its capacity will be dumped into the domestic market," said Mr. Cherniavsky.

He left his Market Perform rating and $13.50 price target unchanged.

David Pett

If Greece wants some tips on how to handle its debt woes, it should look to Newfoundland, says David Hale. The Chicago-based economist points out that Greece’s grim situation, with debt piling up and default a real possibility, bears a striking resemblance to Newfoundland circa 1933.

Back then, of course, Newfoundland was an independent dominion. It had borrowed heavily to finance its role in World War I. It then continued to overspend through the 1920s. By 1933, it was bust, banks were threatening to suspend lending and local politicians were at a stalemate.

A British royal commission pointed out a solution. It suggested that Newfoundland’s parliament vote itself out of existence and turn over power to a commission of six civil servants, three from Newfoundland and three from London. So it did and Newfoundland remained under control of the commission until it voted to become part of Canada in 1949.

A similar situation could work for Greece, Hale figures. The Greek government could suspend its parliament and turn over power to six bureaucrats, three from Athens and three from the European Union in Brussels. The commission could rule the country until it regains solvency. It could impose its will on Greece’s notoriously corrupt political culture and bring the country’s finances back to sanity.

Of course, if that fails, Hale has another idea. Why not imitate Dubai, which renamed its tallest skyscraper in honor of the emir of Abu Dhabi, after that gentleman agreed to bail out Dubai? Hale jokes that Greece might want to consider renaming the Parthenon in honor of Wolfgang Schauble, the German finance minister. A bit of flattery can’t hurt anyway.

Freelance business journalist Ian McGugan blogs for the Financial Post. 

The latest survey of sell side strategists on Wall Street indicates a 9% total return over the next twelve months. Chances are it will prove correct.

"So far in this recovery, Wall Street's bullishness on equities has closely mirrored the performance of the market," said David Bianco, head of U.S. equity strategy, Bank of America Merrill Lynch. 

"Both equity sentiment and the S&P 500 ended 2009 up significantly from their lows set last spring, but have been essentially flat in the first two months of this year."

Mr. Bianco said this month's sell side indicator score was unchanged at 58.9% and remains in neutral territory.

The current Buy threshold is 51.7% and the Sell threshold is 63.5%. The traditional long-term equity benchmark weighting is 60-65%, suggesting the latest indicator score reflects Wall Street's still cautious optimism.

Based on a survey of Wall Street strategists' recommended asset allocations, the sell side indicator has historically been a reliable contrary indicator.

"In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa," Mr. Bianco said.

David Pett

Rowan Companies has an improving technical profile. This morning, the stock broke resistance at $27.54. Current intermediate upside potential is to $35.75. Rowan Companies is the first major U.S. oil service stock to break resistance and reach a 17 month high. The Oil Service sector has a history of moving higher from the end of January to the middle of May. History is repeating during its current period of seasonal strength.

Sherritt (TSE:S) – $8.22 has an improving intermediate technical profile. S broke resistance at $8.44 this morning. It is the first key TSX Mines and Metals stock to break resistance and move to a 17 month high. Current intermediate upside potential is to $12.25.

Mines and Metals stocks currently are in a period of seasonal strength that lasts until May. Following is a 19 year seasonality chart on the sector recently developed by Brooke Thackray. Metals and Mining % Gain Avg. Year 1990‐2009‐4‐20246810JanFebMarAprMayJunJulAugSepOctNovDec% Gain

Other Break Outs above resistance this morning included Boardwalk Equities (BEI/UN) on the TMX and FMC Technology (FTI) International Flavors & Fragrances (IFF), Parker Hannifin (PH) and Torchmark (TMK) in U.S. exchanges.

Breakdowns below support this morning included Davis & Henderson (DHF/UN) on the TMX and Staples (SPLS) on U.S. exchanges following less than consensus quarterly earnings.

Disclaimer: Comments offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. An attempt to provide accurate data has been made, but accuracy is not guaranteed.

Don Vialoux is a research analyst for JovInvestment Management Inc. All of the views expressed herein are the personal views of the author and are not necessarily the views of JovInvestment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by JovInvestment Management Inc