Author: Jonathan Ratner

Burlington Northern Santa Fe Corp. is holding a special meeting on Thurs. Feb. 11 to vote on the company’s proposed sale to Berkshire Hathaway Inc. If the deal is approved, as expected, Warren Buffett’s holding company will buy the 77% of Burlington shares it doesn’t already own.

Some or all of the proceeds from this takeout will be recycled by investors into other railroad stocks, which should increase the near-term buying pressure on the group. In fact, analysts at UBS estimate that of Burlington’s US$34-billion market capitalization, institutional and retail investors account for about US$17-billion.

“While it’s impossible to know how much will be recycled back into rails, it’s probably a minority—but a material minority or an immaterial minority?” analysts Rick Paterson and Fadi Chamoun asked in a report. “What we do know for sure is that it can’t be a bad thing, so in our view it’s better to be long rails in the near-term.”

Jonathan Ratner

The world seems to think China is doing too much saving and not enough consuming. As a result, many are suggesting China should boost its consumption in order to reduce its dependence on external demand and achieve sustainable long-term economic growth. Otherwise, it will always need exports for growth.

The Chinese government appears convinced and has started taking aggressive action to discourage domestic savings by boosting consumer demand. However, while these policy recommendations may appear intuitive, BCA Research warns that they are both misleading and downright dangerous.

The firm’s managing editor, Chen Zhao, notes that while China’s gross national savings rate has risen from 36% of GDP in 1990 to 50% in 2007, the household savings rate has remained much more steady, ranging from 20% to 25% during the past 20 years. That puts China below even India and into the range of Israel and Malaysia.

As a result, it is incorrect to say that Chinese consumers have “over-saved and under-consumed,” Mr. Zhao tells clients.

China’s real private consumption growth has outpaced any other major country in the world over the past two decades at an average annual rate of 15.2%. Corporate savings, which currently stands at 23% of GDP, has been a key factor keeping the country’s gross savings rate at elevated levels. The government sector has also contributed a net 4% to gross savings.

“Corporate savings, in essence, are retained earnings, and the very high savings rate suggests that Chinese companies have kept a large portion of their profits at the company level,” Mr. Zhao explains.

He feels China should not begin to focus on reducing the national savings rate by encouraging domestic consumption while discouraging investment. Why? It is imprudent for a large developing nation like China.

“History has repeatedly shown that capital spending is the single most important element for a poor and rural-based economy to industrialize itself,” he said. “No developing country has ever consumed its way to economic prosperity. Quite the opposite, industrialization is all about saving and investment.”

China has outgrown all other developing nations during the past 30 years because of its high savings rate, which has allowed it to sustain a very rapid expansion of its capital stock while still maintaining a current-acount surplus, Mr. Zhao noted. As a result, policymakers both inside and outside of China should be greatful for China’s plentiful domestic savings that can be used to finance its own industrialization process.

The Latin American debt crisis of the 1980s and the Asian economic crisis in the late 1990s demonstrated showed that sustained consuption booms and capital spending binges can fail.

And while the pace of credit expansion in China is alarming, which has prompted a consensus to form that massive bubble has been inflated, it is important to note that Chinese bank loans represent certain distortions created by fiscal stimulus.

Mr. Zhao explains that one of the real challenges for steady expansion in China is the government’s tendency to adopt economic policies targeted at boosting political popularity of the ruling party, even at the expense of efficiency. For example, the introduction of minimum wage policies and the promotion of labour unions may protect workers, but they inevitably lead to economic rigidity, Mr. Zhao explains.

“Chinese authorities need to change their habit of relying on administrative measures to regulate the economy,” he said, adding that China‘s foreign exchange-rate policy is another area with many potential problems. ”Without further economic restructuring and financial-market reforms, the resilience of the Chinese economy will decrease and the ability to avoid boom-bust cycles will be reduced.”

It remains unclear whether the current government will pursue any refroms, particularly because incumbent leaders are due to step down in 2012. The incentive to maintain the status quo increases the odds of the current economic boom turning into some kind of bust in the next two or three years.

Jonathan Ratner

Photo: An employee counts yuan banknotes at a Bank of China branch in Changzhi, Shanxi province on January 13, 2010. China recently took its strongest step towards tightening monetary policy as the world's third-largest economy roars ahead, surprising investors with an increase in banks' required reserves that rocked global financial markets. (REUTERS/Stringer)

Following seasonal trends works.

Perhaps the best proof of this thesis lies in the fact that the majority of global markets have recently experienced 100%-plus annual gains occurring between November and May. At the same time, they have been lacklustre in the June to October period and negative from August to September.

In the period from 1979 to 2008, the average gain for the TSX between Nov. 1 and May 31 has been 11%. From June 1 through October 31, Canada’s benchmark index has averaged an increase of just 0.1%.

This data, provided by UBS strategists George Vasic and Garry Cooper, is further strengthened by annualized gains of 12.1% over the past 30 years for balance seasonal portfolios titled to stocks from November to May and bonds the rest of the time. That compares to 10.4% for neturally weighted portfolios and 8.6% when the weightings are reversed.

And what does seasonality suggest for sector trends?

Mostly positive, given that there are four more months of seasonal support ahead of us. Energy, fertilizers and financials have the best prospects, while health care and technology have proven to be laggards.

Jonathan Ratner

The trendy new acronym is PIGS. It stands for Portugal, Ireland, Greece and Spain, and is a handy way of referring to the struggling members of the eurozone. These four countries are all facing some similar problems, such as huge budget deficits and galloping unemployment.

But not all PIGS are alike, says Daniel Gros, director of the Centre for European Policy Studies in Brussels. He writes in the Financial Times that Ireland and Spain are actually in a better position than you might think because their domestic savings are adequate to fund their government deficits now that real estate bubbles in both countries have popped and money is no longer flowing into the property sector.

Portugal and Greece, however, are not generating enough internal savings to cover their needs. Greece—no surprise—appears to be in the worst position. Its net national savings, after adjusting for capital consumption, has been negative for almost a decade.

This deficit has important implications for the debate about Greece’s horrible financial position. Many people expect the country to be bailed out by a loan from its European neighbors and for its government to agree to austerity measures, such as reducing the wages of public sector workers.

But as Gros points out, a loan to Greece would only shuffle the debt problem around unless it’s accompanied by deep cuts in Greece’s private-sector wages as well. At the moment, Greece is not generating enough internal cash flow to maintain its capital stock. To put things bluntly, it is a country growing poorer by the day. Gros’s advice to outsiders is not to even think about stepping forward until Greece’s private sector agrees to deep cuts in wages and consumption.

Freelance business journalist Ian McGugan blogs for the Financial Post

U.S. equity index futures are higher this morning. S&P 500 Index futures are up 8 points in pre-opening trade. Equity markets responded to the reappointment of Ben Bernanke to Federal Reserve Chairman.

Index futures added to gains following release of real annualized U.S. fourth quarter Gross Domestic Product. Consensus was a gain of 4.7% versus 2.2% in the third quarter. Actual was a gain of 5.7%.

Canada also reported higher than expected GDP growth. Canada’s GDP rose 0.4% in November. Consensus was a gain of 0.3%.

The parade of higher than expected fourth quarter earnings results continues. Companies reporting higher than consensus earnings included Microsoft, Amazon, Honeywell, Mattel and Canadian Oil Sands.

‘Tis the season for oil service stocks to move higher! This morning Capital One upgraded Cameron International and National Oilwell Varco from Neutral to Add. Both stocks traded higher.

Walmart added 3% after Goldman Sachs upgraded the stock from Neutral to Buy.

Methanex added 1% after BMO Capital upgraded the stock from Market Perform to Outperform. Target price was raised from $26 to $28.

Chevron reported lower than expected fourth quarter earnings. Consensus was $1.66 versus $2.44 per share last year. Actual was $1.53. The main reason for the miss was a $613 million loss from its marketing and refining operations. Gasoline prices in the U.S. will need to increase this spring in order to allow major U.S. refiners to at least break even.

World auto sales rose 22% in December on a year-over-year basis. That’s good news for companies that provide components and materials for the auto industry. Platinum used in catalytic converters looks particularly interesting. 

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

Nokia’s Corp. 17% quarter-over-quarter growth in global mobile device units for the fourth quarter demonstrates new-found market share gains in smartphones that appear sustainable. But it still has plenty of work to do and competition has never been this tough.

The company’s quarterly results beat expectations across the board, with revenues of €12-billion coming in ahead of the street’s €11.5-billion forecast. Device revenues also beat analyst forecasts on the back of higher unit sales, while Nokia Siemens Networks also performed well. However, Nokia’s bottom line beat was primarily the result of a one-time gross margin benefit and tax differentials.

Most of its new models are not slated until the spring or summer, which implies that the company may see an air pocket during the second quarter, according to RBC Capital Markets analyst Mark Sue.

Nonetheless, he noted that Nokia’s execution was strong during the quarter, with the company’s size and scope enabling it to procure the extra components to ship the extra units and gain share.

RBC rates the stock Outperform with a US$16 price target.

Canaccord Adams analyst Peter Misek is slightly less optimistic, rating Nokia a Hold with a US$15 target smartphones.

“We continue to believe that, in the long term, Nokia will be hampered by market share erosion in high-end devices and margin pressure in the lower-end segment,” he told clients. “While the company is still a leading global cell phone manufacturer, it faces severe competition in the high-end smartphone segment from the likes of RIM, Apple and Android-based device vendors.”

Nokia's challenges have not deterred everyone on the street, as the vote of confidence from portfolio managers at Beutel, Goodman & Co. Ltd. demonstrates.

“One of the things that North Americans don’t tend to realize, is that while Nokia doesn’t have a big presence here, it has a big presence everywhere else,” Beutel’s Ehren Mendum told the Financial Post. “They are the biggest manufacturer of handsets, with a broad spectrum from entry level all the way up to smartphones, and they are the biggest manufacturer of smartphones in the world.”

The company has 60% of the market in India, one of the world’s fastest-growing markets, along with a great distribution network in Africa.

“We think over the long term they should benefit from the continued penetration in those markets and trading up as well as people get higher-end phones and economies grow,” the manager added.

Jonathan Ratner

H&R Real Estate Investment Trust could be getting a lot closer to increasing its distribution, according to a number of Bay Street analysts.

They were reacting to an announcement of $230-million in unsecured debentures issued at an average coupon of 5.55%, which is being used to make an early repayment of the unsecured debentures H&R issued to Fairfax Financial. The REIT had borrowed $200-million from Fairfax as it struggled to raise cash so it could build The Bow, the new Calgary-based headquarters for EnCana Corp. H&R cut its distribution by 50% about a year ago to get the building up.

“We expect continued progress on The Bow, significant increases in distributions by 2012 and a narrowing of relative valuation discount to position HR to outperform,” said Rossa O’Reilly and Alex Avery, two analysts with CIBC World Markets.

Many Samols, an analyst with Raymond James, said she expects the REIT to sell part of its interest in the EnCana headquarters this year.

“Look for the potential sale of partial interest in The Bow later this year as the next catalyst,” she said.

Scotia Capital analyst Mario Saric said amendments to the financing of The Bow clearly make it easier for the REIT to increase distributions. He is estimating 2011 distributions per unit will be $1, still only about 75% of adjusted funds from operations.

However, Neil Downey, an analyst with RBC Capital Markets, emphasized in a note to clients he did not see any “significant changes in the distribution/unit” happening in the “near-term.”

H&R chief executive Thomas Hofstedter said in an interview no decision has been made on increasing the distribution but acknowledged it was a possibility based on the REIT’s new financial position.

“We haven’t made up our minds on whether to increase distributions but we have given ourselves the ability to do so,” he told the Financial Post.

Garry Marr

Photo: H&R REIT's The Bow in Calgary, Jan. 17, 2010 (Courtesy of H&R REIT)

If you had any doubts that the U.S. political system has grown increasingly dysfunctional, the last year and the last week of Barack Obama’s presidency should serve as confirmation. Health care reform, climate change legislation and the stimulus measures to promote long-term growth have been disrupted by the polarized political system and special interest groups.

“There is no other advanced democracy where the elected leader has so much difficultly in adopting his political and economic agenda, despite enjoying large majorities in both the Senate and the House of Representatives,” said Pierre Fournier, geopolitical analyst at National Bank Financial. “Governing in the national interest in tough economic times is rarely easy, but it becomes unachievable when you are held hostage by permanent filibusters, two-year election cycles, powerful special interests, and populism.”

After the defeat in Massachusetts and with popularity heading downward, the analyst noted that President Obama and the Democrats are attempted to ensure their political survival by harnessing the populist backlash. The most recent target: large financial institutions.

However, while excessive risk taking and the perceived greed of the U.S. banks may be viewed as the culprits behind the economic crisis, history will show that the declining competitive position of the United States and other developed economies is the most important underlying cause, Mr. Fournier suggested in a new report.

So while the $90-billion “responsibility tax” that large U.S. financial institutions are facing a over a decade may not be particularly meaningful for profits as a whole, it serves as an ominous sign for the future. President Obama and former Federal Reserve chairman Paul Volker’s potentially sweeping overhaul of the banking landscape will likely be watered down and implemented over several years, but that doesn’t mean it won’t do some damage.

“Inevitably, the large banks will engage in various forms of ‘self-censorship,’ and their ability to project power and compete on the international scene will be reduced,” Mr. Fournier said.

Meanwhile, the Supreme Court recently decided to lift the limits on political contributions of organized interest groups. This may serve the banks well in organizing a couter-attack, but this path is fraught with pitfalls and will require more astute political leadership from the bankers than they have shown recently, the analyst noted.

“The populist backlash will not stop there. The President will find it difficult, if not impossible, to resist the protectionist forces in the country, including in his own party. He will also be under pressure to undercut the Republicans on the immigration issue, with negative consequences for the U.S. and world economy,” Mr. Fournier added.

So while economists that are forecasting robust economic growth and job creation in the near-term may prove correct, and many of the structural deficiencies in the political system may be successfully plastered over for a while, the complex relationship between economic and geopolitical factors may continue to undermine the recovery.

Jonathan Ratner

Photo: U.S. President Barack Obama arrives in the House chamber to deliver his first State of the Union address on Capitol Hill in Washington, January 27, 2010. (REUTERS/Kevin Lamarque)

The iPad is not for everyone and the first-generation version of product will surely have its critics. However, it is clearly a smart and nimble device targeted at Apple Inc.’s core customer – the heavy content user. So while the market may start off relatively small, the gaming and education customer bases could prove to be the sweet spot for driving adoption.

In terms of pricing, US$499 for the entry-level iPad with WiFi only and 16GB of storage should entice early buyers. At the high end, the 64GB version will list for US$699, with another US$130 for 3G capabilities. These price points are lower than many had expected and the market reacted by driving Apple shares higher when they were announced. In fact, the consensus starting price may have been closer to the US$699-US$799 range and some expected a cost as high as US$1,000.

As with the first iPod and iPhone, improved versions and lower prices in the future could be what provides the real surprise in terms of iPad sales. The device is not only a near-term upgrade option for more than 30 million iPod Touch users, but it may also compliment existing Macs and address part of the rapidly-growing home computer market.

Initially, the main criticisms appear to be the lack of a webcam, no Adobe Flash and the device’s inability to simultaneously run multiple applications. This may be its biggest downside, but Apple will likely address this issue before the next model is released.

If the battery life proves to be 10 hours of constant use as claimed, which includes watching videos, that is impressive.

With the iPad being positioned more as a small computer, with web surfing, apps, video, maps, games, email, a calendar and books, it is more of a threat to netbooks than to eReaders.

Devices like the Kindle or Sony Reader focus primarily on reading books and periodicals. Apple may have credited Amazon for carving out the e-reading market, but it is taking the game to the next level with the iPad. Of course, the device has a significantly higher price point than the US$269 Kindle 2, so it will require greater commitment from consumers. The iPad could actually spur additional Kindle book sales since the Kindle app is already available on the iPhone.

The iPad, like the iPhone and iPod, has a backlit screen. While this is useful for occasional reading, it will likely not appeal to those interested in long-form reading, particularly books, due to the higher level of eye strain.

Apple’s device appears better suited to reading of newspapers and magazines. Nonetheless, a new entrant in this space naturally means greater competition and the evolution of reading devices is still at a very early stage. The company did reveal that it has deals with major publishing companies to provide content for its iBook store, which points to the potential of it becoming a go-to reading device for students.

Here is what the Street had to say about Apple’s announcements and the outlook for the stock.

“Apple has done it again. With the iPad, we believe Apple cleared another hurdle, entering a new market category with a high-value content and computing-driven experience. We think this cleared hurdle is important for investors’ perception of Apple’s strategic leadership.”

Mark Moskowitz, J.P. Morgan
Rating: Overweight
Price Target: US$240

“We see iPad as the first step in multi-stage growth catalysts for Apple in 2010. We believe iTunes will be updated for additional content, not mentioned yet, including newspaper subscriptions and TV shows. We see the TV subscription model as critical to take adoption of Apple’s devices to the next level. We also see streaming as inevitable for Apple in the near future.”

Peter Misek, Canaccord Adams
Rating: Buy
Price Target: US$250

“The iPad’s launch partially exceeded hype, but, owing to high 3G pricing andthe absence of hoped-for features, investors may be uncertain whether or not Apple has created a new computing category. We believe iPad may become an enduring growth engine.
Apple’s valuation may be range-bound near-term, as we expect some debate amongst reviewers and analysts over the iPad’s upside impact. We would be accumulating on any related volatility, given our strongly positive view of Apple’s superior fundamentals, pending catalysts 2H/CY10, and compelling valuation.”

Mike Abramsky, RBC Capital Markets
Rating: Outperform
Price Target: US$275

“Unlike the majority of past Apple events, the shares remain firm today primarily because of the pricing for the iPad. Investors are extrapolating that unit estimates could be materially higher than expected given the $499 base price. The flip side is that the low price point together with overlapping features does increase the risk of cannibalization of iPod touch sales.”

Richard Gardner, Citigroup
Rating: Buy
Price Target: US$275

“We believe the App store ecosystem is one of the keys to making the device compelling over the long-term. We believe developers will flood the App Store with compelling programs for users, fueling significant sales very quickly.
We were surprised that this feature was not in the device but its absence seems to help pricing. We believe a camera will make its way into the iPad well within a few years time.
Even accounting for potential cannibalization of other products, we believe the iPad adds at least $1.00 in earnings power quickly and $20 plus in value to shares.”

Ben Reitzes, Barclays Capital
Rating: Overweight
Price Target: US$285 (up from US$265)

Jonathan Ratner

U.S. equity index futures are higher this morning. S&P 500 futures are up 3 points in pre-opening comments. Futures are responding to President Obama’s State of the Union speech last night.

Index futures moved slightly higher following release of economic news at 8:30 AM. Weekly jobless claims fell 8,000. December Durable Goods Orders improved 0.3% versus a gain of 0.2% in November. Of greater importance, Durable Goods Orders ex aircraft sales rose 0.9%.

Today the Senate starts the process of approving the reappointment of Federal Reserve Chairman, Ben Bernanke. Approval must be completed by January 31st

Lots of companies reported higher than consensus fourth quarter earnings this morning including Ford, Netflix, Motorola, Procter & Gamble, MMM, Lockheed Martin, Celestica, Canadian Pacific, Nokia, Time Warner Cable and Potash Corp.

Celestica was upgraded from Market Perform to Outperform at Raymond James.

Notable among companies reporting less than consensus fourth quarter earnings were Eli Lilly and Qualcomm.

‘Tis the season for U.S. oil and gas exploration companies to move higher from January 30th to April 13th! U.S. analysts are starting to recommend individual U.S. oil and gas exploration stocks. This morning Wells Fargo upgraded Apache from Market Perform to Outperform. In addition, Barclays upgraded Anadarko from Market Perform to Outperform. Target price is $82.

Oil service stocks are expected to move higher on media reports this morning that demand for oil services has grown to a level where the industry is experiencing a shortage in skilled labour.

BHP Billiton has offered to purchase Athabasca Potash for $8.15 per share.  

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

A relatively minor car accident in Isleworth, Florida serves as a useful example of how microeconomic events can have a much broader effect. After all, the absence of Tiger Woods from the PGA tour has had a major impact on projected ad revenues, sponsorships, TV viewership and attendance for golf tournaments.

In its most recent issue of Junior Mining Weekly, analysts at Canaccord Adams considered some potential events that while unlikely, could have macroeconomic effects.

The first is instability in South Africa following the World Cup of soccer this summer. This is arguably one of the most significant cultural events in the world and South Africa is the economic backbone of Africa.

But Canaccord notes that over the past several years, the country’s accumulated deficit in infrastructure spending has produced power shortages that continue to plague the nation and its economy.

“If the aftermath of the World Cup acts as a de-stabilizing catalyst, what would be the ramifications for the rest of Africa?” they ask.

Next up, the mining analysts consider the possibility of conflict in Asia. It is, of course, home to the economic powerhouses of India and China, which have been crucial to sustaining the world’s economic health. The two countries have a long-standing border dispute, which may have heated up in 2009 despite efforts on both side to downplay any conflict.

“This territorial friction coupled with the demographic dynamics of two populations with more young men than women placed in geographic proximity makes a case for increased tension between these emerging powers,” Canaccord said.

If these tensions boiled over, we could see a Sino-Indian political conflict, trade tariffs or worse. Meanwhile, Kim Jong-il is rumoured to be ill, which raises the question whether or not his passing would serve to stabilze North Korea and strengthen Asia as a whole.

Canaccord analysts also noted that U.S. mid-term elections in November will demonstrate whether voters approve or disapprove of the current administration. The results will surely have an impact on the government’s economic turnaround policies and the U.S. dollar.

In Europe, the problems highlighted by Greece have some suggesting one or more of the 27 member states will eventually try to break off from the European Union and its currency, the Euro.

“The recent experience with Greece and the subsequent uncertainty created for the Euro is a telling example of how a single member state can affect the overall confidence in the relatively new currency,” Canaccord noted.

Then there are the risks posed by both natural disasters and pandemics. Haiti, New Orleans and the earthquake in China’s Sichuan province. West Nile Virus, SARS, Avian Flu and H1N1. There are plenty of examples, but could 2010 see more?

Finally, regime change, particularly in Latin America. History has shown that it can be both quick and brutal.
Political winds have already begun to change with Chileans recently voting for a conservative candidate, while South America would be dramatically altered by a departure of Venezuela’s anti-capitalist leader Hugo Chavez.

While Canaccord presents these possibilities as food for thought, if any were to play out, the analysts note that the immediate and lingering effects would lead to a change in risk tolerance, future expectations and investment strategy.

“We invest in an arena of uncertainty,” the mining analysts said “and it does not hurt to consider some outside-the-box scenarios that may end up developing into the stories of 2010.”

Jonathan Ratner

Photo: Tens of thousands of Confederation of South African Trade Unions members march on August 6, 2008 through the streets of Pretoria central district to protest against food, electricity and fuel hikes. Thousands protested in South Africa as workers disrupted gold mining and other major industries in a national strike over price hikes rattling the continent's economic powerhouse. (GIANLUIGI GUERCIA/AFP/Getty Images)

Peter Lynch, the famous fund manager, always used to tell people to buy the stocks of companies they admired. That might not be the best advice according to a new study from Meir Statman of Santa Clara University and Deniz Anginer of the University of Michigan.

The two researchers looked at Fortune magazine’s annual list of America’s Most Admired Companies and compared the returns of two portfolios—one composed of admired companies and one of unadmired companies.

They found that unadmired companies produced better returns for investors than the admired ones. Between 1983 and 2007, the unadmired companies generated average annual investor returns of 18.3% compared to 16.3% for the admired firms.

Fortune bases its most-admired list on surveys of executives, directors and securities analysts, so the findings suggest that even expert opinion can be seriously mistaken. In fact, the study suggests that an increase in admiration usually signals lower future returns.

We can’t wait for some smart investor-relations person to fasten on these results: “Of course, we’re a good investment. Everyone hates us!”

Freelance business journalist Ian McGugan blogs for the Financial Post

Call it what you want, but economists at Scotia Capital think the Canadian housing market is a bubble that faces downsides into next year – and the numbers continue to prove it.

Teranet’s measure of Canadian housing prices, the closest equivalent to the U.S. S&P/Cash Shiller Home Price Index, was just 0.1% off its all-time record high in November 2009.

“The gains are accelerating in recent months, and the December print is likely to firmly set a nationwide all-time record high,” Derek Holt and Karen Cordes said Wednesday.

While Canadian house prices went down like most other countries, they didn’t stay there. In fact, Teranet’s measure of house prices is up 92% nationwide since the beginning of 2000, blowing most other asset classes out of the water.

The economists compared this with U.S. home prices, which climbed 105% from the start of the decade until they peaked in 2006.

Regionally, Calgary is up 120% in the decade, Vancouver 116%, Montreal 110%, Ottawa 90%, Halifax 85% and Toronto 66%. But Scotia does not buy the assertion that only select markets are in frothy territory.

“All regions of the country have participated with hefty price gains over the past decade on the march to record nationwide prices,” the economists said.

They cited the downside risk posed by a further recovery in supply, a material increase in variable and fixed mortgage rates, a leveling off of new mortgage product adoption rates and exhaustion of pent-up demand from the crisis period.

Jonathan Ratner

Recent gloomy results from major U.S. financial institutions suggest the Canadian banks are unlikely to surprise on the upside in the coming earning season, a bank analyst has warned.

Brad Smith, an analyst at CI Capital Markets, said poor capital markets revenues particularly at Citi and JP Morgan suggest there is little room for optimism around revenue and credit growth in the sector despite evidence of modest improvements in net interest margins.

While it is difficult to extrapolate to what’s going on in Canada, the U.S. results suggest “limited scope for positive surprises when domestic banks begin reporting their Q1/2010 result in late February,” Mr. Smith said in a note to clients today.

Since the financial crisis analysts have been keeping a close eye on provisioning for credit losses at the domestic banks and many are predicting a decline in provisions as the economy picks up.

But Mr. Smith notes what he calls a “pervasive deterioration in credit” in the U.S. that he says will put upward pressure on provisioning.

John Greenwood

Think quickly: what is the only sector of the U.S. stock market to beat the S&P 500 index during each of the past three decades?

If you answered health care, go the front of the class. A fascinating table from Gluskin Sheff (via the Big Picture blog) shows that health care managed to do better than the broad market during 1980-89, 1990-99 and 2000-09. Pharmacy stocks and health care firms may not move quickly, but at least they move in the right direction.

Not so talented is the telecommunication services sector. It is the only sector that has somehow managed to lag behind the S&P 500 during each of the past three decades
 
The most volatile sector is information technology. It lagged behind the market during 1980-89 and 2000-09, but nearly quadrupled the market’s performance during the dotcom-obsessed ‘90s.

If there’s a moral here, it’s that innovation has no necessary relationship with profitability. Telecom and information technology have been hugely creative during the past three decades, but their innovation hasn’t consistently resulted in unusual profits for shareholders. If you’re looking for a good investment, it’s better to be pushing pills than pushing the boundaries of technology.

Freelance business journalist Ian McGugan blogs for the Financial Post

Toyota Motor Corp.’s decision to halt sales and production of some of its most popular models in North America as a result of sticking accelerator pedals is getting lots of attention. However, there may be little impact to investors in the broader auto space, despite the resulting sell-off in Toyota shares.

The company has told dealers to temporarily suspend sales of eight models involved in the recall for parts supplied by CTS Corp. announced on January 21.

This is bad news for Toyota’s image and will likely result in some small market share losses in the near term and may impact its position in the market longer term as well. However, KeyBanc Capital Markets analyst Brett Hoselton does not think the recall will have a material investible impact on the companies he covers.

It affects less than 65% of Toyota’s total sales in the United States, while vehicles produced outside of North America are not impacted. Neither is its Lexus brand.

Mr. Hoselton pointed out that the vast majority of lost production will most likely be made up within the first quarter of 2010, so suppliers should see little impact to their quarterly results. Their revenues are also diversified across a broad range of automaker customers, which is another reason why the impact should be relatively minor.

“Generally an issue of this nature can be fixed in a matter of days, rather than weeks,” he said in a research note. “The majority of any market share losses will likely accrue to non-domestic brands given that Toyota customers are less likely to cross-shop these brands.”

To the extent that this may negatively impact auto stocks, the analyst suggested it could be a buying opportunity given his generally bullish outlook for U.S. auto sales.

Jonathan Ratner

U.S. equity index futures are mixed this morning. S&P 500 futures are up 1 point in pre-opening trade. Traders are waiting for news from a series of news events include testimony by Treasury Secretary Tim Geithner, minutes from the FOMC meeting and President Obama’s State of the Union address.

Apple added 1% in anticipation of launch of its tablet product this morning.

Toyota fell 7% after suspending production and sales of many of its North American products due to a recall triggered by sticky accelerator pedals.

Several S&P 500 companies reported higher than consensus fourth quarter earnings including Caterpillar, Boeing, United Technologies, United Airlines and ConocoPhillips. In addition, Yahoo reported higher than consensus revenues.

Canadian National Railway reported slightly lower than consensus fourth quarter earnings. However, the company also announced a small increase in its dividend and offered positive guidance for 2010.

‘Tis the season for U.S. oil service stocks to move higher! Baker Hughes was upgraded from Market Perform to Outperform by Calyon. Target was raised from $45 to $55. Rowan Companies was upgraded from Neutral to Buy at MKM Partners.

Bank of America/Merrill reinstated coverage of the fertilizer sector by giving Agrium, Mosaic and Potash Corp. a Buy recommendation. Target for Agrium is $71. Target for Mosaic is $75. Target for Potash Corp is $140.

Cenovus was upgraded by Macquarie from Market Perform to Outperform. Target is $31.

Amazon.com added 1% after several investment firms upgraded the stock.

Aurizon Mines was upgraded from Market Perform to Outperform by Raymond James. 

Don Vialoux, chartered market technician, is the author of a free
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Exchange-Traded Funds. For more visit Don Vialoux's Web site

There may be plenty of Bernanke-haters out there but that doesn’t mean he won’t get approval from the U.S. senate to continue as Fed Chairman.

President Obama’s nomination for a second four years at the helm for Helicopter Ben (a nickname he earned after a 2002 speech where he referred to Milton Friedman’s comments about dropping money from a helicopter) should come before his current term expires on January 31.

There is clearly a noticeable lack of broad-based support, however, enough Senators look like they will be persuaded. After all, there would likely be a huge negative fallout in the financial markets if Bernanke’s nomination gets rejected.

You only have to look back to the stock market’s sharp decline on January 22, when the Senate’s approval of Bernanke temporarily appeared in limbo. It served as an eerie reminder of the very negative response global financial markets had when the House of Representatives shocked investors by initially rejecting the major bailout legislation in the autumn of 2008, notes UBS economist Maury N. Harris.

Support from Senators has not be unconditional. For example, in announcing he would vote for Bernanke after the stock market slumped on January 22, Majority Leader Harry Reid said: “I made it clear that to merit confirmation, Chairman Bernanke must redouble his efforts to ensure families can access the credit they need to buy or keep their home, send their children to college or start a small business. He has assured me he will soon outline plans for making that happen, and I eagerly await them.”

UBS believes that Bernanke’s own sense of history will prompt him to uphold the Fed’s independence and start raising the fed funds rate this year after the job market stabilizes in the second quarter.

Jonathan Ratner

Another analyst has picked up coverage of Imris Inc., a medical equipment developer that makes mobile MRI systems for neurological and cardiac surgery.

Douglas Loe at Versant Partners initiated with a Buy rating and one-year price target of $9.75, which implies upside of nearly 70%.

The company’s IMRISneuro system has been approved by the FDA since January 2005. It has sold 35 systems globally, with most of that coming in North America. However, Imris also has a growing presence in Asia-Pacific markets, Mr. Loe told clients.

The company’s MR-angiography systems IMRIScardio and IMRISv have been approved in North America and Europe. Its two sales announced in the fourth quarter of 2009 “already show favourable market adoption,” the analyst said.

Imris has a growing backlog that reflects solid demand for surgical MR capabilities, Mr. Loe noted, adding that it reached $83.8-million at the end of the third quarter, up from $16.3-million at the end of Q2.

While its revenue may still be lumpy and dependent on the installation timelines of hospital, the company’s record-high revenue and gross margin in Q3 provides positive signal on its business fundamentals.

Jonathan Ratner