Mereja

Author: Jonathan Ratner

  • Bank of Canada rate hike expected on June 1

    Foreign exchange strategists at Citigroup Global Markets Inc. say interest rate expectations in Canada “have accelerated significantly,” based on strong economic data and the subtle shifts in comments Wednesday from Bank of Canada governor Mark Carney. As a result, the Canadian dollar has room to grow and represents a “favourable risk-return” for investors, Citigroup said in a note to clients Thursday.

    In a luncheon speech Wednesday, Mr. Carney said inflation was “slightly firmer” than expected, and reinforced that his pledge to keep record-low interest rates until July was “expressly conditional.”

    As a result, Citigroup strategists said Thursday they expect the first Bank of Canada benchmark rate hike since 2007 to unfold at the central bank’s June 1 statement, with an increase of 25 basis points. Afterward, they also expect 25-basis-point hikes at each Bank of Canada statement for the remainder of 2010, which would lead to a benchmark of 1.5% by the end of 2010.

    In terms of currency implications, expect this, they say:

    “Since the relationship between USD/CAD and expected interest rate spreads has reasserted itself in recent months following a breakdown during earlier phases of the crisis, this likely spells a sustained drop beneath parity. We favor selling into USD/CAD rallies.

    “Of course, sentiment on CAD has been strong for some time and positioning would seem to present a significant threat to our positive outlook. … Still, records are made to broken and, as of yet, investors are
    not behaving as if CAD longs have reached capacity.”

    Paul Vieira

  • Europe, jobless claims, Bernanke, consumers – Vialoux

    U.S. equity index futures are higher this morning. S&P 500 futures are up 6 points in pre-opening trade. Traders are responding to news that Germany is willing to consider a bail out of Greece by European central banks “as a last resort”. Comments raised hopes that a summit of European leaders today and tomorrow will reach a resolution. The Euro strengthened, the U.S. Dollar weakened and commodities priced in U.S. Dollars strengthened on the news.

    Index futures improved slightly following release of the weekly jobless claims report. Jobless claims fell 14,000 to 442,000.

    Traders are watching two potential market moving events today: Federal Reserve Chairman Ben Bernanke’s testimony in front of a Congressional committee this morning and the auction of seven year U.S. Treasuries this afternoon.

    More evidence confirming a return by consumers to the shopping malls has surfaced this morning. Lululemon rose 10% after substantially exceeding fourth quarter earnings and revenue estimates and after offering positive guidance. Best Buy jumped 7% after reporting higher than expected fourth quarter earnings and revenues. Nike gained1% after HSBC upgraded the stock from Neutral to Overweight. Earlier this week, Nike reported higher than expected earnings and revenues. EBay rose 3% after Credit Suisse raised its rating from Neutral to Buy. ‘Tis the season for the retail sector to move higher!

    Several other companies reported higher than expected quarterly earnings including Conagra and McCormick.

    Molson Coors was upgraded by Argus from Hold to Buy. 

    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

  • TMX Group initiated at Underperform

    Shares of TMX Group Inc. may come under pressure after National Bank Financial analyst Shubha Khan initiated coverage with an Underperform rating and $31 price target on the stock. TMX shares closed at $30 on Wednesday.

    “Ongoing market share erosion in equities trading is proving to be the biggest impediment to earnings growth,” Mr. Khan said in a report. “The migration of liquidity to Alternative Trading Systems (ATS) has continued unabated, particularly since the late 2008 launch of Alpha, an ATS backed by Canada’s largest liquidity providers.”

    This competition has been compounded by falling yields on trading volumes as TMX seeks to lure high frequency trading to pre-empt ATS competition. Mr. Khan said the negative impact of lower fees has outweighed any potential volume benefits so far. He believes the current fee structure wil encourage deeper penetration by Electronic Liquidity Providers, which will erode trading revenue even further.

    February statistics released by IIROC showed that TMX’s market share (based on volume traded) fell to 71.9% from 74.0% in January and 93.1% a year earlier. Rival Alpha saw its market share climb to 21.0% from 19.7% in January and 3.3% a year earlier.

    With TMX losing 2% for a second consecutive month, GMP Securities analyst Stephen Boland sees no reason why this will not continue.

    “We continue to believe that X is under intense pressure from the ATSs (specifically Alpha) and that price reductions are defensive actions aimed at preserving (rather than growing) market share,” Mr. Boland said in a note to clients this week. “We continue to view shares of X with caution as market share remains under pressure (which we believe will persist in the near to medium term).” He rates the stock a Hold with a $30.50 price target.

    On March 19, TMX announced that it would reduce trading fees for securities trading at $1 and higher on the TSX and TSX Venture. The changes are set to take effect on April 1. Management said the move is intended to “encourage higher volume and liquidity levels, reduce the cost of raising capital for listed issuers and strengthen the Canadian capital markets overall.”

    The company estimates the change will potentially reduce revenue by $11-million to $15-million annually (2% to 2.7%), assuming no offsets. The revision reduces TMX’s active trading fees to a level below Alpha, its primary competitor, for high volume participants.

    Scotia Capital’s Phil Hardie told clients that the move should help stabilize TMX’s waning market share. He rates the stock Sector Perform with a $34 one-year price target. While the analyst reduced his estimates to reflect the fee cut, he warned that they may prove conservative given that any material offsetting benefits in the form of higher trading volumes are not included.

    Jonathan Ratner

  • U.K. not that far behind Portugal

    The one-notch downgrade of Portugal’s sovereign credit rating by Fitch to AA- may have come as little surprise to some. However, Britain is even more vulnerable to a downgrade given its AAA rating, according to Ian Beauchamp, global head of rates strategy with RBC Capital Markets. “It’s not that far behind Portugal,” he said from London on Wednesday.

    Standard & Poor’s and Moody’s Investors Service have both warned that the United Kingdom’s public finance shortfall puts its top rating at risk. After finance minister Alistair Darling delivered his 2010 Budget on Wednesday, S&P said it would reassess its U.K. rating after the general election expected on May 6.

    Fitch said its negative outlook on Portugal reflects concern about the potential impact of the global economic crisis on the country’s economy and public finances over the medium term. The rating agency cited Portugal’s existing structural weaknesses and high indebtedness across all sectors of the economy.

    “A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” said Douglas Renwick, Associate Director in Fitch’s Sovereign team. “Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than EU15 peers, which will put pressure on its public finances over the medium term.”

    As for Greece, Mr. Beauchamp points out the relationship between credit default swap (CDS) levels and how countries score on RBC’s Soverign Risk Heat Map. While Greece is flagged as having the most overall risk, he noted that CDS spreads suggest a huge amount of default risk is actually priced into the Greek market right now. As a result, those who consider a default by Greece unlikely, have been presented with a compelling investment opportunity.

    Spain’s situation is a little bit more perplexing than its neighbours. Its economy has been extremely weak – the weakest in Europe – but its debt situation is only slightly worrying. Spain’s banking system is supposedly quite strong as well.

    “A lot of people think this is too good to be true,” Mr. Beauchamp said, noting that the high level of negative market response suggests there may be a problem yet to be uncovered. As a result, he is keeping a close eye on Spain going forward. “It is purely an economic and market issue, rather than a debt problem.

    France may be embedded in the Eurozone, but you could argue that if it wasn’t, the country would be in a bit of trouble, Mr. Beauchamp said. This is particularly true given its challenged position in terms of debt stock and flow, as well as debt servicing.

    “If it wasn’t part of the Eurozone, it likely would be looking much more like the PIIGS than the core of Europe,” he said. So when the rates strategist is asked if the Eurozone will ever break up, his answer is no. “Because France will never leave Germany.”

    Jonathan Ratner

  • Nintendo 3DS and Wii2 could kickstart profits

    Shares of Nintendo Co Ltd. soared after the company revealed plans to release a new 3D video game device during the fiscal year ending March 2011. Games with 3D effects will be able to be enjoyed without special glasses.

    The hand-held console, tentatively called the Nintendo 3DS, will also include support for 3D viewing and compatibility with the current DS console software. More details are set to be announced at the E3 Expo in Los Angeles that begins on June 15, 2010.

    While the company faces the threat of a profit decline in both fiscal 2010 and 2011, UBS analyst Yuki Nakayasu thinks the share price may start discounting the next operating profit cycle. Expectations may grow in anticipation of this.

    Nintendo shares also face the prospect of falling in the near term as investors take profits related to the new DS announcement. However, the stock does reflect a next operating profit peak estimate of around ¥300-billion, which is below the historical average for successful platforms.

    As a result, the launch of the 3Ds and Wii2 (expected to be released in the second half of fiscal 2011) could mark the start of a steady profit cycle. However, management will need to focus on costs and expanding the potential user base.

    Jonathan Ratner

  • Euro, durable goods, General MIlls, Lennar, GE, Boeing – Vialoux

    U.S. equity indices are lower this morning. S&P 500 futures are off 5 points in pre-opening trade. Index futures responded to overnight news that Fitch downgraded its rating on Portugal from AA to AA- with negative implications. The Euro quickly broke below support at 134.61. Weakness in the Euro triggered strength in the U.S. Dollar which in turn triggered weakness in commodities priced in U.S. Dollars. 

    Index futures weakened slightly following release of the Durable Goods Orders report. Consensus for February Durable Goods Orders was a gain of 1.5%. Actual was a gain of 0.5%. Excluding transportation, consensus was a gain of 0.8%. Actual was a gain of 0.9%.

    General Mills reported higher than consensus fiscal third quarter earnings.

    Lennar reported a less than consensus fiscal first quarter loss. The stock gained 5% in pre-opening trade.

    Bernstein raised its target price on General Electric from $19 to $20. Rating on the stock remains Outperform

    Commerce Bank upgraded Descartes Systems from Sector Perform to Sector Outperform. Target price is $7.50.

    Macquarie upgraded Boeing from Neutral to Outperform. Target price is $83. ‘Tis the season for Boeing to move higher!

    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

  • Ranking the riggies

    Ranking companies based on a scoring system can be tricky. A good company may score low for a number of reasons. Despite the challenges, Kevin Lo, an analyst at FirstEnergy Capital, has ranked drilling companies – he calls them “the riggies” – to determine which operations deserve gold stars. And, while he was at it, Mr. Lo also noted the shortcomings in his ranking system and put some low scorers on the curve, boosting their final results.

    His effort was comprehensive; Mr. Lo examined 557 of the roughly 806 rigs available in western Canada. His results?

    “Our conclusion is that there is no large drilling contractor that has the definitive best fleet in the [Canadian] basin or has more equipment enabling it to perform better,” he said. “There is more dispersion in the smaller contractors, and some companies are certainly better than others in terms of type of equipment.”

    Investors should pick the cheapest large and mid-sized companies on a price-to-asset calculation. Savanna Energy Services Corp. came out on top, the analyst said, noting it is retrofitting its smaller rigs so they can drill deeper. Savanna has been trying to place its shallow-focused rigs in international markets such as Australia, India, and Colombia. As North America leans toward deep wells, those that follow Savanna’s plan should be better off.

    Jomax Drilling Ltd. came in first in one of Mr. Lo’s ranking systems. Can’t find its ticker? That’s because the small company is private. Keep your eye on it, though – it would be an “excellent” takeover target. Beaver Creek, perhaps, too.

    Western Energy Services Corp., placed third in one of Mr. Lo’s categories. Total Energy Services Ltd. was a laggard. “We believe this is one of the reasons why numbers do not always tell the real tale,” the research note said. Mr. Lo still seems to like the company, even though it didn’t fit well into his boxes.

    Trinidad Drilling Ltd. also ranked well among the large and mid-sized companies. Ditto for Precision Drilling Trust. Ensign Energy Services Inc.? Not so much. “Surprisingly, Ensign comes in much lower, although the company consistently makes money from its equipment, again alluding to the intangibles that may not be evident on paper.”

    So, with no clear answers on which company has the best fleet, investors should just buy the cheapest driller in terms of book value, and “as the earnings normalize, the company should over time revert back to mean, and thus should provide the most upside.”

    The large and mid-sized winner is Savanna. Among the small guys, Stoneham Drilling Trust comes out on top. “However, the historical underperformance in utilization compared to the quality of the fleet may not provide the investor with the greatest return for those seeing earnings growth.” 

    Carrie Tait

  • Canadian small cap ETF launched

    As investors continue to seek out ways to play small caps, particularly given the many periods of outperformance from this part of the market, IndexIQ is tapping this demand through two new exchange-traded funds.

    The developer of index-based alternative investment solutions has brought an ETF focused on Canadian small caps to the market. The IQ Canada Small Cap ETF began trading under the ticker CNDA on the NYSE Arca all-electronic platform on Tuesday morning. The platform handles the majority of ETF volumes.

    This product creates an alternative to the iShares CDN SmallCap Index Fund (XCS), which was launched in May 2007 as the first ETF to track the new S&P/TSX SmallCap Index. At that time, Barclays Canada also launched the iShares CDN Russell 2000 Index Fund (XSU).

    CNDA seeks to replicate, before fees and expenses, the performance of the 100-member IQ Canada Small Cap Index. The top weighted names in the index are Red Back Mining Inc. at 3.83% (as of March 18, 2010), Pacific Rubiales Energy Corp. Viterra Inc., Inmet Mining Corp. and Industrial Alliance Insurance & Financial Services Inc.

    The new offering comes at the same time as IndexIQ launches another single-country small cap ETF focused on the domestic market in Australia (NYSE Arca: KROO). The Rye Brook, New York-based company said both CNDA and KROO are designed to provide additional Alpha exposure as satellite holdings built around an investor’s core equity portfolio.

    “Investors targeting Canada or Australia typically have been required to invest in funds with broad-based exposure to large cap and global companies domiciled or operating in these markets,” said Adam Patti, chief executive officer at IndexIQ. “However, these domestic economies have their own important dynamics, driven by oil, gas and metals production in Canada, and coal and metals production in Australia. CNDA and KROO are vehicles dedicated to providing investment exposure to the domestic growth potential of these two countries.”

    To be included in the indexes underlying CNDA and KROO, companies must have a minimum average market capitalization of $150-million for the prior 90-day period; the average maximum capitalization must be equal to the bottom 15% ranking of companies in Canada or Australia based on the prior 90 days.

    Stocks are also required to have a minimum average daily trading volume of at least $1-million for the prior 90 days, and a minimum monthly volume of 250,000 shares for the prior six months.

    For both indexes, the components and their respective weights are rebalanced quarterly.

    Jonathan Ratner

  • Commodities, loonie, Quadra, Silvercorp – Vialoux

    U.S. equity index futures are slightly lower this morning. S&P 500 futures are down 1 point in pre-opening trade. Index futures are responding to slight strength in the U.S Dollar and slight weakness in the Euro. Commodities priced in U.S. Dollars including crude oil, gold, silver and copper are trading slightly lower.

    The Canadian Dollar weakened slightly following news that Canada’s leading economic indictors rose 0.8% in February. Consensus was a gain of 0.9%.

    Quadra Mining has offered to acquire FNX Mining in a friendly share exchange deal. Each FNX Mining share is to be exchanged into 0.9 Quadra Mining shares. The combined company is to be called Quadra FNX Mining.

    Global Hunter initiated coverage on Silvercorp with a Buy recommendation and on Eldorado Gold with a Sell 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

  • Manulife adjustment embarrassing but not meaningful

    The revisions to Manulife Financial Corp.’s previous adjusted earnings and its expectations for future results as a result of how it values its Japanese variable annuity business may be embarrassing, but they are not a sign of any fundamental weakness in the business. There have not been any errors in the reporting of total GAAP earnings and management’s explanation provides comfort that no fundamental problems with this business were revealed by this re-evaluation, according to Desjardins Securities analyst Michael Goldberg.

    “Whether or not there is a direct link, Manulife had replaced its CFO in Japan and subsequently discovered the analytical error,” he told clients.

    The analyst said the $50-million reduction in expected quarterly adjusted earnings through 2010 can and should be offset by a corresponding increase in experience gains. As a result, Mr. Goldberg reversed part of his 2010 and 2011 earnings per share forecast reductions. “There is zero change in total earnings, just in the sources of those earnings.”

    In its Management Discussion and Analysis, Manulife also noted that it added $2.5-billion to its additional margin on segregated funds during 2009.

    “This increases its cushion of profitability and should mean higher earnings emerging from seg funds in the future,” Mr. Goldberg said.

    So while the initial reaction to Manulife’s revisions is expected to be negative, he said its fundamentals are unchanged, maintaining a Top Pick rating and $25 price target.

    Jonathan Ratner

  • Adding ‘China’ to name leads to outperformance

    Attention, CEOs. The simplest way to give your stock a boost may be to add the word China to your company name. Wei Wang, a finance professor at Queen’s University in Kingston, Ont., studied the returns of 82 companies that have adopted names containing “China” since late 2006. He found that the average stock in his study outperformed the market by 31 percentage points in the 40 trading days that spanned the name change.

    As Jason Zweig of the Wall Street Journal notes, “this is far from the first time that investors have fallen under the spell of greed-by-association.”

    According to Zweig, companies that added “.com” to their names outperformed other technology companies by an average of 53 percentage points during the heyday of the Internet bubble in1998 and 1999. More recently, as oil prices surged between 2004 and 2007, companies in Canada and the United States that added “Oil” or “Petroleum” to their names received an instant 8% boost to their stock performance.

    Freelance business journalist Ian McGugan blogs for the Financial Post

  • Quebec’s wireless shakeup

    New legislation in Quebec that is scheduled to come into effect by June 30, 2010 could have a material impact on Canadian wireless service providers.

    Bill 60, which was first introduced in June 2009 in order to amend the previous Consumer Protection Act, will make it easier for consumers to cancel their long-term contracts since the asssociated penalties will be much lower. Currently, if a consumer decides to terminate a long-term contract signed with a wireless service provider, the company has the right to receive a termination fee.

    Quebec accounted for about 19% of Canada’s wireless subscribers at the end of 2009, according to Maher Yaghi of Desjardins Securities. The analyst estimated that BCE Inc. has the most exposure to province’s market, followed by Rogers Communications Inc. and Telus Corp, which have similar market share.

    He said Bill 60 has the potential to both increase the province’s churn rate and provide Québecor Inc. with an easier way to capture disgruntled customers. It could also help the company target customers seeking cheaper services if Vidéotron decides to use price to attract subscribers.

    So while an increase in the wireless churn rate does have a small financial impact on carriers, if Bill 60 is a success in Quebec, the adoption of similar rules in the rest of Canada could have an even more negative impact on the value of wireless customers to service providers.

    In its current form, the bill will not be retroactive to contracts signed before the legislation takes effect.

    BCE, Rogers and Telus have similar termination policies, which stipulate that the fee is the greater of $100 or $20 per month remaining in the contract up to a maximum of $400. However, some do not have the $400 maximum.

    Under the amendments to Bill 60, termination fees will be based only on the subsidy that carriers provide to clients. The subsidy amount is the difference between the cost of the device paid for by the service provider and the price the consumer pays for the device when entering into a long-term contract, Mr. Yaghi noted. He said the impact will be particularly evident in the low and mid-range of the market, but in some circumstances the high end of the market as well.

    Given the entry of new wireless players such as Vidéotron and Public Mobile, coupled with Bill 60 taking effect, the economic value of a wireless subscriber in Québec appears as though it will be reduced.

    Jonathan Ratner

  • Natural gas winners and losers

    The so-called shoulder seasons can be a tricky times for natural gas players. The shoulder seasons — one in the spring, when it is not quite winter but not quite summer; and the other in the fall, when it is not quite summer, but not quite winter — usually drive demand for natural gas down.  Neither furnaces nor air conditioners are cranked up.  And with that in mind, a team of analysts at RBC Capital Markets Corp. rolled out a list of “high beta gas names [that] are at the most risk of underperformance on continued natural gas weakness.”

    Chesapeake Energy Corp., Comstock Resources Inc., Carrizo Oil & Gas Inc.,  Goodrich Petroleum Corp., Quicksilver Resources Inc., and Range Resource Ltd. are all on RBC’s watch list.

    A handful of companies may also roll out market-moving news at an investor conference next week, RBC predicted.  Positive news may flow from Anadarko Petroleum Corp., EQT Corp., Noble Energy Inc., Plains Exploration & Production Co., SandRidge Energy Inc., St. Mary Land & Exploration., and EXCO Resources Inc., the brokerage house said.

    Carrie Tait

  • Lions Gate takeout or M&A unlikely

    Despite Carl Icahn’s offer to buy all of Lions Gate Entertainment Corp.’s outstanding shares, a takeout by the billionaire New York-based financier looks unlikely.

    After an original tender for 10% of the Vancouver-born movie studio that appeared to be an effort to ensure that Lions Gate didn’t over-pay for either the MGM or Miramax libraries, Mr. Ichan probably has a few more goals now.

    The first is to achieve greater influence on the board of directors to further his strategic views, according to David Bank at RBC Capital Markets. Second, the analyst suggested that Mr. Icahn seeks to convince shareholders – in a very visible way – to adopt his views. Thirdly, Mr. Icahn is putting the company in play.

    Mr. Bank told clients that the initial 10% tender was likely to fail, but served as a gauge of shareholder sentiment. But if shareholders were unlikely to give up modest control for US$6 per share, they probably don't want to sell 100% of the company for the same price.

    Mr. Icahn's own slate of directors would need to be elected in order to repeal the “poison pill” takeover defence implemented to prevent him from boosting his stake to 30% from 19%. As a result, it is unlikely that shareholders who stood by management and rejected the offer will suddenly have a change of heart.

    Mr. Bank thinks Lions Gate shares are fairly valued on a fundamental basis, so Mr. Icahn’s tender should not generate an M&A-driven value-realizing event. The analyst also said that the company "simply isn’t on the front-burner for consolidation targets in Hollywood.”

    Jonathan Ratner

  • Quadruple witching, Canadian dollar, Boeing, RIM – Vialoux

    U.S. equity index futures are mixed this morning. S&P 500 futures are up one point in pre-opening comments. Traders are girding for quadruple witching hour at the close today. Historically, volume and volatility in equity markets have spiked on quadruple witching day.

    The Canadian Dollar gained 0.62 to 99.33 cents U.S. following release of Canada’s February Consumer Price Index. CPI on a year-over-year basis slipped from 1.9% to 1.6%. However, core CPI (ex food and energy) increased from 2.0% to 2.1%. The Bank of Canada has expressed concern about the possibility that the core rate could move higher than 2.0% implying that it may move to increase administered interest rates.

    Boeing added 2% on news that the company is increasing production to match rising demand for passenger aircraft. ‘Tis the season for Boeing to move higher until June!

    Research in Motion gained 1% after the stock was initiated as a Buy at Wunderlich. Target price is $96.

    Palm is down 18% after announcing negative fiscal fourth quarter guidance.

    Best Buy gained 4% after Goldman Sachs upgraded the stock from Market Perform to Buy.

    TD Newcrest upgraded Telus from Buy to Action Buy and downgraded BCE from Speculative Buy to Hold. 

    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

  • China revaluation won’t mean much for G-10

    When China allows the yuan to appreciate again, the policy shift will come as no surprise to financial markets. But while the rising currency has an obvious and direct impact on Asian currencies (they should strengthen), a higher yuan may be immaterial for G-10 currency markets, according to a new report from J.P. Morgan.

    Open economies with a high export concentration to China would see their trade balances improve and growth accelerate, since a strong yuan would raise their exports. However, how stimulative this revaluation is depends on the magnitude of yuan’s move and the size of China-bound exports relative to GDP. Among G-10 currencies, only the Swiss franc is managed.

    J.P. Morgan global currency strategist John Normand expects a return to gradual yuan appreciation in the middle of 2010, with a 5% cumulative move by the end of the year.

    Given that China’s exports are 25% higher in value terms than its imports, he said balanced global growth should naturally raise China’s trade surplus. In fact, Mr. Normand suggested that a Chinese revaluation would probably need to be about 20% to have a meaningful impact n global imbalances.

    “If China allows only 5% appreciation this year, which is roughly the pre-Lehman level, the real impact will be trivial.”

    Jonathan Ratner

  • Inflation surprise gives Bank of Canada reason to hike rates earlier

    Higher-than-expected inflation is surely turning heads at the Bank of Canada, raising the risk of an earlier hike in interest rates, says Scotia Capital.

    Core CPI rose to 2.1% year-over-year and saw an annualized 4.2% month-over-month gain on a seasonally adjusted basis. The February numbers represent the first time core inflation has surpassed 2% since December 2008.

    While the details are mixed in terms of the components underlying the move, it is nonetheless pretty difficult to argue that emergency rates in Canada are still necessary, economists Derek Holt and Karen Cordes Woods told clients.

    They expect the Bank of Canada’s projection of core CPI at 2% y/y to move forward from the third quarter to the second quarter of 2011. This revision will likely be addressed in the central bank’s Monetary Policy Report due out on April 22, two days after its next statement.

    “Add stronger than expected growth, a more hawkish Bank of Canada and further improvement in the funding and liquidity environment into the mix and the BoC has what it needs to hike rates at the end of Q2, the economists said. “While that is not our base case assumption, with our own projection for the first hike in Q3 of this year, the reasons for of an earlier hike are growing.”

    Acknowledging that Canadian inflation is again heating up, Krishen Rangasamy of CIBC World Markets feels that like the deflation hype during the recession, inflation fears during the recovery might be a little overblown.

    The economist noted that while core inflation did surprise to the upside, the month of February saw a staggering 19% increase in traveler acommodation, likely due to the Olympics.

    “One month does not make a trend, even more so, when considering the ‘Olympic effects’”, he said in a note.

    Mr. Rangasamy noted that five of the eight broad CPI categories were either down or flat. The 0.4% rise in headline CPI in February (0.1% after seasonal adjustment) was also much lower than the monthly gain in the same month last year.
    Given the temporary factors he indicated, the economist doesn’t expect a change in the Bank of Canada’s stance to until the end of the second quarter.

    “While we believe that the Bank will start its tightening cycle in July, to bring interest rates to more neutral levels, and in line with the improving economic picture, we suspect that the BoC could temporarily take a pause, perhaps in Q4, gauging the effects of the strong C$ and softer growth.”

    Jonathan Ratner

  • Loonie ripe for a correction: Rosenberg

    The Canadian dollar is overvalued by at least six cents, according to David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates. With net speculative long positions for the loonie at their second highest level on record, he suggested that the currency is ripe for a correction.

    The last time the loonie’s net long position was this high was back in November 2007, according to U.S. Commodity Futures Trading Commission data. In the following month, the Canadian dollar suffered a 9.5% decline.

    Mr. Rosenberg also noted that the loonie’s momentum, as measured by its year-over-year percentage change, reveals that it is “hugely overbought.”

    “There has always been a round of profit-taking at these momentum levels in the past,” the strategist said in a note. He added that other commodity-sensitive currencies such as the Australian and New Zealand dollars are far less loved by speculators.

    So while Mr. Rosenberg loves the loonie on a long-term basis – the fair value line is rising a couple of cents each year, serving to show how Canada’s fundamentals are improving relative to the United States – its ascent leaves the bulls with a conundrum.

    For now, given that the loonie is front page news “just about everywhere,” the strategist says most, if not all, of the good news is already in the price.

    On a technical basis, he noted that the Canadian dollar could trade all the way back down to 93¢ without violating any of the constructive intermediate and long-term trend lines.

    Jonathan Ratner

    Photo: David Rosenberg of Gluskin Sheff and Associates Inc., in Toronto, Monday, May 25, 2009. (Photo By Peter J. Thompson/National Post)

  • Why OPEC should contain oil prices

    Getting aggressively long crude oil at this point probably isn’t a good idea. High prices are clearly in the long-term interest of OPEC, but the cartel would be wise to curtail any rapid rise so as to prevent any hint of an oil-driven economic slowdown that may scare off emerging economy buyers.

    Indicisive economic data and see-saw moves in the value of the U.S. dollar have kept oil prices range-bound recently. This could continue for some time, with no significant breakout to the upside anytime soon, according to Marting King of FirstEnergy Capital.

    One element the bullish camp may be using to defend higher oil prices is demand trends in the United States. While some improvement in petroleum demand is expected, the analyst noted that the latest weekly data seems to be shifting into neutral rather than moving higher.

    What about gasoline demand? It has definitely improved off dismal lows early in 2010, but Mr. King argues that this is the result of a seasonal rebound off artificially low levels due to inclement weather – “snowmageddon” – in the eastern part of the United States.

    “If anything, we expect that demand will be plateauing very shortly, as unemployment remains high, but stabilizing, while retail pump prices are nearly 50% higher than one year ago, pulling more dollars from the pockets of those unemployed workers and dampening further demand improvement.”

    The analyst also suggested that a sustained move toward US$90 per barrel might be discreetly opposed by OPEC. The cartel seems to be sending the message that the current overall poor rate of quota compliance, which is barely above 50% as of February, is just fine.

    “With cartel members paying lip service to getting members to tighten up on quotas, we have been of the view that cartel members are putting barrels where they need to go to satisfy demand, primarily in Asia, and that the level of quota compliance is something of a non-issue at the present time,” Mr. King told clients.

    If prices look like their are making a sustained move higher, he expects compliance will actually deteriorate further. The Saudis could lead the way by putting more barrels into the market to dampen prices.

    The analyst explains that spare capacity is plentiful right now, particularly in Saudi Arabia. A rapid upward price move may create an appearance or the potential for a double dip economic recession. With the U.S. dollar showing continued weakness – along with the Euro – OPEC has shown some sensitivity in the past to the basket price moving beyond €60 per barrel. These three factors help explain why the cartel would try to keep prices contained, even though high prices are good for its members.

    While hungry Asian buyers would likely welcome more barrels since they are getting a price break via rising currencies, they may also grow wary of aggressive bidding if their growth in developing economies looks vulnerable – particularly as a result of surging crude oil prices. As a result, Mr. King thinks a move by OPEC to dampen prices this year would serve as a smart business decision.

    Jonathan Ratner

    Photo: Algerian Oil Minister and OPEC President Chakib Khelil arrives for a news conference after a meeting of OPEC oil ministers in Vienna September 10, 2008. (REUTERS/Heinz-Peter Bader)

  • Consumer prices, USD, Nike, Fedex, Broadcom – Vialoux

    U.S. equity index futures are slightly higher this morning. S&P 500 futures are up 1 point in pre-opening trade. Index futures moved higher following release of economic data at 8:30 AM EDT. Consensus for February Consumer Prices was an increase of 0.1% versus an increase of 0.2% in January. Actual was unchanged. Excluding food and energy, consensus was an increase of 0.1% versus a decline of 0.1% in January. Actual was an increase of 0.1%. Consensus for weekly jobless claims was 455,000. Actual was 457,000.

    The U.S. Dollar is slightly higher on renewed concerns about Greece’s debt. Commodities priced in U.S. Dollars are trading slightly lower.

    Nike added 4% after reporting higher than consensus fiscal third quarter earnings.

    Fedex dipped slightly despite reporting higher than consensus fiscal third quarter earnings and after offering positive fourth quarter guidance. The company also announced additional employee benefits that will add to costs.

    Broadcom gained 2% after Goldman Sachs upgraded the stock to a Buy. 

    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