Author: Jonathan Ratner

Moody’s Investors Service raised its ratings on both Ford Motor Co. and the company’s finance arm by one notch on Wednesday. It is also reviewing the ratings for further possible upgrade.

Ford Motor Credit Co.’s senior debt rating moves to B1 from B2, while Ford’s Corporate Family Rating and Probability of Default Rating move from B3 to B2.

“The upgrade of Ford’s long-term ratings anticipates that the company’s restructured business model will generate significantly improved operating and financial performance,” Moody’s said. “The strength of this model is supported by a robust new-product program, a more disciplined approach toward production levels and incentives, the expanding cost benefits associated with the new UAW agreement, and solid progress in globalizing platforms and product offerings.”

Moody’s said this model is generating market share gains in the United States, healthy price realization, and operating performance which is stronger than what the rating agency previously anticipated.

Ford’s senior unsecured debt rating moves to B3 from Caa1, its trust preferred to Caa1 from Caa2, and Speculative Grade Liquidity rating to SGL-2 from SGL-3. Also raised is Ford Credit’s senior debt rating to B1 from B2.

Jonathan Ratner

The VIX is simply a measure of current volatility and offers little or no predictave or indicative value as to the course of the market, according to a new study from Connecticut-based Birinyi Associates.

The stock market research firm has long been critical of technical analysis and chartists, attributing this to a disappointing record of articulating market turns, an even weaker performance in terms of stock selection, and their tendency to comment rather than analyze.

For example, Birinyi noted that through most of 2009, investors were warned that the rally would fail partly because it lacked the critical ingredient of volume. The firm insists that volume is a fleeting number in today’s markets, but wonders if those analysts understood this point.

“At the end of the day, we contend that virtually all technical indicators are descriptive and their predictive results – when they do occur – are coincidental.”

The goal of the Chicago Board Options Exchange Volatility Index is to estimate the implied volatility of the S&P 500 index over the next 30 days. However, the study by Laszlo Birinyi and Kevin Pleines says the VIX actually has limited predictive value. The index details the volatility of the market today very well, but not tomorrow or the day after.

It may, however, be useful in that it appears that high volatility might actually be a contrarian indicator. Low VIX readings (generally considered to be positive) are followed by mixed markets for the next 60 days, Birinyi noted. When readings are high (generally considered a negative) the market does better in the following one, two and three months, but is lower six months out.

Jonathan Ratner

Breadth in economic growth fell to 88% in January, putting it below the nine-month moving average. While such a break has not prevented equity prices from moving higher in the past, Dundee Securities strategist Martin Roberge warns that the most likely scenario is what he calls a “prolonged churning phase,” with the odds of a sizeable correction rising slightly.

In order to get a jump on turns in the equity market, Dundee built a diffusion index of the OECD leading economic indicator (LEI). The firm calculated that the 35-country index leads the OECD LEI and equity market turns by roughly two quarters.

From a 100% reading in October 2009, the OECD diffusion index dropped to 88% in January, below the nine-month moving average of 97%. Mexico, India, Brazil, Greece and Norway had decling LEI.

“This deterioration in economic breadth is meaningful as the expected return for equities drops markedly when our diffusion index drops below the 9-month average,” Mr. Roberge told clients, noting that the six-month forward return drops from 6.5% to 1.8%.

Market corrections of 10% or more typically occur when the OECD diffusion index has broken below the 9-month moving average, he added.

This break should serve as a reminder that investors should take profits on strength throughout the year. With the relative strength index on the S&P 500 and the S&P/TSX composite above 70, and both indexes again trading near 15x forward EPS, Mr. Roberge said such an opportunity has arrived.

“We recommend investors wait to redeploy fresh cash. Otherwise, profit-taking activities or rotation into industry laggards seem a more pragmatic strategy at this point. Thus, investors should not chase price break-outs, but should expect more market churning and work with higher probabilities of a sizeable market correction later this year.”

Jonathan Ratner

U.S. equity index futures are higher this morning. S&P 500 futures gained 3 points in pre-opening trade. The Dow Jones Industrial Average is poised to move above its January inter-day high at 10,729.89 to reach a 17 month high. ‘Tis the season for the Dow Jones Industrial Average to move higher into May!

Early strength can be attributed mainly to weakness in the U.S. Dollar. The U.S. Dollar Index peaked four weeks ago at 81.34. Intermediate downside risk is to the top of a previous trading range at 78.45. ‘Tis the season for the U.S. Dollar to start moving lower.

Equity index futures did not respond significantly to the February Producer Prices report released at 8:30 AM EDT. Consensus for PPI was a decline of 0.2% versus a gain of 1.4% in January. Actual was a decline of 0.6%. Consensus for PPI ex energy and food prices was an increase of 0.1% versus a gain of 0.3% in January. Actual was a gain of 0.1%.

The World Bank raised its expectations for real GDP growth in China from 9.0% to 9.5%.

Weakness in the U.S. Dollar has prompted strength in commodities priced in U.S. Dollars. Crude oil, gasoline, gold, silver, copper and platinum prices are trading higher. Energy and oil service stocks finally are responding to higher energy prices. 

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

U.S. equity index futures are slightly higher this morning. S&P 500 futures are up 2 points in pre-opening trade. Traders are waiting for news on interest rates and monetary policy to be released at 2:15 PM EDT after completion of the Federal Reserve Open Market Committee meeting.

The U.S. Dollar is trading slightly lower this morning. Commodities priced in U.S. Dollars including crude oil, copper, gold, silver, platinum and gasoline are trading higher.

Index futures did not respond significantly to economic news released at 8:30 AM EDT. Consensus for February Housing Starts was a decline of 3.6%. Actual was a decline of 5.9%. Housing starts were hampered in February by weather. Consensus for February Building Permits was a decline of 3.2%. Actual was a decline of 1.6%.

Domtar gained 3% after Goldman Sachs raise its rating on the stock from Neutral to Conviction Buy. Target price was raised from $63 to $82.

General Electric added 1% after JP Morgan raised its 2010 earnings estimate from $1.00 to $1.10 per share and re-iterated its Overweight rating. Yesterday, General Electric broke above resistance at $17.30 to reach a 15 month high. Current intermediate upside potential is to $21.40.

Starbucks rose 2% after UBS upgraded the stock from Neutral to Buy. Target price was raised from $27 to $29. On the charts, the stock recently broke resistance at $24.45 to reach a 28 month high. Current intermediate upside potential is to $28.10. 

The energy industry is gearing up for a major expansion. This morning Shell announced plans to expand production through a $100 billion capital spending program through to 2004. 

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

Expectations of higher gold prices and the belief that existing reserves will increase with further exploration mean most senior and intermediate (and some junior) gold producers are trading at a multiple to their net asset value (NAV).

Dundee Securities analyst Paul Burchell looked at the price to NAV multiple awarded to six senior and intermediate gold stocks over the past four years. He attempted to determine if any trading pattens – and hence buy and sell triggers – could be found, and came up with some encouraging results.

Most of the companies have traded within a fairly narrow P/NAV band, which he believes can be used to increase an investor’s odds of higher returns.

Barrick Gold Corp., Goldcorp Inc. and Agnico-Eagle Mines Ltd. are currently trading at the lower end of the P/NAV range and may offer better returns at this time, the analyst said in a research note. Kinross Gold Corp., IAMGOLD Corp. and Eldorado Gold Corp. are trading closer to the mid-point of their P/NAV ranges, which suggests lower, but still potentially positive, returns.

Jonathan Ratner

While it is unlikely that the Fed will move on interest rates at 2:15 p.m. ET, it could make a shift towards a more hawkish stance. Economists at Scotia Capital outlined five things to watch for. The first three are considered most likely for Tuesday’s FOMC meeting.

• Removal of the term “extended period.” This could be replaced with “some time” in reference to the period the Fed plans to keep borrowing costs at exceptionally low levels.
• If “extended period” remains in the statement, Kansas City Fed President Hoenig will likely dissent again. St. Louis Fed President Bullard could do the same. However, if there is a wording change that provides the FOMC with more flexibility in terms of the timing of rate hikes, there will more likely be a return to unanimity.
• There could be firming wording on the expiry of the US$1.25-trillion agency mortgage-backed securities purchase program, which is expected to be complete by the end of the first quarter.
• Given that emergency rates are no longer necessary, the statement may not include the term “exceptionally” from “exceptionally low levels.” It could be replaced with “highly accommodative” or something else that gradually shifts the statement towards a more hawkish tone, rather than removing it entirely.
• The FOMC could include a more upbeat assessment of the economy as a result of strong data of late. This will likely be offset by further reservations about the U.S. housing market, but tone should be more optimistic.

Even just a few of these changes would bring the FOMC closer to the first rate hike, Scotia told clients. While it continues to expect that will come in the third quarter, the economists said the risk is now tilted to the fourth quarter, partly to allow the Fed the time to remove all unconventional stimulus before changing administrative rates.

Jonathan Ratner

The long Canadian dollar trade became the largest position held against the U.S. dollar in the period ending March 9, according to U.S. Commodity Futures Trading Commission data. Speculators now hold a total of 61,400 CAD contracts, or US$5.98-billion, figures released on Friday show.

While this reflects a more bullish view on the loonie as it moves towards parity with the greenback, it remains short of the position when the Canadian dollar moved through parity in October 2007. At that time, the net long CAD position stood at 83,000 contracts, or US$8.3-billion, according to Scotia Capital currency strategist Camilla Sutton.

She also noted that the net long oil position increased to 109,300 contracts, which indicates that the market is turning more bullish oil in tandem with the Canadian dollar.

After a company reports an earnings surprise – either positive or negative  – its stock price frequently moves in the same direction for weeks or even months. If fact, simply buying names at the end of each month that beat the street with their most recent results is a strategy that tends to outperform the broader index over time by a considerable margin, according to Chad McAlpine, quantitative analyst at RBC Capital Markets. At the same time, holding stocks that fail to meet earnings estimates generally leads to underperformance.

“There are a number of possible explanations for this unusual behaviour, since it clearly flies in the face of the Efficient Market Hypothesis,” the analyst told clients. “Some believe that it’s simply due to the amount of time that it takes for information to be widely disseminated, while others believe that market participants systematically under react to earnings surprises initially, only to later realize the full implications of these unexpected results.”

Revenue surprises also contribute to this movement in stocks and the duration. When a revenue beat is directionally the same as the earnings surprise, the post-earnings announcement share price movement is both higher and more persistent, Mr. McAlpine said in a recent report.

Of the first 129 companies in the S&P/TSX composite index to report, 74 have posted positive earnings surprises. Within this group, 47 had positive revenue surprises and 23 has positive expense surprises.

The Financials and Consumer Discretionary sectors have seen the highest proportion of companies with positive earnings and revenue surprises, while the average magnitude of the surprises for these sectors is also positive for both earnings and revenue. At the other end of the spectrum, Mr. McAlpine found that less than half of the constituents of the utilities sector beat the street based on either earnings or revenue. He also noted that revenue surprises are better than expense surprises in terms of share price movements.

Here are the TSX-listed names that saw both an earnings and a revenue surprise this quarter and rank at the top of RBC’s quantitative model:

Fort Chicago Energy Partners LP
Corus Entertainment Inc.
Cogeco Cable Inc.
AGF Management Ltd.
Astral Media Inc.
Industrial Alliance Insurance and Financial Services Inc.
Canadian Imperial Bank of Commerce
Emera Inc.
Laurentian Bank of Canada
BCE Inc.

Jonathan Ratner

Many of the world’s smartest value investors are going shopping in the insurance sector. Prem Watsa, the eagle-eyed chief of Fairfax Financial Holdings, has swooped down to acquire Zenith National Insurance Corp., a provider of workers’ compensation in the United States. Warren Buffett has upped his stakes in Munich Re and Swiss Re, two of the world’s largest reinsurance companies. And Wilbur Ross, who has made millions by buying up distressed companies, has told Fortune that he believes there are deep value opportunities among both life insurers and property and casualty insurers.
 
The Street Capitalist blog offers a useful rundown on some of the bargains available in the reinsurance sector. Nearly all the main players are going for less than book value. Many sport double-digit returns on equity. And most sell for less than seven times earnings.

What are the negatives? The market for insurance is reckoned to be soft and companies may see their business shrink over the next couple of years if they’re not prepared to reduce premiums. Many insurers also have exposure to U.S. commercial real estate and annuities, both of which could prove problematic.

Still, at current valuations, it’s easy to see why the world’s top bargain hunters are excited. Consider Everest Re Group Ltd. selling for just over six times earnings and at only 0.8 of its book value. Or Montpelier Re Holdings Ltd., which fetches under four times earnings and goes for 0.82 of book. By any standards, these companies look cheap.

Freelance business journalist Ian McGugan blogs for the Financial Post

The rebound in stock prices and a back-up in bond yields pushed the 5-year Government of Canada bond yield (slightly higher than 2.8%) back above the TSX dividend yield (just below 2.7%) on Wednesday.

“This is another indication that financial market conditions are normalizing,” BMO Capital Markets deputy chief economist Douglas Porter said in a note.

Up until the past year, it was unheard of since the 1950s to have bond yields below dividend yields.

As recently as February, dividend yields were 44 basis points above 5-year bond yields (2.86% versus 2.42%). But when 5-year yields bottomed at 1.8% and the TSX dividend yield topped 4.4% in March 2009, Mr. Porter notes that was a “once-in-a-generation asset allocation opportunity.”
 

U.S. equity index futures are slightly lower this morning. S&P 500 futures slipped 4 points in pre-opening trade. Index futures moved lower following release of economic reports at 8:30 AM EST. Weekly jobless claims eased 6,000 to 462,000. The January U.S. Trade Deficit narrowed to $37.3 billion. Consensus was a deficit of $41 billion. The January Canadian Trade Surplus rose to $799 million. Consensus was a surplus of $100 million.

Pengrowth Energy Trust was downgraded to Hold from Buy at Canaccord.

Collins Stewart initiated coverage on the technology manufacturing sector with Buy recommendations on Jabil, Flextronics and Celestica.

Dr. Pepper/Snapple was upgraded by UBS from Neutral to Buy.

Imax gained 2% on news that “Alice in Wonderland” attracted North American sales in of $116 million over the weekend. 

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

An old joke in emerging market circles says that Brazil will always be the country of the future. However, strong global demand for commodities, low international interest rates, much-needed reforms and positive investor sentiment suggests that Brazil's time has finally come and it is set to embark on a “growth miracle” for the next five years or more.

This positive outlook, included in a new report from RBC Capital Markets Emerging Markets Research, predicts Brazilian GDP growth of more than 6% in 2010 and 5% in 2011. The economic expansion is expected to continue through the middle of the decade.

Among other efforts, Brazil’s policymakers have focused on credit growth, which has maintained a healthy 15% to 30% year-over-year pace during the past year. RBC says it is a very powerful driver of Brazil’s growth boost as it has helped to sustain domestic demand. Credit as a percentage of GDP has nearly doubled from 24% in 2004 to 45% by the end of 2009.

The government is expected to undertake approximately $500-billion worth of investment initiatives in the next five to seven years. Of the 635-billion Brazilian reals ($352-billion) set to be invested between 2007 and 2010, just 53.6% had been allocated by October 2009. That leaves a big chunk to be doled out before the end of this year.

Infrastructure, tourism and other activities related to the 2014 World Cup (12 cities) and 2016 Olympics (Rio de Janeiro) will provide another source of growth momentum over the next five to seven years, RBC noted.

Large public-sector social programs, such as grants to Brazil’s poor families, should support consumer spending on a permanent basis. At the same time, there has been a major income distribution shift for Brazilian households in recent years. RBC says the dramatically larger middle class will likely serve as a key source of new long-term household demand in areas such as consumer durables, housing and automobiles.

The report highlights other factors supporting Brazil’s growth outlook going forward, including the long-term decline in real interest rates, the upgrade to Brazil’s credit ratings, growing commodity demand from Asia and a permanently higher level of foreign direct investment

“All are likely to be powerful tailwinds to Brazil’s economy over the coming decade ensuring Brazil’s ‘Growth Miracle' has long legs.”

Jonathan Ratner

Photo: Residents celebrate after Rio de Janeiro won the bid to host the 2016 Summer Olympic Games, on Copacabana beach in Rio de Janeiro October 2, 2009. (REUTERS/Bruno Domingos)

Discount brokerage eTrade is being sued by Lindsay Lohan for modeling a “milkaholic baby” after the actress in one of its popular TV spots. Lohan reportedly wants US$100-million in damages and an injunction to force the ad off the air.

Her lawyer, Stephanie Ovadia, told the New York Post that Lohan has the same single-name recognition as Oprah or Madonna.

“Many celebrities are known by one name only, and E-Trade is using that knowledge to profit. They used the name Lindsay,” she said. “They’re using her name as a parody of her life. Why didn’t they use the name Susan? This is a subliminal message. Everybody’s talking about it and saying it’s Lindsay Lohan.”

UBS cut its rating on Brazilian mining giant Vale to Neutral from Outperform after incorporation disappointing fourth quarter results and the US$1-billion purchase of a bigger stake in Fosfertil into estimates. Its price target (for Vale ADRs) was also reduced from US$34.38 to US$32.70.

“With Vale acknowledging that Q4 09 results were disappointing, investor attention quickly turned to the company’s comment that it is embracing the spot market as a reference point for contract prices,” UBS said. “However, in our view, the sustained cost impacts seen in Q4 09 are likely to oupside surprises in iron ore.”

Its analysts believe the acquisition of Fosferil, Brazil’s leading producer of fertilizers, from Mosaic is rational in strategic trems and secures an end market for Vale’s phosphate rock out of Peru.

The growth opportunities in Brazilian agriculture are also compelling, UBS noted. However, given concerns regarding medium-term phosphate prices, its analysts find it difficult to see significant returns above the company’s weighted average cost of capital and “the US$5.7-billion ticket limits the ability to affect the US$150-billion-plus market cap.”

Jonathan Ratner

A year after the market’s lows, everyone wants to know what Year Two will look like.

Using the ten S&P 500 bear market troughs since 1926, Bank of American Merill Lynch (BAML) found that the average price advance from a bear market low in Year Two is 9%. This follows an average gain of 46% in the first yeara.

On nine out of ten occasions, the second year after a trough was a year of positive returns for the S&P 500. History also shows that fixed income returns tend to be flat in Year Two.

BAML believes March 9, 2009 was a multi-year bear market low and expects 2010 will be different from the extreme markets of 2008 and 2009. “Neither a major collapse nor a massive gain is likely.”

David Bianco, its chief U.S. equity strategist, has a target of 1,275 for the index, which represents upside of 12%. BAML’s fixed income strategists anticipate a slightly negative return for U.S. treasuries in 2010.

Jonathan Ratner