Author: Jonathan Ratner

U.S. equity index futures are mixed this morning. S&P 500 futures are unchanged.

Crude oil added $0.13 per barrel after OPEC raised its forecast for crude oil demand in 2010 to 900,000 barrels per day. ‘Tis the season for crude oil prices to move higher.

Allergan gained 2% after the company received FDA approval to market botox for additional health care purposes.

Chevron was downgraded Bank of America/Merrill from Buy to Neutral.

Pengrowth gained 1% after BMO Capital Markets upgraded the trust from Market Perform to Outperform

Intermune rose 15% after receiving an FDA panel approval of its lung disease drug.

Celestica was downgraded by Scotia Capital from Outperform to Sector Perform.

Brown Foreman is slightly higher after reporting better than consensus quarterly earnings. 

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

Mexico may not get a lot of attention, but the investment community sure seems to recognize its prospects. The Bolsa Index is up more than 90% since the March 2009 lows and is just shy of its all-time high set in January 2010.

One of the primary reasons for this success is commodities. Mexico is one of the most promising areas to invest due to a renewed wave in exploration investments and a mining sector that is well-placed to profit from both increased global demand for commodities and a relatively investor-friendly regulatory environment.

“Further, the broader Mexican index is made up of solid companies, which should outperform most developed-world stock markets,” National Bank Financial geopolitical analyst Pierre Fournier says in a new report.

In 2009, Mexico’s 7% decline in GDP was among the worst performances in the world, underscoring the country’s dependence on the U.S. consumer. The next couple of years is expected to bring modest growth, but the country’s long-term economic, social and political fundamentals are strong enough to justify a bullish long-term investment perspective for Mexico, according to Mr. Fournier.

“Despite its overdependence on the United States, and strong competition from China and other developing countries, Mexico’s manufacturing sector is becoming increasingly competitive and is beginning to diversify its export markets,” he says. “The overwhelming security and geopolitical interests of the U.S. will also ensure that Mexico’s powerful neighbour will provide a backstop in case of need.”

Jonathan Ratner

We’ve outlined Edward Yardeni’s 12 reasons to be bullish, so here are some reasons to be bearish, or at least cautious.

The market’s rebound has been impressive, but even if the S&P 500 edges a little higher in the near term, John Higgins, senior markets economist at Capital Economics expects to see it back down around 1,000 by the end of the year.

The market’s gains this time around have been considerably greater than normal
In the past 12 months, the S&P 500 has risen by nearly 70%. During the previous 13 economic downturns since 1929-1933, it rose by an average of 44% in the first year after hitting a low.

Equities have tended to do less well in the second year after hitting a cyclical low
An average rise of 5% or so has been typical. “There is always the chance that the market will fare better than average this time around… But we doubt last year’s spectacular gains will be sustained for long.”

Valuations are not compellingly attractive
The stock market’s cyclically-adjusted price (reported) earnings ratio is about a third higher than its long-run average based on data provided by Robert Shiller of Yale University. The gradual scaling back of unconventional monetary policy stimulus is likely to curb investors’ appetite for risk this year even if the Fed leaves key policy rates on hold.

The economic recovery is also likely to run out of steam before too long
In the absence of a further increase in margins – which have already rebounded – weak economic growth should weigh on corporate earnings.

Jonathan Ratner

Happy Anniversary!

With North American equity markets up roughly 60% since the lows of March 9, 2009, there are plenty of opinions on where stocks are going and why.

As Ian McGugan wrote in Tuesday’s Financial Post, the optimists believe the U.S. economy is going through a transformation that will see it speed ahead just as fast as it did before the crisis. The pessimists, meanwhile, believe global stocks are already running on enormous amounts of government stimulus and could easily hit the skids.

“It hasn’t been a sucker’s rally,” says economist Edward Yardeni. “It started out as a relief rally following a major bear market.”

The chief investment strategist of Yardeni Research looks back to the S&P’s rally into the end of 2008 (following the collapse of AIG and Lehman), which was followed by another 25% plunge to the March 9 closing low. In all, the market lost 56.8% from peak to trough.

“The final selloff indicated widespread capitulation and revulsion with owning stocks, especially in the financials sector.,” he writes. “Banks were trading as though they were all going to be nationalized.”

But we know that didn’t happen. The banks were successful in raising lots of capital as money poured into the bond markets. Investors and depositors scrambled to get better returns than were available in the money markets after the Fed lowered the federal funds rate down to zero on December 16, 2008.

Looking forward, Mr. Yardeni stands firmly in the bullish camp. He expects the S&P 500 will be as high as 1,350 before the end of the year – another 18.5% – and provides 12 reasons to be optimistic.

Sentiment
It remains bearish for stocks, which is usually bullish.
“Most investors are convinced that ‘this will all end badly. However, the bears have yet to stage a serious correction in stock prices. Individual investors remain especially cautious on the stock market.”

Liquidity
It is more than sufficient to push stock prices higher. Retail money market funds had net outflows of US$274.3-billion during the past 52 weeks (through Feb. 22), but most of that went into bond mutual funds or savings deposits. Money market funds held by institutional accounts totaled US$2.08-trillion during the week of Feb. 22.

Corporate cash flow
Matching the previous record high during the third quarter of 2008, it rose to US$1.52-trillion in the third quarter of 2009. It surely hit a new peak during the fourth quarter and should continue to do so in 2010. Among the most aggressive buyers of equities recently have been companies buying other companies for cash.

The Fed
The U.S. central bank is likely to maintain its zero interest rate policy for an extended period, making liquid assets less compelling to hold than stocks. The “extended period” phrase has been used by the Fed for an extended period, which could extend through the end of the year.

Earnings
They should continue to rebound. While analysts tend to be too optimistic and lower their annual estimates over time as a result, during the previous cyclical upturn in profits from 2004-2006, they raised their estimates.

Valuation
With P/Es relatively low for the overall market and for many sectors and industries, valuation is compelling. The forward P/E of the S&P 500 is currently 13.5, down from a recent peak of 15.0 during September.

Profits cycle
The upturn in profits should revive employment and capital spending, just as it always has in the past. When profits are rising, companies inevitably expand their payrolls and capacity.

Productivity
It is growing rapidly and setting new highs, suggesting that real pay per worker will continue to do the same.

Global economic growth
The global boom is clearly making a comeback after the near-death experience and economic growth should continue at a solid pace.

Leading economic indicators
For the tenth straight month, the U.S. Index of Leading Economic Indicators rose in January. This suggests that the economy may be experiencing a relatively normal recovery rather than a “new normal” subpar recovery with stubbornly high unemployment.

Sovereign debt
Crises around the world should force governments toward greater fiscal discipline. It is reasonable to be concerned that the problems in Dubai and Greece could be the start of another financial contagion, but , governments are starting to recognize that there are limits to deficit-financed spending.

Gridlock
In the United States, political gridlock continues to score wins and will soon get tested again. On November 2, 2010 it should prevail, leading to major regime change in Congress. This will result in a more fiscally conservative government.

Jonathan Ratner

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

China’s auto sales in February rose 55% on a year-over-year basis. That’s good news for platinum. Demand for platinum used in catalytic converters continues to increase. Platinum currently is in a period of seasonal strength lasting until the end of May. 

The last of Canada’s major banks reported fiscal first quarter “cash” earnings this morning. Bank of Nova Scotia reported $0.93 versus $0.82 last year. Consensus was $0.88 per share.

Mattel added 1% after Citigroup upgraded the stock to a Buy.

Yum Brands gained 2% after UBS upgraded the stock to a Buy.

Cisco improved 1% in anticipation of news to be released at 11:00 AM EST. The company is expected to announce launch of a new device that will speed up internet use.

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

With the market anticipating rate hikes from the Fed beginning late in 2010 or early in 2011, investors should be keen to know what gold stocks do before and after such tightening cycles.

On average, gold equities outperform the broader S&P/TSX composite index in the 12 months prior to the hike and lag for roughly nine months afterwards, according to analysis of the last nine cycles from RBC Capital Markets. Then they rebound and eventually peak around the 18-month mark,

Yet the performance patterns demonstrate a wide range. Analysts at RBC looked at the extreme cases and decided there will be less volatility this time around.

“With greater monetary policy transparency compared to majority of the tightening cycles, we expect the market reaction to the first rate hike to be more muted than in prior periods,” they said, citing key drivers such as negative real short-term interest rates, central bank gold buying and strong demand from gold ETFs. RBC anticipates this will support gold in the US$1,000 to US$1,250 per ounce range throughout 2010.

After the hike, however, the analysts forese gold equities underperforming the market for a period of 12 to 18 months. As a result, they will likely recommend investors reduce their gold exposure in the second half of 2010.

“Although inflation concerns could re-appear and provide a stimulus for higher gold prices as observed in the early 1980’s, we believe we are currently in a deflationary environment, although the extraordinary amount of monetary and fiscal stimulus could create significant inflation concerns with a full global economic recovery likely in 2011.”

Since gold stocks have lagged the broader TSX since the fourth quarter of 2009, 2011 doesn’t necessarily have to be a bad year for these equities. The wide range of relative performance patterns of both spot gold and gold stocks in the past nine cycles also suggests more good times may lie ahead.

Jonathan Ratner

As shares of Citigroup Inc. continue to strengthen, a recent investor survey suggests the stock remains under-owned.

Deutsche Bank, which rates Citi a Buy with a US$5.50 price target, sent a list of questions out to clients on February 18. It received 83 responses showing that 49% don’t own Citi. Of those who do, 38% are underweight. That means 68% don’t own the stock or are underweight.

Other than the government stake, the biggest near-term concerns cited were Citi Holdings (a unit that includes the Smith Barney brokerage and a variety of businesses and riskier assets that may be sold), low long-term earnings power and credit uncertainty.

Citi raised capital in December and 40% of respondents bought at the time. Of those, 82% still hold the stock.

As for what the Treasury should do with its stake, 28% believe it should sell as soon as the March 16 lockup expires, 26% believe the shares should be dripped into the market over time, and 11% believe the Treasury should hold out for a profit.

Among survey respondent who plan to buy Citi share, 42% expect to sell another bank stock to do so. Of this group, 39% would sell Bank of America and 21% would sell J.P.Morgan.

In terms of Citi’s most favourable long-term attributes, a strong international franchise and related growth was cited by 59%. Its biggest weakness is considered to be a damaged brand, U.S. retail banking, Citi Holdings and an unclear strategy.

In one year, most expect the stock will be in the low US$4 range. In five years, nearly half see Citi shares above US$7, while one third expect the stock to be between US$5 and US$7.

Jonathan Ratner

Analysts and investors alike were pleased with what they heard at an investor day last week from Tim Hortons. Shares rose 2.5% on Friday and were up again in morning trading on Monday.

“It is clear that management is in growth and renewal mode, not a ‘harvest’ mode,” analyst Keith Howlett of Desjardins Securities wrote in a note to clients. He raised his target price on the shares to $36 from $35. “The key message from the investor day is that management’s commitment to drive profitable growth is undiminished by past success.”

Analyst Irene Nattel of RBC Capital Markets maintained her Outperform rating on the shares with a price target of $38, says the company has had a consistent track record of returning cash to shareholders. Including estimates from a recently raised dividend and a share repurchase program for this year,

“Tim Hortons will have returned over $1-billion to shareholders since the 2006 IPO,” by the end of 2010, she wrote in a note to clients.

Hollie Shaw

Teck Resources Ltd. was upgraded to Buy from Hold by Canaccord Adams analyst Orest Wowkodaw. He also hiked his price target on the stock to $50 from $43 on higher coking coal price assumptions.

Major steelmakers in Japan reportedly agreed to a 55% price increase for this key manufacturing component for the April-June period. They will pay US$200 per metric ton to the BHP Billiton Mitsubishi Alliance, up from US$129 in the current fiscal year.

Canaccord’s new estimates assume benchmark coal year contract prices of US$213/t in 2010 (previously US$165/t), US$200/t in 2011 (previously US$165/t), and US$130/t long-term (previously US$120/t).

“While several operating issues remain a concern (Red Dog permitting, coal production run rate, Andacollo ramp up), the Buy rating is supported by positive near-term coking coal and copper price momentum,” Mr. Wowkodaw told clients.

Jonathan Ratner

Here’s an investing joke that turns out to be true. An Englishman, an American and a Japanese gentleman walk into a bar. They start talking about world stock markets over the past three years. Wot a recovery, the Englishman trumpets. Stocks have made back all their bloody losses and then some. To which the American responds: Get real, dude. It’s been a nice ride but I’m still down 25%. At which point the Japanese fellow bows slightly and informs his friends that the facts are regrettably not in complete accordance with their otherwise profound assertions. World stock markets are worth only about half of what they were three years ago.

Who’s right? They all are. How you see the market’s recent history depends on which currency you use to measure your results. The FTSE All-World Equity Index, on a total return basis, is now at all-time high in sterling terms because of the slide of the pound. In dollar terms, it’s 25% below its 2007 high and in yen terms it’s 44% below its summit.

John Authers, the investment editor of the Financial Times, thinks this “money illusion” may be one of the biggest factors factoring this market rebound. As he explains, people tend to think about investments in terms of their home currency. For British investors, the falling pound translates into big gains on foreign stocks. For U.S. investors, the picture is more mixed, while the recent rise in the yen has cost Japanese investors a small fortune on their foreign holdings. Each of these groups of investors has a different take on world stock markets, but their views have less to do with the markets than with currency fluctuations.

Freelance business journalist Ian McGugan blogs for the Financial Post

The fact that equity risk premiums are elevated should come as little surprise given that stock market valuations have compressed consistently during the past decade – both in bull and bear markets.  UBS explains that risk aversion is one probable reason for the elevated level of risk premiums. Low bond yields is another.

It is interesting to note that bond markets have de-coupled from consensus forecasts. For the past ten years, bond yields have made the usual move of falling relative to long-tern consensus GDP estimates.

UBS suggests the global savings glut is to blame for this. However, the investment bank said that given high levels of profitability, it is difficult to believe that excess savings reflects a lack of investment opportunities. Rather, this savings glut may simply be another manifestation of elevated risk aversion.

High equity risk premiums suggest investors are very cautious. Meanwhile, earnings growth appears heavily discounted, UBS said. Stocks may be cheap, particularly when compared to bonds, but its work suggests that elevated equity risk premiums only reward investors with long-term time horizons.

As a result, UBS maintained its cautious stance in terms of asset allocation, recommending a neutral position in global equities.

Jonathan Ratner

Research In Motion Ltd. was upgraded from Market Perform to Outperform at BMO Capital Markets. Analyst Tim Long also raised his earnings estimates and price target on the stock from $70 to $88 in anticipation of a meaningful beat and guidance boost when RIM reports on March 31.

BMO is 5¢ above consensus for the February quarter and 14¢ above for May. Mr. Long expects the company’s strength will come from all regions, as well as its 9700 and 8520 BlackBerrys.

“Competition that we were expecting now seems further away, including a CDMA iPhone, giving RIM the ability to further grab share in the Smartphone segment,” he said in a note. “RIM has continued to gain share despite a product set that doesn’t grab headlines. We believe the 9700 is driving a solid enterprise replacement cycle. Also, the 8520 for GSM and 8530 for CDMA have been successful in the US and international markets, driving Smartphones into the mid-tier.”

Jonathan Ratner

U.S. equity index futures are slightly higher this morning. S&P 500 futures improved one point in pre-opening trade. Strength in equity index futures was helped by slight weakness in the U.S. Dollar and slight strength in the Euro following confirmation by European politicians over the weekend that Europe was will take action to resolve the Greek financial crisis. Commodities priced in U.S. Dollars including gold, silver, copper, gasoline and crude oil are trading slightly higher.

AIG added 2% and MetLife gained 4% on news that AIG sold a major U.S. unit to MetLife for $15.5 billion. On the charts, MetLife is poised to open above resistance levels at $40.31 and $40.53.

McDonalds added 1% on news that February same store sales rose 4.8%.

U.S. Steel gained 2% after Goldman Sach upgraded the stock from Neutral to Buy.

Cisco improved 1% after JP Morgan upgraded the stock from Neutral to Overweight. Technically, Cisco broke resistance at $25.10 on Friday to reach an 18 month high.

Research in Motion gained 2% after BMO Capital Markets upgraded the
stock to Outperform. On the charts, RIMM is poised to break above key
resistance levels at $72.00 U.S. ($76.17 Cdn.).  

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

 

Share buyback approvals may not be at the levels witness between 2006 and 2008, but the current pace suggests 2010 could be the third best year ever. The number of authorizations to date point to US$413-billion worth of share repurchases this year, according to Birinyi Associates.

The compares to a paltry US$69-billion achieved by the end of October 2009.

However, between the end of the third quarter of 2009 and now, there has been a US$48-billion increase in executions quarter-over-quarter, representing a 54% gain. That number is US$17-billion more than the US$31-billion increase from the second to third quarter, Birinyi noted.

Consumer staples had the largest number of buyback programs authorized with 31, while the communications sector posted the largest dollar value at US$22-billion.

In terms of one-day performance, however, the materials sector saw the most positive impact, rising 4.06%, while utility stocks fared the worst, declining 2.13%.  

Jonathan Ratner

The Euro finally saw some relief as traders did not bring their net short position to another all-time high, according to U.S. Commodity Futures Trading Commission data up to March 2, 2010.

The net short Euro position fell to 66,700 contracts, or US$11.4-billion, providing more evidence that the foundation for stabilizing the currency is being laid, Scotia Capital currency strategist Camilla Sutton said Friday after the figures were released.

There is, however, no shortage of bearish sentiment as the Euro remains the largest net short position held against the U.S. dollar. In fact, gross shorts outnumber longs by a ratio of 3 to 1. At the same time, any sentiment shift could quickly lead to short covering, Ms. Sutton wrote in a note.

Meanwhile, the net British pound position climbed to a new record of 67,600 contracts, or US$6.3-billion. This demonstrates that although bearish sentiment is stabilizing towards the Euro, it continues to grow against the pound as the jump came almost exclusively from the short side. The ratio of gross shorts to long stands at 6:1.

Sentiment towards the Canadian dollar is heading in the opposite direction, with the net long position climbing by nearly 10,000 contracts to 38,300, or US$3.7-billion. Ms. Sutton suggested that a similar move for the Australian dollar shows that commodity currencies continue to see a positive sentiment shift.

Increases in the net long Canadian dollar, Japanese yen and Australian dollar and the reduction in Euro shorts, created a decline in the net long U.S. dollar position. This serves as an early signal that the U.S. dollar index might have seen a temporary top, the strategist added.

Jonathan Ratner

Analysts trimmed their outlooks for Yamana Gold Inc. after the company’s fourth quarter earnings failed to beat expecations. Yamana pre-released production and overall costs on Jan. 12, so there were no major operational surprises in the results. However, given the more than 5% selloff in its shares on Thursday, some see a buying opportunity.

The lower valuations are the result of declining gold reserve grades at the company’s Jacobina (Brazil), Minera Florida (Chile) and Mercedes (Mexico) mines. However, a 50% increase in the situ value given to the Agua Rica (Argentina) project from $500-million to $750-million from Canaccord Adams analyst Steven Butler, partially offsets the reserve changes.

He cut his target price from US$18.25 to US$17.75, but maintained a Buy rating.

RBC Capital Markets analyst Michael D. Curran also noted that cash costs of US$366 per ounce were higher than expected due to higher costs at the Jacobina and El Penon (Chile) mines. However, this was partially offset by lower-than-expected costs at the new Gualcamayo mine in Argentina.

Yamana was able to successfully replace gold reserves mined in 2009, keeping total reserves at 17.6 million ounces. However, this still leaves it below the peer group average.

“With flattish operating forecasts for the next two years while new mines are built, we see some risk that Yamana shares remain rangebound for several quarters until closer to realizing the next phase of growth for the company in 2012,” Mr. Curran told clients, trimming his target from US$14 to US$13 and downgrading Yamana from Outperform to Sector Perform. He added that investors appear to be adopting a “wait and see” position with respect to Yamana’s growth story and RBC has a muted outlook for gold prices over the next few quarters.

Anita Soni at Credit Suisse cut her target on the stock from US$13 to US$12.25 and left Yamana at a Neutral rating.

After the company reported that operations at Minera Florida had been temporarily suspended as a result of the earthquake that hit Chile on Feb. 27, 2010, the analyst lowered her 2010 production estimates and raised her cash costs outlook. Operations at El Penon were not affected by the quake.

While Yamana continues to trade at a discount to its peer group considering its relatively low operating costs, low political risk and strong balance sheet, Raymond James analyst Brad Humphrey nonetheless lowered his target multiple from 2.0x to 1.8x. He said this better reflects the company’s flat production profile and limited reserve growth in 2009. Despite trimming his price target from US$18.50 to US$16.60, he continues to recommend investors buy Yamana, maintaining an Outpeform rating.

Jonathan Ratner

Institutional money managers around the world will have a new option for tracking U.S. Treasuries.

RBC Capital Markets has introduced the RBC Total Return U.S. Treasury (TRUST) Index, a benchmark index that can be used by both investors and portfolio managers. It is the only U.S. Treasury Index updated on a daily basis, as opposed to other indices that are rebalanced on a monthly or quarterly basis.

RBC TRUST has nine different sub-indices:

• Overall market (contains all maturities across the yield curve)
• 1 to 3 year 
• 3 to 5 year 
• 5 year and up 
• 5 to 7 year 
• 5 to 10 year 
• 10 year and up 
• 15 year and up 
• 20 year and up

RBC noted that it is also the only index that covers all points across the yield curve, with issues entering on auction day and exiting daily.

SNC Lavalin Group Inc.’s power division is getting its swing back after the unit scored a key carbon capture project in Saskatchewan.

The Montreal engineering giant won a deal this week to design and deliver a carbon dioxide capture system for SaskPower’s ageing Boundary Dam, a 115 megawatt coal-fired power station near Estevan. SNC will do the work with partner Cansolv, a unit of Royal Dutch Shell. The value of the contract was not disclosed but is thought to be worth $300-million to SNC.

“[The company’s] power division is definitely getting back on its feet,” Genuity Capital Markets analyst Maxim Sytchev writes in a note to clients. “[Carbon Dioxide] technology implementation such as the one contemplated in Saskatchewan should also strengthen [the] company’s growth opportunities given the anticipated capital spend in this end-market.

The power business will represent an estimated 14% of SNC’s total revenues and operating income in fiscal 2010, Mr. Sytchev says. The unit’s backlog at the end of the third quarter 2009 stood at $582-million.

The SaskPower project could capture 1 million tonnes of CO2 per year, which would rank it as one of the first and largest commercial-scale carbon capture projects in the world, adds Desjardins Securities analyst Pierre Lacroix. “We believe such a project should give SNC a strong showcase for future opportunities in this promising market.”

He rates SNC a Buy with a $55 price target. Mr. Sytchev rates the company a Buy with a $60 target.

The engineering firm reports fourth quarter results Friday and analysts are looking for two things: Guidance on 2010 earnings per share growth, and another dividend hike. The consensus estimate is for EPS of 52¢ on revenue of $1.7-billion.

Nicolas Van Praet

Moody’s is taking a dim view of CIBC’s investment in Bank of N.T. Butterfield & Son, saying it views the credit implications of the deal as “negative.”

Canadian Imperial Bank of Commerce announced earlier this week it would inject US$150-million into Butterfield, a leading Bermuda based bank, which was hammered by investments linked to U.S. subprime mortgages. The transaction is part of a US$550-million recapitalization of the 152-year old bank expected to leave CIBC with a 22.5% equity stake. CIBC also agreed to provide a line of credit of as much as US$500-million.

In a statement Thursday, Moody’s pointed out that the Commerce’s investment will account for about 6% of its tangible common equity, “which is quite a substantial amount for a single entity, particularly one with relatively weak stand-alone financial strength.”

Following a “sizeable” loss in the fourth quarter of last year, an anticipated loss in the first quarter along with sizeable loan loss provisions, Butterfield would have been “critically weakened” without the recapitalization, Moody’s said, adding that it is maintaining its negative outlook on the bank.

Fitch also warned about ongoing concerns, saying that the capital infusion provide “only a modest cushion should BNTB experience any credit deterioration in its core loan portfolio.”

John Greenwood