Author: Jonathan Ratner

Dundee’s Mineral Exploration Stock Watch List, which is released a few days before PDAC kicks off, comes in at 140 pages this year. The popular report reviews 43 companies deemed to have excellent prospects and worthy of a closer look. Many of them are taking part in PDAC. Hopefully, Dundee’s guide will help investors find the next “ten bagger,” 

The firm also outlined its view on a variety of subjects in the report, including its bullish stance on the gold price. Last year marked the ninth consecutive time that gold exited the year at a higher price than it had entered, climbing 38%. The gold price has also been moving higher since 2001, but that performance has largely been coincident with a declining U.S. dollar.

However, the strong correlation between the two assets evident during the past decade has weakened significantly of late as investment drivers like safe haven buying have emerged. Dundee believes the falling U.S. dollar between 2001 and 2008 was not the reason gold climbed above US$1,000 per ounce. Instead, it pointed to stronger emerging markets and economic growth pushing up both jewellery and investment demand.

Going forward, the firm’s analysts believe gold will be primarily driven higher by investors searching for meaningful US$ returns without taking currency and credit risk.

Underlying gold equities, as measured by the S&P/TSX Global Gold Index, were able to follw the yellow metal’s lead for the most part. However, the overall performance of gold stocks over the nine-year period has lagged bullion’s gains.

Poor corporate performance from several of the heavily weighted large and mid-cap producers take much of the blame. In 2009, slower-than-expected start ups at several new or recently-expanded operations in the large cap group drove share prices lower. Meanwhile, exploration and development stocks have managed to outperform both gold and the index in seven of the past nine years, Dundee noted. 

The credit crisis may have dried up liquidity and raised concerns that small companies wouldn’t survive or be able to finance their projects, but overall gains for this group have far exceeded their larger couterparts over the longer term.

“While the larger producers are often the first to react to quickly rising gold prices (as happened in late 2007 and early 2008), the euphoria eventually trickles down to the smaller caps, sometimes rapidly should the price rise correspond to a new discovery or the announcement of an acquisition,” Dundee said.

Reversing a six-year upward trend, estimated global exploration spending declined in 2009 to levels last seen in the middle part of the decade. Expenditures were down across all regions, with Canada leading the way in terms of percentage, the firm noted.

Improved metal prices and an easing of the credit crunch in 2009 allowed exploration companies to return to the equity markets for capital. This suggests more aggressive exploration budgets were proposed for 2010. Exploration spending probably won’t reach the record levels witnessed in 2008. However, Dundee anticipates increases this year. Couple that will the resulting newsflow, and share prices appear to have more room to rise in 2010. That means more ten baggers.

Jonathan Ratner

U.S. equity index futures are slightly higher this morning. S&P 500 futures added 1 point in pre-opening trade. Index futures improved following released of economic news at 8:30 AM EST. Weekly jobless claims slipped 29,000 to 469,000. Revised fourth quarter Productivity increased from 6.2% to 6.9%.

Overnight lending rates by central banks over the pond were unchanged. Bank of England maintained its 0.5% rate. The European Central Bank maintained its 1.0% rate.

Canadian investors are waiting for the Federal Government’s budget to be announced after the close today. The Canadian Dollar rose overnight in anticipation of a budget that focuses on cost cutting. The Canadian Dollar is testing the top of its six month trading range.

Toronto Dominion Bank announced higher than expected first quarter earnings. Consensus was $1.35 versus $1.34 per share last year. Actual was $1.60 per share.

Disney added 1% after Bank of America/Merrill raised its rating from Neutral to Buy. Target was raised from $33 to $42. Disney is poised to move above resistance at $32.75 to reach a 17 month high.

Coca Cola added 1% after UBS upgraded the stock from Neutral to Buy. Target price is $62.

Wal-Mart added 1% after raising its annual dividend from $1.09 to $1.21 per share.

More good news from the Canadian energy sector! Canadian Natural Resources raised its dividend by 42%.

The technical outlook for North American oil service stocks continues to improve. See favourable technical and seasonal comments on Nabors and Trican Well Services at www.equityclock.com 

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 consumer discretionaries ranking among the top performing economic sectors in the S&P 500 so far in 2010, some might think its time has passed. However, even if the group trades at 15.8 times its 2010 estimated operating earnings, National Bank Financial’s chief economist and strategist, Stéfane Marion, is comfortable with an overweight position.

He cites data released by the Bureau of Economic Analysis early this week that shows personal consumption expenditures on discretionary goods and services climbing back to pre-recession highs in January.

“The recent turnaround is all the more impressive given the fact that the labour market has yet to create jobs,” Mr. Marion said in a note.

With firms expected to resume hiring any day now, he says investors should not be surprise to see upward earnings revision to the bottom-up consensus for operating EPS in the consumer discretionary sector.

You would think that a strengthening global economy would be gobbling up commodity stockpiles. In fact, the opposite appears to be occurring. The Financial Times reports that “as piles of base metals from aluminum to nickel build up due to poor demand, Goldman Sachs and JPMorgan have entered the little known but very profitable business of metal warehousing.”

The FT says that metals warehousing is an anti-cyclical business that prospers when demand for metals is lacklustre and stockpiles mount. It is not a cheap business to get into. Goldman bought Metro International of Detroit for about US$550-million a week ago. JP Morgan purchased Henry Bath of the United Kingdom a month ago as part of a larger US$1.7-billion acquisition. Both warehouse deals are said by industry insiders to have occurred at premium valuations.

The purchase of metals warehouses would seem to indicate that Goldman and JPMorgan aren’t exactly bursting with enthusiasm about the sustained strength of this recovery. Or about the outlook for commodities.

Freelance business journalist Ian McGugan blogs for the Financial Post

Copper has served as a bellwether for the base metals sector and that role doesn’t appear to be in jeopardy anytime soon. It has recovered significantly since the global economic meltdown and now finds itself driven by both fundamental support and investment demand.

Despite the recent gains in the copper price, equities have not kept pace. This is partially due to the uncertainty and volatility in equity markets as a whole, according to Versant Partners analyst Anthona Curic. The firm expects copper to average US$3.10 per pound in 2010, US$3.25 in 2011 and US$1.95 on a long-term basis.

With the current state of capital markets in mind, Ms. Curic recently highlighted stocks that are robust at US$1.95 per pound copper, have limited geopolitical risk, strong potential, and are led by a quality management and technical teams.

First up is Capstone Mining Corp., an established mid-tier copper producer with a diversified portfolio of attractive high-grade prodjects in excellent jurisdictions. In addition to the company’s attractive growth profile, the analyst also noted that Capstone is a potential takeover target in the near term and the market is not giving it full credit for the hedges in place.

Next, she highlighted Copper Mountain Mining Corp., whose project 300 kilometres from Vancouver is fully permitted and has received approval to being construction of its processing plant. Total reserves and resources are 4.36 billion pounds of copper, 1.8 million ounces of gold and 23.1 million ounces of silver. Copper Mountain also has a strong partner in Mitsubishi Materials Corp., which owns 25% of the company.

Discovery Metals Ltd. has a large, undeveloped copper-silver project in a potential extension to the Zambian Copper Belt. Ms. Curic noted that it is located in mining friendly and politically stable Botswana, where recent improvements in regional infrastructure have opened the area up to potential development.

Hana Mining Ltd. operates in the same area as Discovery Metals, but
offers investors a much lower market capitalization. Discovery has a
similar sized resource but has already completed a feasibility study on
the project, Ms. Curic noted.

Large cap emerging copper producer Equinox Minerals Ltd. also made the list. Its primary asset is a large, low grade, open-pitable copper sulphide deposit in Zambia. Total resources are nearly 14 billion pounds of copper, 5 billion of which is categorized as proven and probable.

Far West Mining Ltd. has a large, undeveloped copper-iron-gold project in Chile with potential for near term production. It too is considered a potential takeover target, along with another pick, Globestar Mining Corp.

Iberian Minerals Corp., a mid-tier producer of copper and zinc with producing and developing assets in Peru and Spain, has strong sponsorship through Trafigura Beheer BV’s majority ownership. Trafigura is one of the largest independent companies trading commodities on a global basis.

Lundin Mining Corp. is an established base metals producer with mostly high grade and low-cost projects. It also offers an attractive near-term growth profile and ana improving balance sheet.

Mercator Minerals Ltd. operates in mining-friendly Arizona, with its high quality project and significant low-cost resource. The company recently addressed addressed its “single asset” risk with the acquisition of Stingray Copper Inc.

Nevada Copper Corp. has a large undeveloped project with total resources of 9.3 nillion pounds of copper, 1.45 million ounces of gold, 55 million ounces of silver, and 183 million tons of iron. “A positive feasibility study for Pumpkin Hollow could make Nevada Copper an attractive take-over target,” Ms. Curic said.

Nord Resources Corp. also operates in Arizona and its production is expected to increase from 5 million pounds of copper in 2008 to 11 million pounds in 2009.

Norsemont Mining Inc. has a large, undeveloped copper-molybdenum project that could make it a potential acquirer or a takeover target.

Finally, Quadra Mining Ltd. is also considered to be a good position as a consolidator in the copper sector.

Jonathan Ratner

U.S. equity index futures are higher again this morning. S&P 500 futures are up 2 points in pre-opening trade. Index futures were helped slightly by weakness in the U.S. Dollar Index and strength in the Euro. Both were impacted by news that Greece plans to introduce an austerity program that will reduce concerns about a possible debt default.

The U.S. Dollar Index is showing early technical signs of reaching an intermediate peak. Short term momentum indicators including MACD, RSI and Stochastics have rolled over from overbought levels.

Conversely, the Euro is showing early technical signs of reaching an intermediate low. Short term momentum indicators including MACD, RSI and Stochastics are recovering from oversold levels. 

Weakness in the U.S. Dollar sets the stage for a move by the Canadian Dollar above resistance at 97.79. 

Weakness in the U.S. Dollar this morning prompted strength in commodities priced in U.S. Dollars including gold, silver, copper, platinum, crude oil and unleaded gasoline. Unleaded gasoline closed at a 17 month high yesterday. 

S&P 500 futures recovered slightly following release of the February ADP private employment report. Consensus was a loss of employment of 90,000. Actual was a loss of 20,000.

RBC Capital Markets is taking a more positive stance on base metal stocks. This morning it upgraded Vale and Freeport McMoran Copper and Gold from Sector to Outperform. Target for Vale was raised from $30 to $36. Target for Freeport McMoran was increased from $92 to $95. ‘Tis the season for the sector to move higher!

RBC Capital Markets also downgraded Cameco from Outperform to Sector Perform. The downgraded was prompted by news released late yesterday that the spot price of uranium oxide slipped last week by $1.25 to $40.50 U.S. per lb.

Goldman Sachs initiated coverage of the Transportation sector. Canadian Pacific was initiated as a Buy. UPS was initiated as a Conviction Buy.

Royal Bank reported fiscal first quarter earnings slightly less than expected. Consensus was $1.04 per share. Actual cash earnings were $1.03 per share.

Costco slipped 3% after reporting fiscal second quarter earnings slightly less than consensus.

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

While the long-term story for commodities is very attractive, the near-term outlook is far less certain. Metal demand growth remains uneven and commodity prices are ahead of the fundamentals (to varying degrees), making them vulnerable to a correction.

This warning, from RBC Capital Markets analysts H. Fraser Phillips and Adam Schatzker, is coupled with an emphasis on investment funds flows being a key driver of commodity prices. They suggest that investment demand leaves prices vulnerable to higher volatility in the short term, but should be a positive for commodities in the long-run.

Based on year-to-date performance and rising cost pressures, RBC’s second quarter outlook included an increase to its aluminium, nickel and zinc price forecasts, along with lower uranium price targets due to an anticipated recovery. Its 2010 copper price assumption also rises from US$1.75 per pound to US$2.00.

As for equities, the analysts anticipate mining stocks will move into a broad sideways trading pattern in 2010.

“The early cycle move in mining share prices has historically not been sustainable. The optimism towards mining asset prices generated by the turn in leading indicators and the resumption in economic and commodity demand growth eventually gives way to the reality of lagging fundamentals. The shares give up some or all of their gains and move into a broad sideways trading range until industry fundamentals catch up. We believe valuation will be the key to performance and that stock selection will be more important than in 2009.”

RBC recommends investors hold a market weight position in non-precious metal stocks. Iron ore is its top pick amongst the commodities, followed by coking coal, thermal coal and copper. The analysts also see the potential for significant molybdenum price increases in 2010 and 2011.

Jonathan Ratner

Greece’s early retirement age is a big sticking point for Germany, which is most likely to lead a bailout as the largest euro state. Greek citizens hit the streets in protest at the prospect of the pension age rising from 61 to 63. Meanwhile, Germany recently hiked its retirement age from 65 to 67.

While Greece has big deficits, it also has low taxes as a proportion of GDP, according to Ed Sollbach of Desjardins Securities.
The analyst noted that the country’s tax receipts have declined by 3% of GDP during the past decade and currently stand at 19% of GDP. That puts Greece fourth from the bottom among 27 countries in the European Union.

The contribution of tax recepts to total government receipts is 49%, the second-lowest in the EU. Direct income taxes are at 8% of GDP, 5% lower than the EU average. Only new members like Estonia, Slovakia, Romania and Bulgaria tax less income.

“Tax evasion in Greece is a huge problem,” Mr. Sollback said, pointing to data that show 94% of personal income declared relates to annual incomes of less than €30,000. Only 3,000 people of Greece’s 11 million population declared incomes above €200,000 and just six residents have declared income of more than €1-million. Clearly, “the country is not having much success taxing the rich.”

Recent EU reports also show that in Greece, 30% of VAT receipts remain uncollected, which is the highest percentage in the EU and 2.5x higher than the region’s average.

Jonathan Ratner

Chile’s earthquake, which had its epicentre approximately 370 kilometres south of Santiago and a magnitude of 8.8 on the Richter scale, may cause at least a 6% GDP loss in terms of stocks. While this forecast from Citigroup’s Chile economist, Marcos Buscaglia, suggests economic activity may fall at first, it should rebound quickly as construction spending rises. As a result, Citigroup sees the total impact on GDP in 2010 at just 1%.

“Chile has strong fundamentals; the country may be better able than most to cope with this tragedy,” the investment bank said in a report. “In line with our views on other asset prices and, given the forecast of an eventual solid rebound in activity, any selling pressure on the equity market arising from the earthquake should be short-lived.”

Inflation, however, is likely to spike in the near term and the trade surplus may fall as output from key export sectors takes a hit. Citigroup notes that there is plenty of room for increased government spending from Chile’s Stabilization Fund. As for the peso, it is expected to hold up fairly well, but interest rate hikes may be delayed until the fourth quarter.

President-elect Sebastian Piñera also happens to be taking office on March 11. However, the disaster poses a major challenge for the incoming administration in terms of leading the long-term re-construction process.

Citigroup highlights pulp and paper as the industry that will likely be most adversely affected by the earthquake and its aftermath. The operations of most of Chile’s pulp and paper companies are located in the most affected area of the country, south of the capital, Santiago.

While any loss of production should be temporary, Citigroup nontheless anticipates this will make a notable dent on results for the first half of 2010. On the positive side, pulp prices could benefit as Chile represents roughly 8% of total market pulp production. And if pulp production facilities go offline and production comes out of the market for a month or so, the March pulp price increase announced last week may be more easily implemented.

Jonathan Ratner

Valuations for silver producers picked up late in 2009 and remain significantly higher than a year ago, but most stocks in the sector still reflect spot prices below current levels.

The majority of silver equities are reflecting a long-term price for the metal of US$13 per ounce, according to estimates from analysts at RBC Capital Markets. That is an improvement from the US$11 to US$13 range seen last quarter, but it is still well below the spot price around US$16.50.

As for the gold-to-silver price ratio, following a return to historical averages in the low 60s that took most of 2009 to play out, gold has gained the upper hand again in recent months, RBC noted. The ratio has climbed to 68:1.

The analysts believe silver could outperform gold in the near term, which would push the gold-to-silver ratio back towards the low 60s and even into the high 50s. That suggests spot silver will re-test the US$18 to US$20 per ounce level.
RBC continues to forecast US$15 for 2010 and future years.

Jonathan Ratner

Apple Inc.’s iPad launch could be limited in size or delayed altogether as a result of a bottlebeck in production and a shortage of components at the device’s manufacturer, according to Canaccord Adams analyst Peter Misek.

He pointed to an unspecificed problem at Hon Hai Precision, which will likely limit the launch region to the United States and the number of units available to roughly 300,000 in March. Apple initially estimated 1 million units.

The delay in production ramp will likely impact Apple’s April unit estimate of 800,000 as well, Mr. Misek said.

Given the limited number of units available in March, the analyst suggested that the launch could be delayed by a month. However, he left his iPad estimates for fiscal 2010 and 2011 unchanged at 1.2 million and 3.5 million units, respectively.

“We believe that the only material impact from the iPad delay could come in the form of frustrated consumers and some modest loss of lustre for the company’s product launch,” Mr. Misek said.

Jonathan Ratner

Photo: Stephen Colbert opens the show holding an Apple iPad at the 52nd annual Grammy Awards in Los Angeles January 31, 2010. (REUTERS/Mike Blake)

U.S. equity index futures are higher again this morning. S&P 500 futures are up 6 points in pre-opening trade. Moves by the S&P 500 Index, Dow Jones Industrial Average and NASDAQ Composite Index yesterday above their 50 day moving average has triggered technical buying. 

The Bank of Canada kept its Overnight Lending Rate to major Canadian banks at 0.25% and is expecting to maintain this rate until June. The Bank of Canada’s comment implied preparation for a less accommodative monetary policy later this year.  The Canadian Dollar moved up to 96.90 cents on the news.

The Reserve Bank of Australia continues to rein in inflation pressures and excessive economic growth. Last night it raised its Policy Rate from 3.75% to 4.00%. This is the fourth increase in the Policy Rate since last fall.
Bank of Montreal reported higher than expected fiscal first quarter earnings. Consensus for cash earnings was $1.03 per share. Actual was $1.13 per share.

Analysts are taking a more bullish stance on the Canadian energy sector. This morning Deutsche Bank raised its target price on Suncor from $20 to $28 and increased its target price on Canadian Natural Resources from $78 to $80. ‘Tis the season for the sector to move higher!

Technicals on the U.S. energy sector also are improving. See a technical and seasonality comment on Hess by EquityClock.com 

CF Industries re-entered the battle to take over Terra Industries. CF Industries has offered to purchase Terra for a cash and stock deal worth $47.40, topping a competing offer at $41.10 per share. Terra quickly rose in overnight trading to near $47. 

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 higher this morning. S&P 500 futures are up 3 points in pre-opening trade. Strength was prompted partially by merger & acquisition news. Prudential has agreed to buy AIG’s Asian unit for $35.6 billion. AIG added 9% on the news. In addition Merck AG has agreed to purchase Millipore for $7.2 billion.

Responses to U.S. economic news released this morning were neutral. Consensus for January Personal Income was an increase of 0.4% versus an increase of 0.4% in December. Actual was an increase of 0.1%. Consensus for January Personal Spending was an increase of 0.4% versus 0.2% in December. Actual was an increase of 0.3%.

Economic news in Canada released this morning was encouraging. Consensus for Canadian annualized real GDP Growth in December was a gain of 0.4%. Actual was a gain of 0.6%. Consensus for fourth quarter GDP was a gain of 4.2%. Actual was a gain of 5.0%.

Currencies fluctuated wildly over the weekend. The Euro gained and the U.S. Dollar fell on rumors that the financial crisis in Greece was about to be resolved. However, gains over the weekend became losses this morning when rumors proved to be untrue.

Copper prices added $0.06 per lb. following the earthquake in Chile. Chile is the largest producer of copper in the world. News reports out of Chile indicate that approximately 20% of Chile’s copper production has been halted. Mining stocks around the world are trading higher.

Investment dealers are taking a more positive stance on the energy sector. This morning Bank of America/Merrill Lynch upgraded selected European based energy companies. BP PLC and Total SA were upgraded from Neutral to Buy.

Research in Motion added 1% after Canaccord Adams raised its target from $95 to $100 U.S. 

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

Red Back Mining Inc. was upgraded from Neutral to Outperform by Credit Suisse in anticipation of reserve increases at its Tasiast mine in Mauritania and Chirano in Ghana. Analyst Anita Soni also expects a higher level of dump and heap leaching at Tasiast.

Her target price on Red Back shares climbs from $19.50 to $26, representing upside of approximately 28%.

Ms. Soni now uses a 1.7x target price to net asset value multiple, which she revised upward to reflect expected M&A speculation surrounding Red Back given Barrick Gold Corp.’s plans to spin out 25% of its African assets.

African Barrick Gold is set to be used as a growth vehicle via acquisition.

Euro speculators brought their net short position to a record high of 71,600 contracts or US$12.1-billion as of Feb. 23, 2010. This is significantly higher than the prior week, according to U.S. Commodity Futures Trading Commission data released on Friday.

The numbers hint that Euro traders are unfazed by the extreme positioning and are willing to move even further short the currency, despite the threat of a looming short covering period, according to Scotia Capital.

Data shows that remaining longs cut their positions and shorts added to theirs, with the ratio of shorts to longs now standing at 3.2 to 1. Meanwhile, the overall net long US dollar position increased to its highest level since 2008.

As for the Canadian dollar, the net long position increased for the second straight week. The currency’s ability to hold strong, despite the Euro’s move to a new record short, demonstrates the willingness to take on risk through long Canadian dollar positions, Scotia noted.

“We continue to have a bullish outlook for CAD, partially due to positive sentiment, and expect it to move sustainably to parity by the end of the second quarter,” the firm’s currency strategists Camilla Sutton and Sacha Tihanyi said in a report.

Jonathan Ratner

With the huge cash balances non-financial companies have built up during the past few years of global economic uncertainty and frozen corporate spending, the size of recent M&A transactions suggest money is ready to be redeployed. The fact that the fourth quarter confidence reading for U.S. CEOs also returned to a five-year high should also serve as support for broad equity markets for the balance of 2010.

Recent deals such as Yara International’s friendly takeover of competitor Terra Industries for US$4.1-billion and Simon Property Group’s US$10-billion offer for General Growth Properties (Brookfield Asset Management has also entered the fray) have sparked a deal revival that is likely to continue for the balance of the year, Dundee Securities strategist Martin Roberge said in a recent report.

He noted that global non-financial companies generated a record US$3.6-billion in free cash in 2009. As a percentage of enterprise value, the free cash flow yield for this group increased from 8.2% in 2007 to 10.3% in 2009. A high FCF yield not only means that excess cash sitting on balance sheets can be used to buy back stock and hike dividends, it also provides fundamental value for potential acquirers.

Calling Canada “a land of opportunity” in this respect, Mr. Roberge noted that the S&P/TSX non-financial index boasts a FCF yield of 11.7% – the highest amoung G7 countries.

The biggest FCF generators and yielders are the energy, industrial, consumer discretionary and telecom sectors. While telecoms offer a FCF yield of 15.6%, there are few M&A opportunities there. The group is, however, in the best position to increase dividends, which is why it represents the strategist’s favourite defensive play. As for energy and industrials, Mr. Roberge expects M&A transactions will take centre stage as both sectors remain highly fragmented.

With more deals on the horizon, investors should expect bidding wars and white knights to emerge.

Jonathan Ratner

National Bank of Canada was upgraded from Sector Perform to Outperform by CI Capital Markets analyst Brad Smith after the bank reported better-than-expected first quarter results.

Adjusted cash earnings per share of $1.55 were well ahead of his $1.36 estimate and consensus at $1.45. A 4% revenue shortfall, primarily due to lower trading revenues, was more than offset by an 8% lower-than-anticipated expense run after the $75-million penalty from the bank’s ABCP involvement was excluded.

The bank changed the way it measures risk-weighted assets during the quarter, which meant its Tier 1 capital ratio climbed to 12.5% from 10.7% at the end of the fourth quarter of 2009. Management confirmed that if recently proposed new capital rules are enacted as set out, the preliminary estimate of the impact on Tier 1 would be a reduction of 300 to 400 basis points.

Despite beating his quarterly estimates by a healthy margin, Mr. Smith left his 2010 and 2011 full-year estimates unchanged. He told clients this is due to lingering uncertainty relating to the sustainability of National’s reduced provisioning and expense efficiency levels.

Nonetheless, the upside the analyst sees in the stock justified to upgrade. Mr. Smith’s price target on National Bank shares is $65.

Jonathan Ratner

U.S. equity index futures are mixed this morning. S&P 500 futures are unchanged in pre-opening trade. Index futures did not respond significantly to the second estimate of fourth quarter GDP. Consensus was growth at an annualized rate of 5.7% versus the initial estimate of 5.7%. Actual was growth at 5.9%.

Volume on U.S. exchanges is expected to be lower than average this morning due to a major snow storm that hit New York last night.

AIG fell 9% after reporting a fourth quarter loss of $8.9 billion.

Gap Stores added 4% after reporting higher than expected fourth quarter earnings, after increasing its dividend, after announcing a share buy back and after offering positive guidance for 2010. ‘Tis the season for retail merchandiser stocks to move higher!

FNX Mining reported higher than expected fourth quarter earnings. Consensus was a profit of $0.17 versus a loss of $4.68 per share last year. Actual was $0.31 per share. FNX Mining currently has a positive technical profile. Intermediate trend is up. The stock moved above its 50 day moving average yesterday. On balance volume shows that the stock is being accumulated by major investors. Support is at $11.27 and resistance is at $13.78. Current intermediate upside potential on a breakout above resistance is to $16.85. ‘Tis the season for base metal stocks to move higher until May! 

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

It has become clear that in economic terms, the Euro does not work. Parts of the Euro area would surely have been better off – at least economically – if they had never joined.

However, the costs of breaking up the Euro appear far greater than the benefits at this stage. As a result, the European Monetary Union will not be dissolved, according to UBS economist Paul Donovan.

He suggests that it would be far better to have a default within the Euro, than to incur the political, economic and potentially social costs of trying to survive outside.

While the concept of fiscal transfers across different regions within a monetary union typically suggests a degree of political union, this does not have to be the case, the economist said. “Monetary unions entail sense of economic community.”

The Euro area is not generally viewed as an “optimal currency area”
since economies are diverse enough that external shocks impact them to
different degrees. 

Mr. Donovan argues that wealthier areas should therefore subsidize those parts of the monetary union that are at an economic disadvantage, noting that fiscal transfers are the price to be paid for a union of any meaningful size. In other words, “Germans should pay for Greek pensions.”

In December 2001, then European Union Commission President Romano Prodi wrote in the Financial Times: “I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”

This may not be the crisis, the UBS economist noted, but it has probably brought Europe closer to the point where institutional reform is required. “For any monetary unions to survive, the costs must not persistently outweigh the benefits.”

Jonathan Ratner

Photo: A teller counts euro banknotes inside a National Bank of Greece branch in Athens February 10, 2010. Greece's debt crisis has shaken the entire currency union. (REUTERS/John Kolesidis)