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Stocks then: Ugly; The outlook now: Caution
Michael Babad
Today's top stories from Report on Business :
A year after the low, what's next?
It was one year ago today that stocks hit their low point of the crisis before starting a remarkable comeback. The benchmarck S&P/TSX composite has surged almost 60 per cent while the Dow Jones industrial average and S&P 500 have also rallied sharply. The outlook now, however, is more guarded. Here are the recent views of three observers on what to expect in U.S. markets:
Barclays Capital :
“We continue to believe the S&P 500 will stall below its mid-January highs as improvements in the data push rates higher and pull forward market expectations for Fed policy normalization. Rapid growth and central bank tightening in Asia, market expectations around the end of [quantitative easing] and reserve draining in the U.S., the end of [quantitative easing] in the U.K. and, perhaps, the winding down of the ECB's emergency measures could lead to a reasonably high-velocity correction in global government bond markets. In our view, this would lead to the next and possibly final leg lower for U.S. equities ... Looking back at 2009, we believe the primary catalyst for the highly-correlated capital market rally was the Fed's quantitative easing ... We believe that by the time the Fed actually raises rates, the market adjustment will largely be complete and equities will post positive returns [in the second half of 2010].”
Bank of America Merrill Lynch :
“The equity market rally, which began last March, is now lapping its first year and represents one of the strongest 1-year percentage gains since the 1930s. But with only 72 per cent of the peak recovered, the current rally is in the middle of the pack and lags the recoveries of 1949, 1957, 1962, 1970, 1982 and 1991 despite superior earnings growth ... We believe the rally has further to go as investor concerns of a double dip fade. The second year of a typical rally, although considerably slower than the first year, still generates strong market returns. The average second year price return from the last 10 bear market rallies was 9.4 per cent, 200 basis points higher than the average annual price return since 1900. Declining jobless claims should lead to the first positive payroll in March, which should help the S&P 500 climb higher as confidence in quarterly [earnings per share] growth continuing improves.”
Capital Economics :
“It is a year since the U.S. S&P 500 closed at a cyclical low. The market's rebound has been impressive, but even if the index edges a little higher in the near term, we expect to see it back around 1,000 by the end of the year ... Equities have tended to do less well in the second year after hitting a cyclical low. An average rise of 5 per cent or so has been typical, but sometimes the market has fallen outright. There is always the chance that the market will fare better than average this time around. After all, there have been instances in the past when the market has continued to rise strongly. But we doubt last year's spectacular gains will be sustained for long.”
Related: Market Blog on the anniversary that wasn't
Related : Mood of investors turning more guarded
Video : Bullish on Canada
Buy ‘Northern Tiger,' Scotia Capital advises
Markets have been exceptionally bullish on Canada lately, citing a rebounding economy, a strong currency, a healthy banking sector and a fiscal position far superior to those of other countries. Some commentators have even mentioned the success of the winter Olympics. Scotia Capital economists Derek Holt and Karen Cordes today cited 20 reasons to invest in ‘The Northern Tiger,' writing that “the country has much of what one would want in both a global portfolio and a physical presence.” They cite:
1. The Bank of Canada will be the next major central bank to raise its benchmark rate, in the third quarter of the year.
2. The Canadian dollar is poised to hit parity with the U.S. currency and “the economy will not only survive in this climate as it has before, it will generally thrive.”
3. The loonie has an edge over the Australian dollar as Australia's central bank is close to finishing its pullback from the crisis, while the Bank of Canada hasn't started yet.
4. Canada will be “the poster child for fiscal health” over the next five years compared to other major economies. “Provincial finances are a bigger challenge, but general government net-debt-to-GDP still stands Canada in very good stead.”
5. Corporate revenues should be on a strong growth path, mirroring the beginning of “a strong recovery.”
6. The world wants the commodities Canada has to offer.
7. Canada will boast a “virtually unbeatable” global corporate tax system within two years. “Who'd have thought that after years of painful dialogue that led to reforms?”
8. While growth in productivity suffers now, it could catch up.
9. Real estate is "richly valued" and more of a "containable risk" than it was in the United States and Europe.
10. The balance sheets of non-financial companies are in “excellent” shape.
11. A financial sector deemed “best in class.”
12. Canada will have fewer “messy” exits from emergency measures.
13. Canada has a “relatively favourable” regulatory environment.
14. Ottawa is offering tax incentives to invest in equipment.
15. Canada has little political risk.
16. There is no risk of defaulting on sovereign debt.
17. Canada offers “untapped opportunities” in seed capital and financing for ideas.
18. Last week's federal budget cut back on the paperwork needed for venture capital.
19. Canada boasts “strengths in diversity” with a high proportion of foreign-born workers and “strong market ties.”
20. Canada offers a highly educated work force.
Scotiabank tops estimates
Bank of Nova Scotia this morning wrapped up what can only be seen as a stellar quarter for the country's major banks. Scotiabank topped analysts' estimates with a first-quarter profit of $988-million, up 17 per cent from a year earlier. Its Canadian banking operations saw record profits rise 28 per cent to $560-million. But for Royal Bank of Canada , the major banks have handily surpassed the expectations of analysts, and RBC's earnings were nothing to sneeze at. “The Canadian banks reported tremendous earnings,” money manager Barry Schwartz told Bloomberg. “This tells me that the Canadian economy is really recovering.”
Barclays Capital analyst John Aiken added in a research note: “We were a little surprised that Scotiabank's earnings did not exceed consensus by a higher margin, given the fact that [loan loss] provisions came in $100-million below the Street's expectations. However, Scotia did finish earnings season off in style and we believe the outperformance on earnings against consensus should benefit its valuation as it had lagged the group through this earnings season.” Read the story
Greece presses U.S. on credit default swaps
European leaders are pushing for curbs on credit default swaps, pointing the finger at speculators they say have used such derivatives to bet against Greek bonds. Greek Finance Minister George Papaconsantinou told CNBC television today, before Greece's Prime Minister Geroge Papandreou met with President Barack Obama in Washington that “there's a broader problem here, it's a European problem, it has to do with the euro and it has to do with speculation.”
Separately today, German Chancellor Angela Merkel and Luxembourg's leader Jean-Claude Juncker, also pressed for greater oversight of credit default swaps.
Yet Germany's regulator said this week that, after a review of the data, there was nothing to show that Greek debt was the victim of credit default swaps. And, according to Bloomberg News, UniCredit SpA is warning that a “government debt bubble” could be the result of any curbs to trading on CDS. “CDS exist to improve the efficiency of credit markets,” said UniCredit strategist Tim Brunne in Munich. “Simply abandoning sovereign CDS helps to create a government debt bubble.” Read the story
Related : Europe backs idea of IMF-style bailout fund
Toyota to fix Prius models
Toyota Motor Corp. plans to fix Prius hybrids from the 2004-2009 model years, the Wall Street Journal reports today. Among them is the vehicle that was involved in a highly publicized mishap in California. The newspaper said on its website that the auto maker had recalled several Toyota models to stop floor mats from trapping gas pedals. As part of that, it said, Toyota had said the Prius models would be recalled later and it told Prius drivers to simply remove the floor mats for now. But that part of the recall hasn't happened yet because a fix is not ready.
Just yesterday, a 61-year-old Prius driver had to be helped by police after his car sped up to 94 miles per hour (150 kilometres) on a highway near San Diego when its accelerator stuck. A California Highway Patrol officer helped stop the runaway vehicle, and Toyota is investigating that incident. James Sikes, the driver, said he was passing another car when his Prius accelerated. He pressed on the brakes, he said, but the car continued to speed. A CHP cruiser pulled up alongside and, through a loudspeaker, helped Mr. Sikes slow down.
Read
U.S. police help slow runaway Toyota Prius
Lawsuits could cost Toyota $3-billion
Chevron to slash jobs
Chevron Corp. said today it's slashing 2,000 jobs this year and plans to continue cutting positions next year. Speaking to analysts in New York, the energy giant also said projected refining will continue to be tough over the next few years.
Alimentation Couche-Tard profit falls
Canada's biggest convenience store group, Alimentation Couche-Tard Inc. , said today its third-quarter profit fell to $54.8-million (U.S.) or 29 cents a share from $71.1-million or 36 cents a year earlier. But the company said it bettered its performance and increased its quarterly dividencd to 4 cents a share from 3.5 cent.
Of doughnuts, coffee and stock prices
UBS Securities Canada this morning raised its price target on Tim Hortons Inc. by a dollar, citing what it called a successful presentation to analysts last week. Its target is now $38, and its earnings per share estimates “moderately” higher. Analysts Vishal Shreedhar and David Palmer said in a research note that UBS believes Tim Hortons is “a strong company characterized by low relative risk, high returns, and continued growth, underpinned by accelerating progress in the U.S.”
From today's Report on Business
Job seekers faced with wary employers
