Market Update – August 27, 2008

The S&P/TSX composite traded higher today, up 231.58 points at 13,530.65, as oil prices continued to rise on worries that Tropical Storm Gustav may disrupt oil and gas operations in the Gulf of Mexico while CIBC reported a huge drop in profit from a year ago.

 

CIBC reported that net income fell to $71 million for the third quarter, down from $835 million for the same period last year as the bank was hit with more losses connected with the American housing sector. Diluted earnings per share were 11 cents, down from $2.31 a year ago. In other news, Scotiabank says it will pay US$15 million for 33 percent of a new mutual fund company in China that will be formed with the Bank of Beijing.

 

U.S. stocks on Wednesday stepped higher as investors found reason for economic hope in a July rise in orders for U.S. durable goods, with a spike in the price of crude viewed as temporary in light of storm conditions in the Gulf of Mexico. The Dow Jones Industrial Average was climbing 107 points to 11,520, while the S&P 500 was gaining 12 points to 1283. The Nasdaq rose 30 points to 2392.

 

General Motors plans to reduce its vehicle output in Spain to account for flagging demand, Reuters reported. GM will shutter its Figuerelas auto plant for two days in September and four days in October, lowering production by 12,000 vehicles. ConocoPhillips plans to exit the gas station business, selling off the last of its 600 stations to PetroSun West for $800 million, The Wall Street Journal reported. The deal is part of a growing trend among oil companies, which are exiting the business to concentrate on energy exploration. The firm’s Conoco, 76 and Phillips 66 stations will retain their branding.

 

TiVo, the company that whose little black box allows users to watch what they want when they want, is now letting its customers sample other people’s tastes, namely those of the staff at Entertainment Weekly. The company is entering a deal with the magazine, which is owned by Time Warner, which will allow users to configure their TiVo devices to automatically record programs recommended by EW, The Wall Street Journal reported.

 

On the data front, Statscan reported Wednesday that the average weekly earnings of employees were $789.23 in June, up a moderate 0.1 percent from May and 2.5 percent from a year ago. Down south, orders for big-ticket manufactured goods jumped for a second straight month, the government reported Wednesday. Orders rose 1.3 percent in July, easily outpacing the 0.1 percent gain economists were expecting, on average. The rise was in line with the upwardly revised 1.3 percent increase reported in June. Separately, the Federal Housing Administration said it would increase the price of its insurance of mortgages to 1.75 percent of the loan amount from 1.5 percent. The new rate takes effect on Oct. 1. And early Wednesday, the Mortgage Bankers Association reported a week-over-week rise of 0.5 percent in mortgage applications for the week ending Aug. 22.

 

The Canadian dollar, meanwhile, was trading up 0.19 cent at 95.57 cents US. Crude oil settled up $1.88 at $118.15 US a barrel after the Energy Department said that stockpiles of unused crude fell by 100,000 barrels and gasoline stockpiles fell by 1.2 million barrels last week.

Market Wrap Up – August 25, 2008

The S&P/TSX composite traded lower today, down 158.33 points at 13,288.96, pulled down by mining and financial stocks while Maple Leaf Foods continued to tumble amid a recall of meat products linked to a food poisoning outbreak. Maple Leaf Foods Inc. said on Sunday it expects a direct cost of about $20 million from a recall of contaminated meat linked to an outbreak of food poisoning that has killed at least four people in Canada.

 

In other news, Precision Drilling Trust has finally reached a deal to buy Grey Wolf, Inc. in exchange for the equivalent of $2.1 billion in cash and equity. Lastly, Q9 Networks Inc. announced Monday that it has reached a deal that would see it acquired by Abry Partners. Q9 released a statement saying the Boston-based communications private equity firm would purchase the company for $361 million.

 

U.S. News

U.S. stocks dropped sharply on Monday, retreating from the last session’s strong gains, as oil remained above $114 a barrel and as concerns about the financial sector continued to weigh on investor sentiment. The Dow Jones Industrial Average sank 242 points to 11,386, and the S&P 500 slid 25 points to 1267. The Nasdaq skidded 49 points to 2365. All three lost roughly 2 percent. Mortgage firm Freddie Mac saw shares rise 21 percent on Monday after the firm successfully sold $2 billion worth of three-month and six-month bonds. During the previous week, a less successful bond sale had investors worrying about the company’s ability to raise capital. Freddie’s sister company, Fannie Mae, traded up 14 percent in sympathy. The two were among the only financial-services stocks marking gains and led among the S&P 500’s gainers.

Along with AIG, financial firms JPMorgan and Bank of America were dragging the Dow lower. JPMorgan announced that it had lost $600 million during the current quarter on investments in Fannie and Freddie, sending shares down 2.8 percent. Bank of America dropped 2.6 percent. None of the index’s 30 components were in the green.

 

Economic News

 

As for economic data, the National Association of Realtors’ US existing-home sales report came in at an annualized rate of 5 million units in July, vs. 4.85 million in June and ahead of analyst expectations. Inventories, however, rose 3.9 percent to 4.67 million units, a record level, and home sales fell 13.2 percent year over year, and the median home price fell 7.1 percent from a year ago.

 

The Canadian dollar, meanwhile, was trading at 95.17 cents US, down 0.004 from Friday’s close. Oil prices seesawed after tumbling $6.59 a barrel Friday to settle at $114.59 on a stronger dollar and bets that global demand is slowing. U.S. light crude oil for October delivery rose 52 cents to settle at $115.11 US per barrel onthe New York Mercantile Exchange. Retail gas prices continued to drop overnight, extending the downward trend, according to a survey of gas station credit-card activity. Gas prices are down 10 percent from all-time highs hit in mid-July.

Market Wrap-Up August 21, 2008

The S&P/TSX composite traded higher this afternoon, up 189.08 points to 13,539.22, as crude oil prices continued to gain while investors also took in news of higher inflation in July. In corporate news, Nortel Networks Corp. shares rose 9 cents to $6.42 after it said it has acquired DiamondWare, whose technology has been deployed in gaming environments and in U.S. military tactical intercom systems, in a deal worth up to US$10 million. Nortel describes DiamondWare as a pioneer in 3-D positional voice technology.

Elsewhere, shares in Maple Leaf Foods moved down 32 cents to $10.27 as the company deals with a massive, nationwide recall of ready-to-eat meat products made by food giant Maple Leaf Foods. At least one person is dead and 16 others are ill across Canada from a bacterial infection that can be fatal to the infirm, the elderly and unborn children.

U.S. stocks finished mixed but mostly higher Thursday, as an analyst upgrade and speculation of a hostile bid boosted the shares of Lehman Brothers, while investors grew hopeful over a possible government bailout of mortgage giants Fannie Mae and Freddie Mac. The Dow Jones Industrial Average added 13 points to 11,430, and the S&P 500 was up 3 points at 1278. The Nasdaq, however, gave back 9 points to 2380. Among Dow components, oil giants Chevron and ExxonMobil both gained roughly 2 percent, as oil surged nearly 5 percent amid rising tensions over Russia’s military conflict with Georgia. Shares of Lehman Brothers also rebounded from earlier pressure after Ladenburg Thalmann analyst Richard Bove upgraded the stock, saying the stage was set for a hostile takeover of the firm. The stock finished down 0.1 percent at $13.72 after earlier slumping by more than 4 percent to $12.54.

As for corporate earnings, several consumer-oriented businesses announced financial results before the open. Heinz announced rising profits and trumped expectations, thanks to sales growth both domestically and overseas. Fast-food restaurant Burger King posted a 42 percent year-over-year increase in profits, beating estimates. The stock faced selling pressure, however, on declining profit margins.

On the data front, Canada’s inflation rate rose in July to its highest in more than five years, as the price of gasoline soared 28.6 per cent nationally compared with the same time last year. Statistics Canada says the annual inflation rate rose to 3.4 per cent in July from 3.1 per cent in June. Down south, the Labor Department’s initial jobless claims for the week ended Aug. 16 came in at 432,000, below economists’ expectations for a read of 438,000. The previous week’s unemployment tally was revised to 450,000 from 445,000. Also, the Philadelphia Federal Reserve manufacturing index increased to negative 12.7 in August, ahead of analysts’ estimates for a read of minus 13.4 and up from a negative 16.3 in July. The Canadian dollar, meanwhile, was up 1.56 cents to 95.79 cents US. U.S. light crude oil for October delivery rose $5.62 to $121.18 US a barrel on the New York Mercantile Exchange, with investors seeing the weaker U.S.dollar and the renewed worries about the economy as a reason to get back into commodities.

Are You a Sub-Prime Lender?

We have been seeing the turmoil in the US housing market takes its toll on stock markets around the world as banks around the world keep writing down more and more of their mortgage backed securities that dont seem to have buyers regardless of the offering price.

I decided to look at the Canadian market and the Alberta real estate market in particular although the first part of the discussion is national in scope. The federal government recently made changes to CMHC insured mortgages whereby individuals would have to come up with at least a 5% downpayment to purchase a home.

This is significant as this is primarily what got prices out of hand in Canada and drove prices up in the US. Individuals could get into the housing market with no investment and no risk. If housing prices went up, that was great. Individuals now had equity positions that they didnt have before. As we are seeing in the US, when prices go down, people walk away from their houses as the debt exceeds the collateral and their is no incentive to make monthly payments.

If they declare bankruptcy, so what? They didnt have any equity to begin with. In the US, some of these mortgages were backed by Freddie Mac and Fannie Mae and they have taken hits accordingly. In Canada, we have the Canada Mortgage and Housing Corporation (CMHC). The difference is that CMHC does not trade in the public markets and is fully backed by the Government of Canada so the losses that they rack up due to this Sub-Prime equivalent policy are not readily known and will be fully covered by you and I, the taxpayers. Fallout due to this policy will continue for awhile and can be considered a major contributor to weaker housing prives right now.

This brings me to the second part of the blog relating to whether you are a Sub-Prime lender. Many of the deals being marketed in the newspaper and radio whether they are Real Estate or Land are being funded up to 150% of current market values. Possibly even more. This is how it works. Company A buys a property for $10 million. They raise $14 – $15 million, however. They promise you 15% per year for a two year period. That’s approx. $4 million in interest. The balance pays commissions and salaries for their sales staff and advertising on radio and newspaper.

In essence, they can give you the promise of the interest as you are just paying yourself the money you originally invested. The problem is when the two years is up and the $15 million has to be paid back. The property needs to go up buy 50% for you to get your original investment back. Anything less and you will have a loss on your hands.

These deals took off because the Alberta market did generate those increases. Real estate prices are coming down. Inventories continue to go up. The promoters won’t be able to pay back the principal on time as they try and sell their deal at high prices. The good times are coming to an end and alot of these deals are going to go south.

What do you think? Do you agree with this assessment?

Christmas Comes Early For Business Income Trusts

Private equity firms came out of the woodwork today with two takeover offers bringing the number of buyouts to three this month as the income trust sector shrinks until its ultimate demise in 2011. Most business trusts closed with positive numbers today on these announcements.

Sleep Country (Z.UN) closed up $5.83 or 36.3% to $21.88 after a $32.00 friendly takeover bid by Birch Hill Equity Partners was announced before the market opened today. Clearwater Seafoods Income Fund (CLR.UN) closed up .65 to $4.40 or 17.33% on the day. The $4.50 per unit all cash offer was made by a group of investors supposedly lead by Clarke Inc. (CKI) which already has a large position in the company.

These offers come on the heels of the ATS Andlauer deal that was announced earlier in the month at $11.75 per share. The federal government had announced back in 2006 new legislation that would halt the conversion of corporations into trusts and prevent further corporate tax leakage.

The interesting thing however is that the leakage in tax revenues that they were trying to prevent hasn’t improved. Most of the companies have either been taken over by foreign companies with preferrential rates on corporate profits or taken private (ie BCE). The companies taken private get loaded up with debt as this is how the takeover gets financed and the interest paid wipes out the profit used to pay corporate taxes.

The retail investors took a hit back in 2006 that easily rivals or exceeds the decline that we have seen in the markets over the last year due to this legislation and the government will not receive the increase in tax revenues that they sought. Do you think the government did the right thing eliminating the income trust structure?

Lifecycle Funds…Why You Should Consider Them

Saving for retirement is something most people think about very regularly. You are doing it on your own or using a financial advisor or planner. Every time you sell something, you sit in cash analyzing what to buy next. When a stock goes up, you agonize about when to sell. When a stock goes down, you agonize about when to sell or perhaps buy more. How much should you have in Canadian stocks, International stocks, bonds, cash? How do you rebalance the assets? Monthly, quarterly, never?

It gets complicated and it is almost impossible to execute. Lifecycle funds are simple to understand and take the guesswork out of when to invest and when to reallocate. The portfolios are designed based on when you plan to retire. The closer you get to retirement, the less equity you have in your portfolio. Most people get more risk adverse as they get older. They can’t handle large fluctuation in their portfolio but rebalancing at the right time is difficult to do on your own.

Lifecycle funds do the rebalancing on a quarterly basis ensuring that the asset allocation is done regularly. As well, this strategy ensures that the fund is buying low and selling high which is something that most people are incapable of doing over the long term.

Companies like Fidelity, Mackenzie, Franklin Templeton have programs in place to take the worry away from making the right investment decisions. The approach seems simplistic but it works.

Here is a link to our site with articles and more information.

http://rothenbergcapitalmanagement.com/index.php?id=199

What are your thoughts on this approach to investing?

Oil….Buy The Stocks, Skip The Crude

As the markets close, oil stocks are rebounding nicely from yesterdays close. Encana is up 3.5%, Canadian Natural Resources is up almost 6%, Petro-Canada up 1.75%, Talisman up 3.25% and Suncor up 3.5%. The TSX came close to wiping out yesterdays losses up 1.6% on the day.

Interesting that these stocks are up on a day when the underlying commodity was down slightly on higher than expected supplies. Economics 101 would suggest that when oil goes up, so should oil stocks and vice-versa.

The markets are taking note that perhaps the 20% – 30% drop in the above-noted blue chip names may just have been overdone. At first glance, you may not think so as crude has dropped from its $147/bbl high to $118 in this short time frame representing a 20% decrease.

I went back a year and looked at the charts on Crude oil. Amazingly, crude oil was trading at about $63/bbl. Oil has nearly doubled even at todays levels in just over a year yet the response from these blue chip oil companies has been negligible.

Encana is up 15% year over year. Canadian Natural Resources is up 10%. Suncor is up about 15% while Petro-Canada and Talisman have negative one year numbers. These companies are swimming in cash right now but dont reflect the nearly doubling of prices in the last year. Sure, the new Alberta Royalty Regime comes into effect next year and can explain part of the lower pricing. But, surely these companies should have nice price increases with the upward trend in crude.

Last month was probably the worst month in recent memory for Long/Short hedge funds that were short financials and long commodities. The unwinding of that position created unusual spikes upwards for financials and the reverse for oil stocks. As the unwinding of those trades comes to an end, expect more normalized trading patterns and higher prices for these oil stocks all things being equal.

What are your thoughts on the current prices of oil stocks? Do you think they are going higher from here?