Market Watch for Friday, February 10, 2012

Issue 6                                                       Friday, February 10, 2012

 

Another Superbowl in the books, and although I am saddened with the loss by my New England Patriots to those New York Football Giants, I can honestly say that it was a very entertaining, well played game. C’est La Vie, there is always next year… on to far more interesting, market moving events. 

Global equity markets have had a strong past 3 months; the Morgan Stanley Composite World Index, Germany’s DAX Index, and both the Dow Jones and S&P 500 in North America have all shown better than 20% growth since mid October. Canada was up slightly less at 12% over that same period. However, we do expect to see a pausing 

of this broad rally amid concerns over the deteriorating Greek debt situation. With the flip-flop by the Greek politicians, investors have sold in response to the sudden change in direction  or lack of resolution that for the most part was thought to have been resolved. That is not to say we foresee contagion, but the potential for a Greek removal from the EU would set the stage for a global equity market pause. 

What we are frequently asked is, “how is this going to affect Canada, and what does our crystal ball say about a market decline”. Our reply is that yes, Canada will be affected, but as to how much the general TSX may be impacted is unknown. We are far more focused and concerned with how each of our client’s portfolios may be impacted than worry about the broad market which we do not own. 

The key risk over the next several months would be if a recession in Europe evolves and how this might spur a banking system crisis that spills over into a global lending crisis as in 2008. A great thing about history is we can often learn from it, and as demonstrated today by North American corporate balance sheets – they are significantly stronger than they were in 2008 with significant cash balances. While we are not in the camp of global recession, as you may recall from previous weekly commentaries, we do remain cautious. 

The train wreck / gong show / circus or whatever metaphor you want to use for the European situation, has been the fixation of markets and media since last May.  It could certainly make a flight to safety to sit in cash or Government Bonds a natural response. With Treasury Bills and short term Bonds showing negative real returns, our preference for safety remains gold.

With the advent of ETFs, investing in gold has become far easier than in years past, when physical ownership of gold was  the only way to own bullion. Now we have our choice of ETFs, in either US or Canadian currencies. Although if you want to own gold in order to protect against a decline in the USD you wouldn’t want to own gold in USD, thus our preference is a Canadian ETF. 

Some of you recall we have previously discussed the Horizons Gold Yield Fund. Currently in the market as a closed end trust that is converting to an ETF in April, it holds Gold Bullion with a covered call option strategy on one third of the portfolio to generate a dividend yield. We continue to like this gold investment for clients as it provides the defense that we like to see in order to reduce the month to month volatility. More importantly, we also get paid to be on the defensive, which as of late has been yielding investors 10%. 

Defense and dividends all wrapped in Gold, something we will be increasingly talking about. 

  

As always, your comments and feedback are welcome. 

For those Star Wars fans (such as my daughter) Episode 1 in 3D is released today, so it’s safe to say you know where  I will be at 7PM tonight) 

Have a great weekend, and may the force be with you.

Courtesy of,

The Dekker Hewett Group

Market Watch Weekly for Friday, January 13, 2012.

Issue 2 Friday, January 13, 2012

Two weeks into the New Year and general market activity is beginning to return to normal. Volumes have picked up to near normal levels as people return from Christmas holidays. Market tone continues to be somewhat positive, but cautious.

The Canadian economy remains strong, and earlier this week reported a national trade surplus for the most recent monthly reporting, November 2011. This added strength to our currency, and our outlook is that the “Loonie” remains strong throughout the year, averaging right around parity with the US Dollar. This valuation that hasn’t happened in over 25 years, and up until last year our dollar has traded at a discount to the US Dollar since 1975.

With Stats Canada reporting a trade surplus, primarily due to energy exports, we would expect to see continued strength in the currency, resulting in the Government of Canada Bond yield remaining low throughout 2012 and into 2013. Currently 10 year Government of Canada bonds yield 1.9%. This trade report is the last major economic data point prior to the next Bank of Canada meeting on January 17, where it is fully expected that Governor Carney will keep interest rates on hold.

While these record low yields may not be of benefit to Canadians wanting to invest in Government Bonds, it is of great benefit to our Provinces who are taking advantage of record low borrowing costs to raise funding.
The current uncertainty as it relates to the economic outlook not only includes Europe, but North America as well. CIBC government bond strategist, Warren Lovely, also writes that this may become a future concern should our provincial leaders not tackle the deficits and put spending on more sustainable footing. So while we will not make a political comment with respect to BC’s fiscal policy, suffice it to say, that we are one of the provinces who need to see deficit reduction sooner rather than later.

Staying with the Government Bond theme, we hop across the pond to the EU, where sovereign debt yield in both Italy and Spain declined on Thursday. This is very good news, as investor confidence in Europe’s financially stretched governments is key to contain its fiscal woes. ECB President Mario Draghi was quoted in today’s Globe and Mail, “we are seeing the tentative signs of a stabilization in economic activity, albeit from low levels.”

This is not to say that we are sounding an all clear on Europe, far from it, but what we are saying is that the first signs of stability are a good thing for our economy. Further positive data points from France and the UK this week, indicate that the threat of a strong recession in the Euro region may be easing. While a recession is still likely, a mild one would impact us far less, when it comes to the ripple effects we will experience.

As for investing in Europe, we are not stepping in just yet outside of a particular REIT that operates fully in Germany. If we were to make a comparison, we see the investor climate in the EU similar to how we saw the US in 2009. So we are staying out of Europe (again with the exception of the Dundee International REIT) and would expect to remain on the sidelines for a similar amount of time, ie: a couple of years. Just as we are only now suggesting to look at the US in particular sectors, we wouldn’t suggest investing in general Europe through next year.

Rather when it comes to investing in Europe our recommendation would be to finance it directly by taking a family vacation. The Euro should be expected to remain low, and with their economy weak, you should get a great deal.

Courtesy of The Dekker Hewett Group

Bank of Canada maintains overnight rate target at 1 per cent

Ottawa -

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Uncertainty around the global economic outlook has increased in the weeks since the Bank released its October Monetary Policy Report (MPR). Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis. The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October, as a result of increased deleveraging and tighter financial conditions, as well as necessary fiscal austerity and structural reforms.

Recent economic data suggest that growth in the United States has been slightly more robust than anticipated, largely as a result of continued vigour in consumer spending and business investment. Nonetheless, household deleveraging, fiscal consolidation and negative spillover effects from the European crisis are all expected to weigh on U.S. growth. Growth in China and other emerging-market economies continues to be strong, although there are signs that it is moderating to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening.

On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the Bank projected in October. Household expenditures have more momentum than had been expected and business investment remains solid. Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels. The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar.

Although total CPI inflation has been slightly higher than projected, the Bank continues to expect the inflation rate to decline as a result of reduced pressures from food and energy prices and ongoing excess supply in the economy. Core inflation has also been slightly firmer than projected and is expected to ease as the output gap persists well into 2013.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

Information note:

The next scheduled date for announcing the overnight rate target is 17 January 2012. A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 18 January 2012.

Tudor's Halloween Costume Contest!

Gift basket valued at $140

Here’s what you do: Send along a picture of you, your kids, or your family in Halloween costume. It can be in electronic form, a link to an online album, or a hardcopy. Just make sure we get it by Thursday, November 3^rd.

Here’s what you get: The winner will receive a gift basket valued at $140 along with a chocolate making tour courtesy of Cinnamon’s Chocolates in North Vancouver (because everyone needs a little extra Halloween candy).

So send in the pictures!
You can email them to info@tudormortgage.ca, or stop by the office at Suite 200 – 100 Park Royal in West Vancouver.

Good luck, have fun, and Happy Halloween!

Bank of Canada maintains overnight rate target at 1 per cent

Ottawa - The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economy has slowed markedly as several downside risks to the projection outlined in the Bank’s July Monetary Policy Report (MPR) have been realized. Financial market volatility has increased and there has been a generalized retrenchment from risk-taking across global markets. The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies.  The Bank now expects that the euro area—where these dynamics are most acute—will experience a brief recession. The Bank’s base-case scenario assumes that the euro-area crisis will be contained, although this assumption is clearly subject to downside risks. In the United States, diminished household confidence, tighter financial conditions and increased fiscal drag are expected to result in weak real GDP growth through the first half of 2012, before growth strengthens gradually thereafter. In Japan, reconstruction activity is projected to boost growth over 2012-13, although Japan’s economy will be constrained by reduced global activity and the sharp appreciation of the yen.  Growth in China and other emerging-market economies is projected to moderate to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening. These developments, combined with recent declines in commodity prices, are expected to dampen global inflationary pressures.

The outlook for the Canadian economy has weakened since July, with the significantly less favourable external environment affecting Canada through financial, confidence and trade channels.  Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year.  Domestic demand is expected to remain the principal driver of growth over the projection horizon, though at a more subdued pace than previously anticipated.  Household expenditures are now projected to grow relatively modestly as lower commodity prices and heightened volatility in financial markets weigh on the incomes, wealth and confidence of Canadian households. Business fixed investment is still expected to grow solidly in response to very stimulative financial conditions and heightened competitive pressures, although it will be dampened by the weaker and more uncertain global economic environment.  Net exports are expected to remain a source of weakness, owing to sluggish foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Overall, the Bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates and confidence increases.  The Bank projects that the economy will expand by 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.

The weaker economic outlook implies greater and more persistent economic slack than previously anticipated, with the Canadian economy now expected to return to full capacity by the end of 2013.  As a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2 percent by the end of 2013. The projection for total CPI inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices as well as modestly weaker core inflation.  Total CPI inflation is expected to trough around 1 per cent by the middle of 2012 before rising with core inflation to the two per cent target by the end of 2013, as excess supply in the economy is slowly absorbed.

Several significant upside and downside risks are present in the inflation outlook for Canada. Overall, the Bank judges that these risks are roughly balanced over the projection horizon.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.