Weekly Insights The big picture : Something for everyone in Conservative budget

Market Watch



The big picture

Something for everyone in Conservative budget



Last Tuesday, Canadian Finance Minister Jim Flaherty unveiled the first Canadian federal budget to include deficit spending in more than a decade. The budget included up to $12 billion for infrastructure over the next two years, income tax relief for individuals and small businesses, a one-time 25% reduction in the minimum RRIF withdrawal for 2008, a $1,000 increase in the senior age credit, and even a new home renovation tax credit. All told, the Conservative government announced 109 separate spending initiatives, spreading $22.7 billion worth of stimulus across virtually every segment of society.



Markets were buoyed this week by rumours that the U.S. Treasury will soon announce the creation of a “bad bank” to buy troubled assets from the nation’s otherwise good banks. Meanwhile, the House of Representatives passed President Obama’s $819 billion stimulus bill on Wednesday despite the fact that Obama was unable to drum up support from Republicans. The bill is on its way to the Senate, where Republicans are in a position to demand revisions. Meanwhile, the U.S. Federal Reserve Board signalled that it will keep using unconventional tools to cushion the fallout from deteriorating economic conditions, including keeping the targeted range for the federal funds rate between zero and 0.25 per for quite “some time.”



Business and political leaders converged in Davos, Switzerland this week for the four-day World Economic Forum. The mood was more subdued than usual as business confidence has continued to wane globally.



The markets

Pfizer bucks credit trend



Pfizer, the world’s largest drug maker, is about to get a lot bigger after announcing the $68 billion acquisition of Wyeth. The deal will add successful drugs Effexor and Prevnar to a product portfolio that already generates more than $1 billion in annual sales. Arguably of equal significance, particularly given the current credit environment, Pfizer was able to fund the deal with a combination of shares, cash on hand, and loans totalling US$22.5 billion from a consortium of banks.



Fast-food giant McDonald's said Monday its 2008 net profit soared 80% percent from a year ago, lifted by growing demand from consumers seeking low-cost meals in a deepening global recession. In contrast, Starbucks announced its earnings on Wednesday and said that it would slash 6,700 jobs and close an additional 300 stores — including 200 in the U.S. — as the company continues to struggle during the recession.



The share price of British bank Barclays soared on Monday, closing up 73%, after the group insisted it did not need a government bailout. Just last week, the shares had plunged on rumours that the company might be nationalized.



Our recommendation
Consider moving off the sidelines



· Equities. Equity markets tend to rebound ahead of the general economy. During periods of market weakness, consider moving at least some cash off the sidelines. Paul Danesi, Director, Portfolio Advisory Group, suggests looking at exchange traded equity funds that offer rich dividend yields and longer-term capital appreciation potential.



· Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, says high quality corporate bonds, such as Canadian banks and insurance companies, continue to offer attractive yields relative to government issues.



· Portfolio strategy. With volatility still at record highs, it’s important to review the impact on your portfolio allocations and ensure that your holdings remain appropriate for your goals and risk tolerance.












The month in review
January: a month of extremes



The year got off to a dynamic start with central banks and governments continuing their aggressive measures to stabilize economic conditions, and markets continuing to demonstrate remarkable volatility. On the upside, a summit of G10 central bankers and Canada’s own chief central banker affirmed that a return to economic growth is expected in 2010.



What follows is a list of what helped move markets throughout the month.



Interest rates on the decline



Following in the footsteps of the U.S. Federal Reserve, the central banks in Canada and England moved their target lending rates down to record lows in January. The Bank of Canada reduced rates to an all-time low of 1%, and the Bank of England cut its key lending rate to 1.5%, which is the lowest in its 315-year history.



Deficits on the rise



In his inauguration speech, President Barack Obama outlined sweeping plans to invest in roads, bridges, electric grids, digital lines, and alternative energy. It is believed that these plans will contribute to a staggering $1.2 trillion budget deficit in 2009. Meanwhile, it has been estimated that Canada will face a deficit in the range of $80 billion over the next five years.



Volatility the reality



Volatility continued at a record pace in January, with the price of oil routinely whipsawing several dollars per barrel in a single trading session, and the Canadian dollar also experiencing daily swings of unprecedented proportions. Both the commodity and the currency trended lower for the month. Equity markets saw a sort of “mini banking crises” this month as concerns about the solvency of U.S. banking giant Citigroup sent the shares—which had once traded in the $60 range—to below the $5 per share. Shares of Bank of America were also caught in the undertow. The following week, similar concerns sent U.K. banking concerns Barclays and Lloyds sharply lower.



Autos get relief



The USD$17 billion North American auto bailout in December was followed this month by a British bailout plan worth USD$3.25 billion and news that the Italian government is contemplating a $7.9 billion plan. Earlier in the month, Toyota announced the most drastic suspension of production in its history, and Chrysler revealed that it had struck a deal with Fiat for a 35% ownership stake in exchange for the Italian firm sharing its distribution channels and technology.



Positive outlook for 2010



No one is calling for a rapid economic recovery, and it’s all but certain that corporate earnings will continue to fall and unemployment will continue to rise in 2009. However, speaking on behalf of a meeting of G10 central bankers this month, European Central Bank President Jean-Claude Trichet said the group expects a "significant pick up" in 2010. Also this month, Bank of Canada Governor Mark Carney reiterated the bank’s aggressive forecast of 3.8% economic growth for Canada in 2010.