Wareham Weekly Insights

The big picture

U.S. rejects call for new reserve currency



On Thursday, U.S. and European officials outlined plans for strict new financial rules to stabilize the economy and curb the risk-taking that nearly destroyed the banking sector and set off a worldwide recession. The news came as the U.S. revised fourth-quarter GDP data showing the economy shrank at its fastest pace since 1982 in the fourth quarter as corporate profits fell a record $120.1 billion. However, these revisions were not as bad as expected.



Earlier in the week, Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Timothy Geithner flatly rejected a call from a senior Chinese official to drop the dollar as the world's key reserve currency. Zhou Xiaochuan, head of the People's Bank of China, proposed the creation of a new international reserve currency in an essay published by the central bank's Web site on Monday. China has the world's biggest foreign exchange reserves and is the top holder of U.S. Treasury securities. According to Canadian Finance Minister Jim Flaherty, China's proposal to replace the U.S. dollar as the international reserve currency will not get much attention at the next week’s G20 summit.



The markets

Indices continue to show resilience



The S&P/TSX continued to gain ground this week, climbing over the 9,000-point level on Thursday and taking it back into positive territory following the selloffs of late February and early March. The rebound has been driven in large part by significant moves in oil and copper prices and a recovery in financial stocks. Since the rally took hold March 10, the main TSX index is up over 16% while the Dow industrials have risen over 18%.



Following Monday’s announcement of the proposed $19.1 billion merger between Suncor Energy Inc. and Petro-Canada, the Canadian federal government says it will review the proposed deal to ensure it does not violate federal restrictions on Petro-Canada's share ownership. Meanwhile, WestJet Airlines said it expects significant growth in market share over the medium to long term, despite the difficult year ahead. The airline’s tone of optimism was echoed by Bombardier saying it expects big gains as the economy picks up and companies start to replace older, inefficient planes mothballed during the downturn.



Tata Motors, the Indian owner of such venerable auto brands as Jaguar and Range Rover, launched its ultra-compact Nano model on Monday for about USD$2,000 – making it the cheapest car in the world.



Our recommendation
Time to selectively build positions



· Equities. Economic statistics are anticipated to be at their worst over the next several months and Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group suggests that in response to any negative market reactions investors should be selectively building equity positions in quality companies to position portfolios for the next cycle.



· 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. Although credit spreads have tightened significantly, they still remain wide, and we recommend investors following the laddered portfolio process add exposure to these sectors when rolling maturities at this time.



· 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.

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