Wareham Weekly Insights

Market Watch

The big picture
Central banks leave rates unchanged

The Bank of Canada (BoC), Bank of England, and European Central Bank all left their benchmark lending rates unchanged this week. The BoC indicated that financial conditions and business confidence have significantly improved, while cautioning that economic recovery will likely be “more muted” over the near term. BoC Governor Mark Carney also warned that if the recent unprecedented rise in the Canadian dollar persists, it could threaten to derail the recovery.

Prime Minister Stephen Harper said this week that, although Canada’s latest gross domestic product (GDP) figures are bad, they are better than expected and show the economy is over the worst of the crisis. Meanwhile, the GDP of Australia actually showed growth in the first quarter of 2009, making it the only major western nation to avoid recession altogether.

In Congressional testimony, Federal Reserve Chairman Ben Bernanke warned that the labour market "tends to lag" the business cycle, "and so even as the economy begins to recover, unemployment can still remain high." The U.S. unemployment rate increased 0.5 percentage point to 9.4% in May, the highest level since August 1983. However, job losses softened markedly last month, sending one of the strongest signals yet that the severe recession may be transitioning towards recovery. Last month's drop was the smallest since September 2008, when the recession intensified in the wake of the collapse of Lehman Brothers.

The markets
Stock markets continue to rise

The TSX index is now up approximately 40% since its low of March 9th, with Financial and Energy shares leading the market. Higher energy and commodity prices and a steady trickle of positive economic data have helped fuel the rise, along with increasing optimism about the future of corporate earnings, which remain the ultimate driver of stock prices.

General Motors made its long-awaited filing for bankruptcy protection this week. The company’s restructuring is now underway with several parties coming to the table—including the Canadian governments’ pledge of $9.5 billion in bailout funds, and news that Chinese concern Sichuan Tengzhong Heavy Industrial Machinery Co. has tentatively agreed to purchase the Hummer brand. In other auto news, a U.S. Court of Appeals agreed on Tuesday to hear a challenge to Chrysler LLC’s sale of most of its assets to a group led by Italian automaker Fiat, in a move that could potentially delay the deal.

Our recommendation
Corporate bonds still offer attractive yield premium

· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, believes the current strength in equities is overdone and that the market is vulnerable to a correction. We continue to advocate that investors take profits in long trading positions or overvalued cyclical positions that do not represent long-term core holdings. In the event of an inevitable pull-back, return to selectively accumulating equities in anticipation of the next bull market for stocks.

· 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 significant volatility still a factor in the markets, 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
May: The return of optimism

May saw commodities, energy, the Canadian dollar, and equities all heading to new highs for the year. Although some sobering economic statistics were released this month, investors appeared to be paying more attention to the positive indicators, such as rising consumer sentiment, a more optimistic corporate earnings outlook, and signs of strength in the housing sector.

Signs of recovery

There were a number of signs of pending economic recovery this month. Canadian sales of new motor vehicles rose 6.3% in March, the largest monthly gain since January 2008. A Department of Commerce report showed an increase in U.S. construction spending and a 3.2% rise in pending home sales. In addition, the U.S. Conference Board said consumer confidence leapt to its highest level in eight months this month. ADP Employer Services also released a report noting a decline in private-sector job losses.

Not all good news

All the good news in May was tempered by some less-than-optimistic data. For example, the S&P/Case-Shiller national home-price index fell 19.1% in the first quarter versus a year earlier—the steepest decline in its 21-year history. In addition, the number of Canadians receiving jobless benefits surged 10.6% in March from the previous month, the biggest increase since the labour market started to weaken last October. Statistics Canada said the nation’s employment rate is running at an 11-year high in May as the worst recession since World War Two led to massive lay-offs in Ontario’s manufacturing sector.

Markets hit highs

The TSX briefly hit a seven-month high on the first day of June, capping a month in which it continued to show impressive upward momentum. The gains in Canadian equities went hand-in-hand with surging oil prices. Crude hit a new high for the year—over US$63—in the last week of the month. U.S. markets were also buoyant in May, with the Dow Jones Industrial Average coming within striking distance of its high point in January 2009.

Canadian dollar heading for parity?

The Canadian dollar gained a remarkable 9.4% in May, crossing the threshold of U.S.$0.90 cents. The strength of the loonie is, in part, a by-product of U.S. dollar weakness compared to most other world currencies. A falling U.S. dollar tends to contribute to higher commodity prices, which some economists see as creating continued gains for the Canadian dollar and, eventually, a return to parity with the U.S. dollar.

Auto restructuring

Investors were on the edge of their seats throughout May as the restructuring of General Motors hit a number of roadblocks. With a month-end, government-imposed deadline looming, there was a major setback as bondholders rejected an offer to exchange U.S.$27 billion in unsecured debt for 10% of the company’s stock. However, the month wound up with GM hammering out a deal that will see Canadian and U.S. governments digging deeper deficits in order to provide additional funding to the ailing company in exchange for ownership positions.

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