Wareham Weekly Insights

Market Watch



The big picture

Signs of economic recovery



The U.S. kept its near-zero interest rate policy unchanged while noting conditions in financial markets have “generally improved in recent months.” Orders for U.S. manufactured durable goods, such as household appliances, computers and aircraft, rose by 1.8% in May, the strongest increase since December 2007. As well, U.S. mortgage applications climbed 6.6% last week, following four straight weekly declines. Moody’s Investors Service reassured investors that the U.S. government’s triple-A credit rating was safe, even as the U.S. borrows heavily to spend its way out of recession.



The World Bank unnerved investors early this week by saying the global economy would shrink 2.9% this year, more than its previous estimate. However, the Organisation for Economic Co-operation and Development said prospects for industrialized nations are the best in two years: “It looks as if the worst scenario has been avoided. Even if the subsequent recovery may be slow, such an outcome is a major achievement of economic policy.” Finance Minister Jim Flaherty expressed confidence that the Canadian economy is on the mend, although “we are not out of the woods.” A new survey suggests consumer confidence is edging up – since March, the consumer confidence index has risen 10.6 points, a turnaround from late 2008.



The markets

TSX swings with commodity prices



Volatility was the name of the game as the Toronto stock market was driven down early in the week largely by falling commodity prices. However, the market later recovered its losses largely due to rebounding energy and gold prices. Despite mixed economic data, U.S. markets also recovered from weakness earlier in the week following better-than-expected earnings from homebuilder Lennar Corp. and home furnishings chains Bed Bath & Beyond Inc.



Last weekend, Apple sold more than one million units of its newest iPhone in its first three days on the market, doubling analysts’ expectations. In automotive news, debt-ridden Porsche is proposing a deal that would give the Gulf state of Qatar a 20% share in Volkswagen. It was the end of an era as Nortel shares were permanently delisted by the TSX and NYSE. Nortel plans to sell its wireless network business to Nokia Siemens for US$650 million while winding down the 127-year-old Canadian company; Nortel has been operating under court protection from creditors since January but will soon cease to exist.



Our recommendation
Favour shorter-maturity bonds as rates set to rise

· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says their continuing conviction is that equity markets will endure a pullback or period of consolidation over the coming weeks while seeking greater fundamental evidence and support for a sustained bull market. Investors may be motivated to take profits based on the conclusion that stocks have in fact moved too far too fast and have few pending catalysts to generate further gains until the Q2 earnings season commences in late July.

· Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, highlights that with Scotia Economics recently changing their forecast, calling for rising yields across the entire maturity curve in 12 months time, active traders should remain in shorter-maturity bonds. Municipal debt appears to show relative value with yields higher than Canadian bank deposit notes in the 5-year and greater maturity range. For passive buy and hold investors, the safety you receive from Municipals presents this as a decent opportunity to diversify from corporate sector and continue to pick up decent yield.

· 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.

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