Wareham Weekly Insights

Market Watch



The big picture

Mixed economic signals



This week, there were positive signs of stabilization in the U.S. manufacturing and housing sectors, but, at the same time, a far bigger-than-expected rise in unemployment for June brought the unemployment rate up to 9.5% as U.S. Nonfarm payrolls shed another 467,000 jobs. President Barack Obama had warned that unemployment would top 10% as it would take time for an economic recovery to translate into job growth. The impact of unemployment has hit California hard – the state has declared a fiscal emergency with a US$26.3-billion deficit caused by a dramatic drop in revenues from personal income taxes.


In Europe, the European Central Bank (ECB) kept its main interest rate steady at a record low of 1.0% as ECB chief Jean-Claude Trichet downplayed the threat of deflation. Canada’s report on April economic growth was released, showing the economy inched down 0.1% from March, one of the smaller declines since the recession began. Hardest hit were manufacturers and retailers. While the pace of economic contraction is slowing, economists agree that we’re not out of the woods just yet, as evidenced by auto plant shutdowns and the strong Canadian dollar causing havoc in May and June.



The markets

Quarter ends on a high note



The TSX rally that started in early March continues to slow, nevertheless Canadian and U.S. markets chalked up their best quarterly gain since 1990. Markets got a quarter-end boost as bank stocks rallied on Monday and oil prices jumped more than 2% to $73 a barrel on Tuesday on reports of rebel attacks on an oil facility in Nigeria – prices have since retreated to the $66 per barrel range. It was a year ago today (July 3, 2008) that oil prices settled at a record high of $145.29 per barrel.



In the auto industry, the U.S. government gave GM a deadline of July 10 to get approval to sell its assets. The #1 U.S. automaker filed for bankruptcy protection on June 1. Porsche is considering an offer from the gulf state of Qatar, which could solve its debt problems, particularly after Germany rejected the carmaker’s €1.75-billion loan application on Tuesday. In other news, Elan’s shares soared Thursday after Johnson & Johnson said it would pay US$1 billion to the Irish drug maker to gain access to Alzheimer’s disease treatments. Starbucks has lowered costs and introduced new, healthier menu options to help bolster declining sales – quarterly sales fell 8% in the U.S. in April, while the number of customer transactions fell 5%.



Our recommendation
Rising yields make shorter-maturity bonds more attractive



· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, believes the current rally is losing steam and at best may move sideways during a period of consolidation, or indeed give back part of recent gains. 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 over the next few weeks.

· 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. Corporate spreads have narrowed significantly since the beginning of the year, due to investor risk appetite returning. As such, we see better relative value in municipal bonds where spreads have not declined to the same degree.

· 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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ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF

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