Wareham Weekly Insights

The big picture

Economies edge towards recovery



Leaders of the world’s biggest developed and emerging nations met in Italy this week for a three-day summit on issues ranging from the economic crisis and international trade to gas prices and climate change. Leaders have agreed to avoid devaluing their currencies to promote their exports, but struggled to reach consensus on a proposal to cut greenhouse gas emissions by half by 2050.

Australia’s central bank held its interest rate unchanged for the third month, citing a stabilizing global situation and a stronger-than-expected domestic economy. The Bank of England will pump extra new money into markets and keep its key interest rate at a record-low 0.5% in a bid to kick-start lending. British Chamber of Commerce chief economist David Kern said, “The worst phase of the recession is over, but serious downward pressures persist.”

Canada was at the back of the class in an annual report card issued Monday by the Conference Board, ranking 11th for economic performance in 2008 among 17 peer countries. On a bright note, analysts were surprised as the value of building permits leapt 14.8% in May from April, to $5 billion, versus an expected gain of 0.7%. Statistics Canada said net job losses in June totaled 7,400 and the unemployment rate rose to 8.6 percent from 8.4 percent in May. Overall, fewer Canadians lost their jobs in June than expected even as the unemployment rate hit an 11-year high, adding credence to the view that the economy is stabilizing.

Oil creates slippery slope for markets



World stock markets slipped as oil prices took a six-day slide, after a bleak U.S. jobs report last week and a bigger-than-expected increase in U.S. gasoline reserves. Prices stabilized at US$60, boosted by news that this week’s jobless numbers were down sharply and by better-than-expected quarterly results posted by aluminum company Alcoa.

Google announced it will offer its own operating system in the second half of 2010, a direct challenge to Microsoft Windows, the most widely used operating system in the world. The Jean Coutu Group, Quebec’s leading pharmacy chain, said it plans to grow by one-third to 400 stores within five to seven years, capitalizing on the province’s aging population. A judge approved General Motors’ restructuring plan, allowing the company to emerge from bankruptcy and leave behind much of its costs and liabilities. The U.S. government will own about 61% of the “new GM” and the Canadian government will control an 11.7% share.

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 its 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 five-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 the 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.





The month in review

June: Global economy reaching a turning point



In June, there were encouraging signs that the global economy is stabilizing, but markets were volatile as weak commodity prices and mixed economic data gave investors doubts on the strength and speed of an economic recovery. Leaders around the world expressed cautious optimism that the recession was slowing and the general consensus is that the worst-case scenario has been avoided. Ten U.S. banks repaid $68 billion of bailout money and U.S. President Barack Obama unveiled a proposal for sweeping reforms to bank and market regulation.



Market rally falters

In June, markets continued the rally that started in March, but then stalled as oil and commodity prices softened mid-month. Despite the pullback, March 1 to June 30 marked the best quarterly gain for North American markets in a decade. Oil prices in June peaked at US$73 per barrel compared to US$145.29 per barrel price nearly a year ago.



Canadian dollar pulls back with commodities

The Canadian dollar gained 9.4% in May, passing the $0.90 cents U.S. mark, then fell in late June as the price of oil and metals weakened. The Canadian dollar ended the month in the area of $0.85 cents U.S.



Global central banks hold rates

Central banks in the U.S., Canada, England, Europe, Australia and Japan put interest rate cuts on hold this month, satisfied that their policies are working, with growing signs that economic contraction is slowing.



Global economies continue to stabilize

While it may be too early to call it a recovery, statistics are indicating that the rate of decline is slowing, suggesting a bottom to the recession. In the U.S., there were positive signs of stabilization in the manufacturing and housing sectors – orders for U.S. manufactured durable goods rose by 1.8% in May, the strongest increase since December 2007. As well, U.S. mortgage applications climbed. However, at the same time, a far bigger-than-expected rise in unemployment for June brought the unemployment rate up to 9.5%.



Canada’s report on April economic growth was released, showing the pace of economic contraction is slowing, as the economy inched down just 0.1% from March, one of the smaller declines since the recession began. China reported a strong recovery in industrial production and Japan saw rising exports and output, while European economies were mixed.



Auto restructuring

General Motors filed for bankruptcy protection on June 1 and the Canadian and U.S. governments became reluctant shareholders to aid in the transformation of the 100-year-old automaker. GM was given a July 10 deadline to get court approval for a restructuring plan and bankruptcy sale, which will result in a “new GM” with a smaller workforce and fewer factories and dealerships. Debt-mired Porsche is looking for a “white knight” and seems to be pinning its hopes on the Gulf state of Qatar, after rebuffing an offer from VW and being rejected for financing by Germany’s state bank.



Ins and outs

Research In Motion will launch a new Blackberry in July to rival Apple’s June launch of the new iPhone 3G S, which sold 1 million units during its first weekend in market. In other news, after 127 years, Nortel is being wound down, with its wireless network business being sold to Nokia Siemens.





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Jeff Wareham
Wealth Advisor

ScotiaMcLeod
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Greg Holland
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