Wareham Weekly Insights

The big picture

Bank of Canada declares recession over



On Thursday, the Bank of Canada joined the central banks of the U.S., Japan and Australia, declaring the recession over in their respective countries. Earlier in the week, U.S. and Canadian central banks promised to keep borrowing rates at record lows well into next year to nurture a recovery. “We have a very long haul here,” cautioned Fed chairman Bernanke. “It’s not going to feel like a very strong economy.” America’s climb out of the recession is being slowed by rising unemployment; however, the U.S. index of leading economic indicators rose 0.7% in June, the third straight monthly gain, pointing to solid GDP growth by the fourth quarter of 2009.



The Bank of Canada projects the Canadian economy will bounce back at least twice as strongly as the U.S., advancing by 1.3% during July to September, and 3% in the fourth quarter (annualized rates). Canadian retail sales rose more than expected in May, posting the fourth gain in five months, led by auto sales. Spending also jumped for building and home supplies, as consumers took advantage of tax incentives on home renovations.



The markets

Markets rally and consumers go to the movies



The Dow Jones Industrials Index rose above the key 9,000 mark for the first time since January, and the S&P 500 rose to its highest close since November on strong corporate profits and economic data. The TSX came close to breaking through its June high and reaching levels last seen in October. Apple reported its best-ever revenue and earnings in a non-holiday quarter, and will market a special iPhone for the Chinese market that could sell 14-million units in the first year.



At Starbucks, cost cuts boosted profits and store traffic is improving. Starbucks will close 40 more stores, for a total of 805 closures worldwide since July 2008. Moviegoers flocked to the sixth Harry Potter film, setting a new worldwide box office record of US$104-million for opening day. Cineplex in Canada launched a trial of D-Box, a new technology using special chairs that move to mimic the screen action. In car news, Porsche’s CEO was ousted as Volkswagen continues to position itself in what has been an epic struggle between the two carmakers. According to German reports, both firms have now agreed to settle their differences and get on with a merger.



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

· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says the group believes 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. Although stocks advanced dramatically since the March lows, Q2 earnings results in the U.S. are coming in ahead of expectations, which may prompt a brief rally before equities resume a sideways trend.

· Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, highlights the desk's current recommendations as follows: Term Call – below benchmark duration. Sector Call – Underweight Canadas, overweight Provincial and Municipals; neutral on corporates. Currency Call – favour the C$, so no tactical FX calls at this time. Alternative Strategies – underweight high yield, overweight Emerging Markets Debt, neutral on inflation protected bonds.

· Portfolio strategy. When market volatility leads to large shifts in the weights of individual holdings, we recommend clients rebalance portfolios to maintain a discipline that encourages profit taking on strength, while adding on weakness in other positions that may have underperformed.



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