Wareham Weekly Insights

The big picture

Nurturing a recovery



While the Bank of Canada updated their forecast last week to include expectations for the recession to end in Canada in the third quarter of 2009, Finance Minister Jim Flaherty’s view was more cautious, saying that stimulus spending would continue until a recovery takes firm hold. Flaherty cautioned that unemployment would persist as firms are typically slow to hire after a recession. Unemployment climbed sharply in May, up 9.2% from April, to 778,700. The federal government is being pressed to block the US$1.13-billion sale of Nortel’s wireless division, including 125 patents, to Swedish firm Ericsson. Ontario Finance Minister Dwight Duncan joined federal opposition leaders, saying, “We just think every step should be taken to try to keep these patents in Canadian hands so that the industry can continue to develop here in Canada.”



In the U.S., new home sales rose by 11% in June, the biggest rise in more than eight years – more evidence that the housing market is finally bouncing back. As well, home prices rose on a month-to-month basis for the first time since July 2006, up 0.5% in May versus a decline of 0.6% in April. In other positive news, the rate that banks charge each other to borrow for three months fell below 0.5% for the first time, another signal that confidence is returning to credit markets.



Markets

U.S. and Europe make gains



U.S. stocks surged this week on improved U.S. jobless data and solid corporate profit reports. The S&P 500 reached its highest level in nine months, just points from the psychologically important 1,000 level. The TSX and the Canadian dollar swayed with oil prices, which fell in the first half of the week, then recovered on Thursday. Rising economic sentiment drove European equities to their highest close in nearly nine months.



In market news, Microsoft and Yahoo! will combine forces to take on the number one search engine, Google. The deal is a

10-year revenue sharing scheme, which utilizes Microsoft’s new Bing search engine. Rogers Communications earnings beat analysts’ expectations, but shares fell 5% as the firm lowered its revenue targets to 4%, from 9%, for 2009. Private-equity giant KKR will underwrite its first IPO, alongside Goldman Sachs and Citigroup, issuing shares of U.S. budget retailer Dollar General. U.S. computer giant IBM will buy business analytics software firm SPSS for US$1.2-billion.





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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