Wareham Weekly Insights

The big picture

Australia and Europe next in line for recovery


The European Central Bank left interest rates at record lows as the European economy showed signs of recovery and may even return to growth this quarter. But in Britain, while interest rates were unchanged, the Bank of England expanded its quantitative easing program by £50 billion ($US 84 billion), saying the U.K.’s recession is deeper than policy makers expected.

In the U.S., the pace of job losses slowed and the unemployment rate dropped for the first time since April 2008, the clearest sign yet that the recession is easing. Payrolls fell by 247,000 in July, after a 443,000 loss in June, and the jobless rate dropped to 9.4% from 9.5%. Small business employment, a closely watched indicator, declined for the 18th straight month. Small businesses are typically the first to hire again after a recession. U.S. retailers saw their 11th straight month of sales declines, with sales down 5.1% from a year ago. In contrast, Australia defied expectations with a rise in employment of 32,200, keeping the jobless rate steady at 5.8%, in a show of strength that could make it the first developed country to tighten its fiscal policy.


The markets

Stocks rally, then fall back



After a three-day weekend, Canadian stocks took off on Tuesday, breaking through the 11,000 barrier to a 10-month high. U.S. stocks started strong on Monday with the S&P 500 rising above 1,000 for the first time in nine months. As the Canadian dollar hit a 10-month high versus the U.S. currency on Tuesday, Finance Minister Jim Flaherty warned of taking measures if a strong currency threatens economic recovery. U.S. oil prices fell back slightly from a six-week high on Thursday, settling at $72.

Agrium posted a better-than-expected quarterly profit and predicts improving demand in the fall as farmers have delayed purchases because of the credit crunch and high fertilizer prices. Organic food retailer Whole Foods Market, criticized for its high prices, surprised analysts with a slight profit increase versus the expected 13% decline in earnings, causing the stock to soar 15%. Despite McDonald’s aggressive coffee promotion, Tim Hortons increased sales amidst a weak economy with profits rising 3.7% in the second quarter.

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. came in better than forecast, providing support for recent strength 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 Provincials and Municipals, neutral on Corporates. Currency Call – generally favour the C$ against most majors, exception being A$ which is expected to outperform;
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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