Wareham Weekly Insights

The big picture

Global recovery slowly takes root



“It is a sign that we are on the path to economic recovery,” said U.S. President Obama, after a survey showed the U.S. manufacturing sector grew in August following 18 consecutive monthly declines. Nevertheless, the U.S. jobless rate in

August climbed to 9.7%, the highest since 1983, and employers cut another 216,000 jobs, although fewer than in July.



Australia’s economy grew strongly, expanding 0.6% in the second quarter – the best result among developed countries. However, this did not prompt the Reserve Bank of Australia to change its key interest rate. The European Central Bank also left interest rates at a record low and signalled it’s in no rush to withdraw emergency stimulus measures. Finance ministers from the Group of 20 meet in London on the weekend to draft a strategy to keep the economic momentum going. The IMF increased its estimate for global economic growth to slightly less than 3% in 2010, up from 2.5% in July. Two million buyers took advantage of Germany’s car scrapping rebate, which expired on Wednesday, driving the country’s auto sales up 28% in August. Some worry that 2010 sales could slump as many drivers rushed to take advantage of 2009 sales incentives. In the U.S., lacklustre back-to-school sales hinted that retailers may be facing another tough holiday season.



Markets

Markets tumble, then climb – gold closes in on $1,000



China’s key stock index fell 6.7% early in the week knocking European and North American stock markets lower along with the price of oil. Stocks rose again on Thursday, as U.S. chain stores reported surprising sales that topped projections, spurring the S&P past the 1,000 mark. Meanwhile, the price of gold jumped to a six-month high of $999.50/ounce.



Bombardier saw its second-quarter profit decline by $100 million – less than analysts had expected – as its aerospace division delivered fewer planes than a year ago. In technology news, new hardware and an alliance with Facebook could see Nokia catching up with rivals such as Apple and RIM. Apple is expected to unveil an updated line of iPods next week. Sony says it will introduce a 3-D television by the end of 2010; its TV division has lost money for five straight years. Disney will buy Marvel Entertainment for $4 billion, marrying princesses with superheroes in its biggest deal since buying Pixar in 2006 for $7.4 billion in stock.



Our recommendation
Rebalance portfolios to buy low, sell high



· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says the market trend remains upward in the short term despite economic risks on the horizon. Although market valuations are not excessive at current levels, they are already pricing in a significant rebound in earnings in 2010. The market is not overpriced, just overbought in the short term; we would be adding weight in cyclical holdings on any market pullback.



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 Municipals and Provincials, neutral on Corporates. Currency Call – favour the C$, as well as the A$, which is expected to outperform. Alternative Strategies – underweight high yield, overweight Emerging Markets Debt, neutral on inflation protected bonds.


Portfolio strategy. Vincent Delisle, Scotia Capital's Portfolio Strategist, writes "we are in higher high/higher lows environment and recommend buying the dips, not selling the rallies. Our longer term stance remains positive and we expect equities and corporate bonds to outperform Treasuries over the next 12-18 months."

The month in review
August: Major economies continue to stabilize as rates stay on hold



The U.S. Federal Reserve declared that U.S. economic activity is “levelling out.” The central bank held its key lending rate at a record low, and signalled it would end one of its stimulus programs (buying U.S. Treasury securities) at the end of October. Federal Reserve Chairman Ben Bernanke declared that the U.S. economy is on the verge of a long-awaited recovery after enduring a brutal recession and the worst financial crisis since the Great Depression. Bernanke was re-appointed for a second term.



In Europe, Germany and France unexpectedly returned to growth in the second quarter. Good news also came out of the U.K. – data showed house prices stabilized, and the Royal Institution of Chartered Surveyors now predicts the average house price will rise by the end of the year, reversing its forecast of a 10% to 15% decline. In Canada, retail sales jumped 1% from May to June, but remain 4.4% lower than a year ago. With inflation at a 56-year low, consumer spending remains weak, and some economists say it could be years before companies begin to raise prices.



Canadian banks shine

In August, the Royal Bank reported record profits while earnings from the Bank of Montreal, TD Bank and the Bank of Nova Scotia also beat expectations. Financials were the largest contributor to the TSX Index last month and account for 51% of the gains year-to-date.



Loonie strength prompts Bank of Canada warning

As the Canadian dollar hit a 10-month high versus the U.S., the Bank of Canada (BoC) warned again that it is prepared to intervene to stop the sharp rise of the loonie from derailing the economic recovery. The BoC has not intervened in foreign exchange markets in more than 10 years.



TSX up for the sixth straight month

In August, the TSX broke through 11,000 to a 10-month high, and the S&P 500 rose above 1,000 for the first time in nine months. Both indices fell back, but still finished the month slightly up. The Canadian index is up 20.9% year-to-date with the top 10 contributors accounting for 64% of the gains (Royal Bank, TD Bank, Research In Motion, Bank of Nova Scotia, Bank of Montreal, Teck Resources, Suncor, Petro-Canada, Canadian Natural Resources and Talisman).



Auto industry soldiers on

The U.S. government’s $3-billion “cash for clunkers” program drove 700,000 auto sales, prompting Ford to hike factory output. Toyota will slash production by 580,000 vehicles – 6% of global capacity – despite capturing 19% of the sales from the program. General Motors claims its new electric car, the Chevy Volt, will get an unprecedented 230 miles per gallon (100 km/l), four times the mileage of Toyota’s Prius. It will go on sale in late 2010 for US$40,000. Meanwhile, Volkswagen announced that it will pay US$4.7 billion for a 42% stake in Porsche as it executes a gradual merger.



Apple heats up

As the iPhone prepares for its debut in China – the world’s largest cell phone market – Apple is investigating reports from France of iPhone screens exploding, apparently because of overheated lithium ion batteries. Meanwhile, analysts speculate that Apple is working on a new multimedia tablet that will let people access movies and TV, games, the Internet and books.



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