Wareham Weekly Insights

Market Watch



The big picture

U.S. economy picking up steam

The Federal Reserve kept interest rates unchanged at 0.25%, while giving its most upbeat assessment of the U.S. economy in 18 months and voting to end its US$1.45-trillion program for buying mortgage debt three months early. G20 world leaders are holding talks on the global financial crisis today, where bankers’ pay will be at the centre of discussions. Britain’s finance minister says “the party is over” for bankers who were at the heart of “this almighty car crash.” Bank of England Governor Mervyn King revealed that the Royal Bank of Scotland and HBOS had been just hours away from collapsing last October.

In Canada, Prime Minister Stephen Harper cautioned that while the recession technically may be over, the recovery is extremely fragile, particularly in the automotive and forestry industries. Retail sales fell 0.6% to $34.2 billion in July, mainly because of lower gas prices. The Bank of Canada said it would ignore short-term volatility in its exchange rate but warned again that a strong Canadian dollar could curb growth. A rate increase could come after the middle of 2010.

The Markets

Stocks slide on falling oil prices and home sales

North American stock indices retreated broadly on Thursday as a slide in oil prices knocked energy shares lower and weak U.S. home sales data hit other shares. With supplies on the rise, oil prices dropped more than 4% to less than $66 a barrel. Research In Motion’s quarterly profit and outlook fell short of analyst expectations on Thursday, sending its shares down sharply. Canada’s biggest IT services player, CGI, surged nearly 6% Monday on takeover speculation, following Dell’s proposed acquisition of Perot Systems for US$3.9 billion, which represents a 68% premium.

Canadian auto supplier Magna said it will appease Volkswagen, which has threatened to pull business from Magna if it buys a stake in Opel, a competing car company. After rejecting an initial offer of US$16 billion, Cadbury has asked Kraft to submit another bid. A123 Systems, a U.S.-based battery maker for electric cars, jumped 43% in one day after raising US$380 million through an initial public offering. Google re-touched the US$500 level, after hitting a low of US$250 in the past year. Google’s new Internet phone service, Google Voice, is expected to draw scrutiny from regulators.

Our recommendation
Favour equities to outperform



· 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 following recommendations: 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 – overweight high yield, overweight Emerging Markets Debt, underweight inflation protected bonds.

· Portfolio strategy. Vincent Delisle, Scotia Capital’s Portfolio Strategist, writes, “we are in a higher-highs/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.”

TM Trademarks used under authorization and control of The Bank of Nova Scotia.
ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. ("SCI"), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance. Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and outstanding equity securities of Royal Bank. Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or debt securities of, or have provided advice for a fee with respect to Royal Bank. TM Trademark used under authorization and control of The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.