Wareham Weekly Insights

Market Watch



The big picture

Australian rate hike sparks optimism



Australia surprised markets Tuesday by increasing interest rates, setting off a wave of optimism about the global economic recovery. The Reserve Bank of Australia raised its benchmark interest rate to 3.25% from 3.00%, becoming the first among the Group of 20 countries to increase borrowing costs since the start of the global financial crisis. In Canada, Prime Minister Stephen Harper reiterated that the global recovery will remain fragile until jobless rates start to fall. Canada’s unemployment rate fell to 8.4% from 8.7% in September, the first monthly decline since the fall of 2008. Employment increased for the second consecutive month, up 31,000. In the U.S., the unemployment rate is at a 26-year high of 9.8% and still climbing.

Americans will have to save more in the future after years of accumulating too much debt, according to U.S. Treasury Secretary Timothy Geithner. He predicts that this change will transform the whole world’s economic reality. “Everyone is going to have to come to terms with the fact that we are going to save more in the United States.” He called on Europeans and Japanese to work at boosting domestic demand, and credited China for being at the forefront of thinking about new ways to reduce the dependence of its economy on U.S. exports and investments.



Markets

Stocks ride wave; wealthy tighten their Gucci belts



Optimism sparked by Australia’s rate hike sent stocks rising around the world on Tuesday. The TSX also was buoyed by strong commodity prices as gold topped $1,050 and oil hit $71. The Canadian dollar surged above 95 cents while U.S. Aluminum producer Alcoa posted a surprise profit and Costco beat analysts’ estimates despite a drop in quarterly profits. In Canada, Jean Coutu reported quarterly revenues up 7.3% versus a year ago, while Canwest sought court protection from its creditors, with $4 billion of debt. As the rich tighten their belts, luxury retailer Neiman Marcus has priced 40% of its new catalogue at just US$250 or less.



In the smartphone wars, Bell and Telus will break Rogers’ monopoly and begin selling iPhones next month as their new iPhone-compatible network comes online. Verizon will offer phones with Google’s Android operating system, while Microsoft unveiled its own new mobile operating system, available on 30 phones. The battery-powered LEAF car will hit British Columbia in 2011, as a result of a partnership between the Renault-Nissan Alliance, the province, the city of Vancouver and BC Hydro. The U.S. government is lending $1 billion to two new green automakers – Tesla Motors and Fisker Automotive.



Our recommendation
Buy the dips, don’t sell the rallies

· Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says the market trend remains upward in the short term despite economic risks on the horizon. 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 –generally favour the C$ against most majors, however with the recent weakness in the British Pound, it is now expected to outperform the C$ over the next year. Alternative Strategies – overweight high yield, overweight Emerging Markets Debt, underweight inflation protected bonds.
Portfolio strategy. Vincent Delisle, Scotia Capital’s Portfolio Strategist, writes, “On the equity side, our global bias remains unchanged: Overweight Americas and Emerging markets, underweight Europe and Japan. From a sector standpoint, U.S. Energy, Materials, Discretionary, Financials, and Technology are posting superior relative earnings momentum. Our Sector Strategy continues to be geared towards Cyclical sectors.”


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