Wareham Weekly Insights

Market Watch

The big picture
Canadian economy shows strength

The Canadian dollar neared parity with the U.S. dollar after six straight days of gains, topping 97 cents on Wednesday before pausing ahead of the Bank of Canada's interest rate announcement next week. Prime Minister Stephen Harper warned that too rapid a rise could damage the country's economic recovery, but said some of the Canadian dollar's sharp climb is justified by fundamentals. "We know that Canada's economy is relatively stronger than certainly virtually any other developed country." The central bank has said it would not counteract rises in the dollar due to fundamental factors.

Unemployment in Britain is still rising, but the monthly increase has slowed, signalling the worst may be over. The Bank of Japan held rates while raising its economic assessment for the second month, and refrained from ending its liquidity-boosting measures. U.S. retail sales were better than expected in September - up 0.5% excluding autos. Overall retail sales dropped 1.5%, as auto sales plummeted 10% after the Cash for Clunkers program ended. Federal Reserve policymakers agreed that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Fed Vice Chairman Donald Kohn said that a subdued U.S. economic recovery with sluggish growth would keep inflation at bay.

Markets
Dow breaks 10,000 barrier; oil hits one-year high

The blue-chip Dow index passed the 10,000 mark fuelled by results from Intel and JPMorgan Chase and September retail data that beat expectations. Up 52% from its March low, the Dow remains 29% below its peak in October 2007. The TSX was also fuelled by the energy sector as oil hit a one-year high of US$78 on an unexpected drop in U.S. gasoline inventories. Gold hit a record $1,070 and its popularity has risen to the point where shoppers can now buy gold bars at Harrods department store in London.

In third-quarter earnings announcements, Google shone with net income up 27% over last year; Intel posted results and a fourth-quarter outlook that exceeded Wall Street expectations; Johnson & Johnson saw revenue fall 5% as generic competition caused prescription sales to plunge 14% from a year ago; and railroad operator CSX reported an earnings decline that was not as bad as feared. In the financials sector, JPMorgan reported a ninefold increase in profits over a year ago. Goldman Sachs profits more than tripled and the firm faces criticism for $20 billion in planned year-end bonuses. Citigroup posted a loss, suffering $8 billion of credit losses. In the smartphone wars, Research In Motion released Storm 2 to challenge the iPhone.

Our recommendation
Add cyclical holdings on market pullbacks
* Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says the market trend remains upward heading into the end of the year 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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