Wareham Weekly Insights

Market Watch



The big picture

U.S. recovery slow and fragile



Housing and manufacturing are driving the early stages of an economic recovery in the U.S., however the most recent Federal Reserve survey pointed to a slow and fragile turnaround. Some economists fear the fledgling housing revival could be derailed when the first-time home buyers credit expires on November 30. The survey reported that the weakest links in the recovery were consumer spending, which accounts for 70% of economic activity, and commercial real estate.



Prime Minister Stephen Harper said his biggest concern is how the recovery plays out in the U.S., and he cautioned that, despite Canada’s strength, spillover effects could cause a double-dip recession. The Bank of Canada (BoC) announced it would keep its key rate unchanged at a record low of 0.25% and BoC Governor Mark Carney gave his clearest warning yet that he will take steps to stop the dollar’s rise if it continues at the current pace, warning that the strong dollar was hampering Canada’s recovery. Mr. Carney is also monitoring the surge in Canada’s housing market, with average house prices up 13.6% in one year. A top adviser to French President Nicolas Sarkozy complained that the euro’s strength, at US$1.50, was a disaster for European industry, and could lead to printing euros and inflation.



Markets

Ups and downs



Markets were volatile this week as investors reacted to the Fed survey results, Canada’s interest rate announcement and earnings news. The Canadian dollar slid almost two cents when the Bank of Canada announced its key rate would remain at 0.25%. However, on Wednesday, U.S. dollar weakness sent the loonie back up. Oil reached a fresh 2009 high of US$81.36 a barrel as U.S. gasoline inventories fell by 2.3 million barrels last week.



Apple posted record quarterly sales, pushing its stock to all-time highs. Meanwhile, Nokia filed a lawsuit claiming the iPhone infringes 10 of its patents. Research In Motion rolled out an updated BlackBerry Bold and Microsoft launched its new Windows 7 operating system in efforts to fend off Apple’s gains in the cellphone and PC markets. Microsoft announced Bing will search Twitter and Facebook for up-to-the-minute content. Within hours, Google announced a similar deal with Twitter. Caterpillar posted stronger-than-expected earnings and raised its full-year forecast. Hit by the sharpest drop in potash demand on record, Potash Corp. reported its quarterly profit fell 80% from a year ago. Cadbury posted strong sales, fueling speculation that Kraft will have to raise its bid. McDonald's profit climbed almost 6% on the success of its expensive new Angus burger.



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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