Morning Call: Thursday, June 04, 2009
Good morning.
Bernanke spoke green and the screen turned red. He spoke of "fiscal sustainability" and the market took fright. As the flight to quality eases so does the US$. Optimism of recovery coupled with concern for the inflationary effect of printing money bear down on the US$. The FED is selling bonds and Treasury is buying which can be called an internal cross or maybe by some, wash trading. The conclusion is a gold story that won't quit. However bullion does need to make new highs to support the current equity prices.
ADP's survey with 532K job losses is a reality check. ISM non-manufacturing a point below consensus at 44 indicates that the service weighted US economy still hasn't turned. Goldman pointed out that new orders to Inventory (book-to-fill ratio) indicating a rapid recovery ignored by the market. CSFB showing that P/E's are a normal 15.5 times didn't matter. It just underscores that it’s a traders market and it won't always make sense.
It’s time for a test and that's it. Will oil go to $50 and with it the Canadian $ to 80 cents? Unlikely. Will natural gas unravel and go back to the low $3? Likely. Some have used the phrase "Widow Maker ". Base metals won't escape. Bull runs end in with a copper roof as a mentor often told us. The US consumer we were told is now saving more than the Japanese counterpart. That too is a correction and will end. But we are holding our breath until the end of the Quarter.
What Bernanke also said is that the FED won't monetize the debt. The debt to GDP is going back to 1950's levels. But, with lots of spare capacity in the system, inflation's not an imminent problem. We have to cut spending and/or increase taxes. There is no way that taxes are not going a lot higher in all sorts of ways. The US consumer will spend less because they have less.
The form of things to come has Latvia experiencing a failed bond auction. Lithuania and Estonia will probably follow. We expect more problems for Hungary and Romania.
Yet, against this backdrop the appetite for Corporate bonds is growing as evidenced by the plethora of issues. That will allow for re-allocation into equities and the re-balancing of pension portfolios.
We are rotating and the focus will again be on early cycle stocks. Banks and Insurance Pipes and Utes high dividend and Consumer will do relatively better.
ADP's survey with 532K job losses is a reality check. ISM non-manufacturing a point below consensus at 44 indicates that the service weighted US economy still hasn't turned. Goldman pointed out that new orders to Inventory (book-to-fill ratio) indicating a rapid recovery ignored by the market. CSFB showing that P/E's are a normal 15.5 times didn't matter. It just underscores that it’s a traders market and it won't always make sense.
It’s time for a test and that's it. Will oil go to $50 and with it the Canadian $ to 80 cents? Unlikely. Will natural gas unravel and go back to the low $3? Likely. Some have used the phrase "Widow Maker ". Base metals won't escape. Bull runs end in with a copper roof as a mentor often told us. The US consumer we were told is now saving more than the Japanese counterpart. That too is a correction and will end. But we are holding our breath until the end of the Quarter.
What Bernanke also said is that the FED won't monetize the debt. The debt to GDP is going back to 1950's levels. But, with lots of spare capacity in the system, inflation's not an imminent problem. We have to cut spending and/or increase taxes. There is no way that taxes are not going a lot higher in all sorts of ways. The US consumer will spend less because they have less.
The form of things to come has Latvia experiencing a failed bond auction. Lithuania and Estonia will probably follow. We expect more problems for Hungary and Romania.
Yet, against this backdrop the appetite for Corporate bonds is growing as evidenced by the plethora of issues. That will allow for re-allocation into equities and the re-balancing of pension portfolios.
We are rotating and the focus will again be on early cycle stocks. Banks and Insurance Pipes and Utes high dividend and Consumer will do relatively better.
Solar and Sunny Thursdays
Schneider Power Inc.* (SNE:V) completed the acquisition of Grand-Valley Wind Farm Inc. from Earth First Canada Inc (EF:T) on June 3rd 2009. This was completed in partnership with Schneider Power holding 66% and Lands End Corporation holding 34%. Grand-Valley holds 22 MW of fully-permitted capacity with an additional 28MW to be potentially developed.
It may look daunting but…………………………. Invest your money.
VIX Index (Bloomberg): The Chicago Board Options Exchange SPX Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st and 2nd month expirations are used until 8 days from expiration, the 2nd and 3rd are used. A.K.A “the Fear Index”.
Quote of the Day:
“Whales only get harpooned when they come to the surface, and turtles can only move forward when they stick their neck out, but investors face risk no matter what they do.“
-- Charles A. Jaffe
Ed Pennock, CFA, Managing Director
416-369-6921, epennock@dominick.ca
Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca
416-369-6921, epennock@dominick.ca
Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca
(*D&D Securities has acted as agent in a private placement deal in the last 12 months. The firm’s principals currently own this stock.)
The above note is prepared by an Institutional Salesperson based on morning meeting comments and general Institutional desk discussion and should not be construed as a research report or a solicitation. For information purposes only. D&D Securities, its clients, and principals may have positions in these securities.
