Morning Call: Thursday, June 11, 2009
Good morning.
Rising US yields (the 10 year was a tad over 4%) and rising oil prices, reaching $71.33 at the close, took the air out of the market’s sails. There is a lesson to be learned about "free money". The very positives are that the 2 D’s aren't happening. Neither Deflation nor Depression are being seriously discussed. There's a creeping concern about the impact on long term yields of the zero rate structure and infinite Deficits. The BRIC -sans India - bought IMF bonds in a political statement, but it did worry bond traders and contributed to the rise in 10 year yields.
When we wrote Focus 09 we worried about a mid year back up in rates that might cap off the recovery (mainly in the market). Well it’s happening and being abetted by the oil price. The Tsunami of liquidity is finding itself all kind of investment vehicles, not the least of which is oil, and hence energy stocks. However the old mantra of “BTU Equivalency” is totally dead and we expect gas on gas competition within the next 12 months. That’s not pretty!
The headlines in Canada that New Home prices were down 0.3% in April is missing the point. Mortgage rates got to the magic spot some time in late April or May. The reality that you can borrow $1mm for a cost of $3k per month has gotten buyers excited. In Toronto the $600k to $1mm segment is selling and selling well. Australia didn't have a recession to speak of but maybe ours is almost over.
When we wrote Focus 09 we worried about a mid year back up in rates that might cap off the recovery (mainly in the market). Well it’s happening and being abetted by the oil price. The Tsunami of liquidity is finding itself all kind of investment vehicles, not the least of which is oil, and hence energy stocks. However the old mantra of “BTU Equivalency” is totally dead and we expect gas on gas competition within the next 12 months. That’s not pretty!
The headlines in Canada that New Home prices were down 0.3% in April is missing the point. Mortgage rates got to the magic spot some time in late April or May. The reality that you can borrow $1mm for a cost of $3k per month has gotten buyers excited. In Toronto the $600k to $1mm segment is selling and selling well. Australia didn't have a recession to speak of but maybe ours is almost over.
With Rim reporting on June 18th a Goldman analyst is suggesting buying a call spread. She raised her target from $83 to $96, noting that Rim trades at 16 times while Apple and Qualcomm trade at 25 and 24 times their 2010 EPS forecast. The strategy would be to buy an $85 call and sell a $95 call. With the stock at $82.02 it costs $3.10 while option premiums are pricing in a 13% move. Along with the EPS (consensus $1.06) Rim will launch the Pearl Flip 8230 -3G with media, camera and of course e-mail. Their numbers not ours.
Another theme yet to really develop is the end of Productivity Gains as we've known them. The IT spend has moderated. The PC growth has stopped except for laptops and notebooks. The tight labour markets are a thing of the past. Oil at $150 will undo many of the cost benefits of Globalization. Cheap and Cheerful China is done as they focus on their own agenda. The Halycon days for American shoppers is over.
Another theme yet to really develop is the end of Productivity Gains as we've known them. The IT spend has moderated. The PC growth has stopped except for laptops and notebooks. The tight labour markets are a thing of the past. Oil at $150 will undo many of the cost benefits of Globalization. Cheap and Cheerful China is done as they focus on their own agenda. The Halycon days for American shoppers is over.
The charts tell an interesting story. The DOW has broken out above the 200 day and the 50 day has crossed the 100 day. The QQQ's are even better and recently the 50 day crossed the 200 day. The oil 50 day is poised to break through the 200 day while the CRB is doing it right now! The best metal charts are Nickel and Zinc with everything going. Gold looks like it failed to break out. Stay Tuned.
So on balance, it’s time to………………… Invest the money.
So on balance, it’s time to………………… Invest the money.
SKF US (Bloomberg): UltraShort Financials ProShares is an exchange-traded fund incorporated in the USA. The fund seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones US Financials Index.
Quote of the Day:
“Politicians say they’re beefing up our economy. Most don’t know beef from pork.”
--Harold Lowman
--Harold Lowman
Ed Pennock, CFA, Managing Director
416-369-6921, epennock@dominick.ca
Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca
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.
