Markets close to bottom: CIBC

Markets close to bottom: CIBC

STEVE LADURANTAYE
Tuesday, November 11, 2008

With interbank lending showing “signs of life,” there are signs that stock markets have reached their bottom and the rest of the year will unfold without another meltdown, CIBC World Markets said in a report released Tuesday.

“With credit and liquidity fears abating somewhat, concern is rapidly shifting to one of the other key factors clouding prospects for a heavily resource-weighted TSX, the troubled global economy,” chief economist Jeff Rubin commented.

Mr. Rubin also cited China's massive stimulus package, which he said could boost the country's economic growth by up to 3 per cent over the next two years. He also pointed out the United States is poised to bring in another stimulus plan.

“We are cautiously optimistic that we can ride out the balance of the year without any further systemic shocks,” Mr. Rubin said.

Still, he said, the “building blocks” for a sustained rally in stocks are not firmly in place, even though it “seems safe to assume that a grim economic outlook is already well priced into valuations.”

“Our 12,000 target for the TSX composite next year would represent only a typically paced recovery, benchmarked to past cyclical yardsticks,” he said. “It is certainly consistent with the three-year period it has taken to fully reverse comparable percentage declines, although the rapidity of today's crash may suggest, given the speed of market reactions, a more rapid recovery when the news brightens.”

The S&P/TSX was trading around 9,415 Tuesday morning, down 2.82 per cent or 273.60 points, as oil fell near a 20-month low of $60 a barrel. The Dow Jones industrial average was off 2.78 per cent, of 246.27, to 8.624.27. The S&P 500 fell 2.81 per cent, or 25.82 points, to 893.39.

David Baskin, the Toronto-based president of Baskin Financial Services, said investors need to take a step back and realize that the last five weeks actually haven't been that terrible. The S&P/TSX closed trading on Oct. 9 at 9,600 – on Tuesday, it also opened around 9,600.

“It feels as if we've been through worse than that,” said Mr. Baskin, who manages client assets of about $400-million. “We've gone through the ups and downs, but the fact of the matter is, if you look at the numbers, it's remarkable that all of those losses were really in the first week of October.”

Mr. Baskin said the most positive development in recent weeks has been the change in the London interbank offered rate, or Libor rate. It has fallen from its highs, which means banks are lending to each other again after pulling back in light of a credit crisis that forced Lehman Brothers Holdings Inc. into bankruptcy and forced world governments to injection hundreds of billions of dollars into their economies to keep financial markets operating.

“If you look at the Libor, it's gone almost straight down for 17 days in a row,” he said. “It's been incremental, but it should provide some comfort that the banking situation is in hand, though obviously it's not quite cured yet. But at least we don't need to worry about a systematic collapse, and hopefully we've gotten past thoughts of the world coming to an end.”

Fourth-quarter earnings, Mr. Baskin said, will be disappointing when they are released in January. But, the market may have already priced in a lot of the bad news.

“Assume earnings are down 30 per cent,” he said. “The market has been down more than that. If you're a stock owner, you need to force yourself to look past the immediate negativity and discount the headlines. We are trading where we were a month ago, and to me that would indicate we've found a floor.”

Danielle Park, a Barrie, Ont.-based portfolio manager for Venable Park, pulled all of her clients out of the market in May. She's still 92 per cent in cash and bonds, but has stepped lightly back into the market.

“At the end of October, markets were heavily over-sold on our measurements and so we thought and still think a bounce of a few weeks or months may well be in order,” she said. “We are thinking that if we do see a rally take shape over the next few weeks it may be only for a trade before the indices break down again into the spring... We are tactical and watching very careful for signals as to the next phase. We think it is no time yet to make big, bold bets long or short.”



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