TSX Up On Great Financials

The Toronto stock market put in a strong advance Wednesday, led by higher financials after CIBC delivered earnings that beat expectations.

The S&P/TSX composite index came back from negative territory to close up 90.77 points to 11,648.12. The TSX Venture Exchange gained 5.93 points to 1,462.78.

The Canadian dollar was down 0.04 of a cent to 94.27 cents (U.S.).

CIBC shares moved ahead $3.27 or 4.89 per cent to $70.08 after the bank reported that net income rose to $640 million in the fiscal third quarter, up from $434 million a year ago, as revenue held steady and the bank took fewer provisions for credit losses.

Excluding one-time items, the bank’s earnings were equal to $1.66 per share, beating consensus analyst expectations of $1.53 per share, according to Thomson Reuters.

Overall, the sector advanced just over one per cent. It had retreated Tuesday after Bank of Montreal handed in earnings that missed expectations.

On Wednesday, BMO rose 84 cents to $56.34 after falling about six per cent the previous day.

Royal Bank gained 60 cents to $50.69 a day before the country’s biggest bank — and the most heavily-weighted stock on the TSX — delivers its quarterly earnings. National Bank also reports Thursday and its shares gained 12 cents to $55.65.

However, some analysts warned that the banks could be in for more selling pressure as worsening economic conditions hurts results.

“The banks have done a very good job of hanging in and trading pretty well over the last year and a half,” said Paul Thornton of Investor Boot Camp Online.

“And I think their time has run out. The Canadian real estate market has finally peaked and I think that is taking the bloom off the rose of the banks, along with the belief that the global recovery is threatened.”

The gold sector was also a strong advancer as bullion moved higher with the December contract on the New York Mercantile Exchange ahead $7.90 to $1,241.30 (U.S.) an ounce. Goldcorp Inc. was up $1.57 to $44.60 and Barrick Gold Corp. improved by $1.51 to $47.96.

Base metal stocks also turned higher even as economic worries continued to punish copper prices. The September contract on the Nymex closed down three cents to $3.21 (U.S.) a pound. Teck Resources climbed 78 cents to $33.73 while Taseko Mines gained 19 cents to $4.54.

Energy stocks were slightly higher as oil prices bounced off earlier lows that came in the wake of data from the Energy Information Administration showing higher crude and gasoline inventories in the U.S. The energy sector declined as the October contract in New York gained 89 cents to $72.52 (U.S.). Canadian Natural Resources rose 21 cents to $33.12.

The telecom sector was the major decliner, down 1.36 per cent with Rogers Communications off 95 cents to $37.06 after TD Bank analyst Vince Valentini reduced his rating on Rogers to “hold” from “action list buy.”

BCE Inc. lost 51 cents to $32.77.

Stocks had been lower for most of the session after disappointing U.S. consumer and housing data deepened worries that the American economy could fall back into recession.

The U.S. Commerce Department reported that orders to factories for big-ticket manufactured goods rose 0.3 per cent last month, well below the 2.8 per cent gain that had been expected. Without the volatile transportation sector, orders actually dropped 3.8 per cent.

The Commerce Department also reported that sales of new homes fell 12.4 per cent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600, lower than the 333,000 sales that economists expected. Also, June sales were revised down to 315,000 from 330,000.

Economists had been expecting home sales to fall with the expiration of special tax incentives brought in by the U.S. government to stimulate the economy. However, the dropoff has been bigger than anticipated.

The fear among investors is that if the economy continues to worsen, corporate earnings will start to weaken, just as economic indicators have.

“The worry is, if the economy looks worse, maybe companies start ratcheting down” their earnings forecasts, said Russell Croft, portfolio manager at Croft Leominster Investment Management in New York.

“It’s still a very uncertain time.”

Gains on New York markets were much more muted in the wake of the economic reports as the Dow Jones industrial average gained 19.61 points to 10,060.06.

The Nasdaq composite climbed 17.78 points to 2,141.54 while the S&P 500 index was 3.46 points higher to 1,055.33.

In other news, BHP Billiton Ltd., the world’s biggest miner, said Wednesday its full-year earnings more than doubled to $12.7 billion (U.S.) as the company slashed its debt and enjoyed record demand for iron ore.

Last week, BHP launched a hostile $38.5-billion (U.S.) takeover offer for Canadian fertilizer company Potash Corp. of Saskatchewan Inc. On Monday, PotashCorp said its board voted unanimously to reject the bid. BHP Billiton’s chief executive said Wednesday that PotashCorp would fit well within the diversified mining company’s global strategy but adds that BHP is prepared to abandon its takeover bid if necessary. BHP shares were ahead 18 cents to $65.60 in New York while PotashCorp shares declined $3.29 to $154.51 on the TSX.

Shares in Research In Motion rose 76 cents to $50.70 after the BlackBerry maker confirmed it has acquired California-based Cellmania, which produces software to manage virtual application stores and their content. Financial terms were not disclosed.

Toronto stock market down on BMO

The Toronto Stock Exchange saw some heavy losses Tuesday as a number of elements came together to shake investors' confidence in the equities market.

At midday, the S&P/TSX composite index was down about 125 points, or 1.1 per cent, to 11,595.

Financials, the most influential sector on Bay Street, was hit as Bank of Montreal reported third quarter earnings that trailed analysts estimates. Not including one-time items, it saw earnings of $1.14 a share. Analysts expected $1.21. Its shares were down 5.52 per cent to $55.80 at midday.

In the U.S., existing-home sales for July came in below already-low expectations from economists. They fell 27.2 per cent to an annualized rate of 3.83 million, missing experts' expectations of about 4.65 million.

Crude oil was down 96 cents to $72.14 U.S. a barrel on the New York Mercantile Exchange, which coincided with losses for TSX energy stocks. Gold was up $6.80 to $1,235.30 U.S. an ounce.

The Canadian dollar was down 39 basis points to 94.64 cents U.S..

On U.S. markets, the Dow Jones industrial average was down about 80 points, or 0.8 per cent, to 10,095 at midday. The Nasdaq composite index fell around 20 points, or 0.9 per cent, to 2,140.

The main stock markets in Europe and Asia were all seeing declines of more than one per cent.

© The Financial Post

Stocks retreat following overseas markets lower; traders brace for weak housing report

Stocks retreated Tuesday as worries continue to mount about the pace of a global recovery.

U.S. traders braced for another disappointing report on the housing market later in the day. Overseas markets tumbled.

The Dow Jones industrial average fell 102 points in early morning trading. Broader indexes also fell more than 1 percent. Investors jumped back into the Treasury bond market as they shunned stocks for the safety of government debt. That sent interest rates lower.

Stocks extended a slide that continued Monday when investors focused more on signs that economic growth is slowing than strength in individual companies and a fresh round of corporate dealmaking. Economic reports in recent weeks have shown the pace of the recovery is waning, which has sparked concerns the economy could fall back into recession.

Japanese stocks led the way lower Tuesday, falling more than 1 percent as the yen hit a fresh 15-year high against the dollar. Japan's economy relies heavily on exports, so a stronger yen hurts profitability. European markets were also sharply lower.

The National Association of Realtors is expected to report that sales of previously occupied homes plunged in July. Sales totaled a seasonal adjusted annual rate of 5.37 million houses in June.

Home sales have tumbled since a home buyer tax credit expired at the end of April, despite mortgage rates falling to record lows. Banks have also been selective in giving loans, which could be freezing out many potential buyers.

Home buyers also remain skittish about the value of homes and job concerns remain pervasive adding to the caution. The unemployment rate remains at 9.5 percent and weekly claims for unemployment benefits have consistently risen in recent weeks.

In early morning trading, the Dow Jones industrial average fell 101.72, or 1 percent, to 10,072.69. The Standard & Poor's 500 index fell 12.50, or 1.2 percent, to 1,054.86, while Nasdaq composite index fell 29.65, or 1.4 percent, to 1,782.68.

Warning about Low Interest Rates: IBM Gets 3 year Money For 1% / Year

Beware of the Bond Bandwagon

Recent data shows that investors are flocking to bonds and bond mutual funds in overwhelming numbers. The image of the thundering herd comes to mind as economic fears and stock market volatility has instilled fear amongst investors. Recent comments from PIMCO, which runs the world’s largest bond mutual fund, indicate that they are taking in over a billion dollars of capital from investors looking to invest in bonds.

The rout in interest rates has allowed corporations to borrow money from the bond market at some of the lowest interest rates on record. Recently, IBM was able to sell 3 year bonds paying only 1% in interest and Johnson and Johnson was able to issue ten year bonds that only cost the company 3.1% in interest annually.

For corporate America, things have seldom been better. It is estimated that US businesses have nearly $1.5 trillion in cash on their balance sheets and are able to borrow at the most attractive interest rates in decades.

The chart above compares the current dividend yield being earned by shareholders of IBM, McDonald’s and Johnson and Johnson. By looking at the comparison, we can see that the shareholders (owners) are getting paid almost as much or more as the lenders (bond owners). It should be kept in mind that these companies have annual dividend growth rates that that are 16.80%, 28%, and 14% respectively.

If these companies were to continue to grow their respective dividends over the next ten years at the same rate as the last ten years, then the income earned by shareholders would far exceed the income received by the bond holders of these companies. For example, in the case of Johnson and Johnson, if the company could continue to increase its dividend for the next ten years as it did for the last 10 years, its current dividend yield would rise to almost 14% while the bond holders who just purchased the recent bond issue highlighted below would continue to receive a fixed 3.10% interest rate for 10 years.

Read more: http://business.financialpost.com/2010/08/16/beware-of-the-bond-bandwagon/#ixzz0xRaDlQtz

IBM raised $1.5 billion at the lowest interest rate on record as the credit rally that began in June extended into August on investor confidence the economy won’t slip back into recession.

The 1 percent, 3-year notes from IBM, the world’s biggest computer-services company, have the lowest coupon of the more than 3,400 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt. Dearborn, Michigan-based Ford Motor Co.’s credit rating was lifted two steps by Standard & Poor’s.

Investors are wagering on corporate America’s debt with 75 percent of S&P 500 index companies reporting profits that exceeded analyst estimates. U.S. manufacturing growth slowed less than economists estimated and Federal Reserve Chairman Ben S. Bernanke said the central bank is “maintaining strong monetary policy support” for the economy.

“Even though the economy isn’t working to its fullest capacity, a lot of investors are feeling that if companies are capable of turning in decent earnings, then they’re able to manage themselves to this low-growth environment,” said Arthur Tetyevsky, chief U.S. credit strategist at Gleacher & Co. in New York.

Borrowers sold $12.9 billion of U.S. corporate bonds yesterday, according to data compiled by Bloomberg. Citigroup Inc. issued $3 billion of notes, following July sales by Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Credit-Default Swaps

The extra yield investors demand to own company debt instead of government bonds fell 1 basis point to 176 basis points, or 1.76 percentage point, the Bank of America Merrill Lynch Global Broad Market Corporate index shows. Average yields rose 1.6 basis points to 3.767 percent.

Credit markets rallied as the gap narrowed from 201 basis points on June 11 amid growing confidence Europe’s sovereign- debt crisis was under control.

Elsewhere in credit markets, the cost of protecting corporate debt in the U.S. rose, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on company debt or speculate on creditworthiness, climbing 0.48 basis point to a mid-price of 99.62 basis points as of 11:44 a.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings dropped 3.3 to 96.59.

Both indexes, which are at the lowest since May 13, typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of bonds and loans.

Household Spending

Rising wages will probably spur household spending in the next few quarters, even as weak job gains drag down consumer confidence, Bernanke said yesterday in a speech in Charleston, South Carolina.

“We are maintaining strong monetary policy support for the recovery,” Bernanke said in response to an audience question, without discussing further action the Fed could take to aid growth.

U.S. employers cut 60,000 jobs in July, the second straight drop in non-farm payrolls this year, according to the median estimate of 77 economists in a Bloomberg survey before the Labor Department reports the data Aug. 6.

The Institute for Supply Management’s manufacturing gauge dropped to 55.5 last month, exceeding the median forecast of economists surveyed by Bloomberg News, from 56.2 in June. Readings greater than 50 indicate growth. The group’s bookings gauge, considered a leading indicator, fell to a one-year low.

Bond Issuance

Companies sold $90.1 billion of U.S. corporate bonds last month, the most for July since at least 1999. Average yields on the securities fell to 5.01 percent on July 31, the lowest since April 2004, according to Bank of America Merrill Lynch index data.

Sales yesterday were the busiest since July 21, when the total reached $12.9 billion, Bloomberg data show.

“It’s a very good time for companies to be issuing debt and they have excellent balance sheets that they’re leveraging as well,” John Herrmann, a senior fixed-income strategist at Boston-based State Street Global Markets LLC, said yesterday in a Bloomberg Television interview. “We have extremely low rates and yet at the same time investors are searching for yield over Treasuries.”

IBM’s bonds were priced to yield 30 basis points more than similar-maturity Treasuries, data compiled by Bloomberg show. The company, based in Armonk, New York, last sold debt in November, issuing $750 million of two-year floating-rate notes and $1.25 billion of 3.5-year fixed-rate securities.

Citigroup Bonds

Citigroup’s bonds were sold in a two-part offering, according to data compiled by Bloomberg. The $2.25 billion of 10-year notes pay 255 basis points more than similar-maturity Treasuries, and the $750 million of debt sold through a reopening of its notes due in 2015 yield 4.182 percent, the data show.

The sale was Citigroup’s biggest since September when the bank sold $5 billion of notes guaranteed by the Federal Deposit Insurance Corp. in a four-part offering, Bloomberg data show.

Citigroup may sell as much as $21 billion of debt this year, up from an earlier target of $15 billion, Treasurer Eric Aboaf said in a July 22 interview with Bloomberg News. Goldman Sachs, JPMorgan and Morgan Stanley issued a combined $8.9 billion of bonds last month.

Ford’s credit ranking was raised by S&P to B+, four steps below investment grade, from B- on expectations the company will remain profitable and amid signs that customers have a better impression of the automaker’s vehicles, the ratings company said yesterday in a statement. The outlook is positive.

Ford has “substantial” cash balances and likely will continue to generate free operating cash flow, the ratings company said. Consumers have an “improved perception” of Ford’s vehicles and its efforts to introduce more fuel-efficient models in the next few years, S&P said.

The dreaded "W" to news & commentary by Gordon Pape

The dreaded "W" (news & commentary by Gordon Pape)

So are we or are we not going to experience a double-dip recession referred

to as a "W" in economists' shorthand?

I don't know. Neither does Federal Reserve Board Chairman Ben Bernanke,

although he and his fellow governors are worried about the possibility. The

statement accompanying the Aug. 10 decision by the Federal Open Market

Committee (FOMC) to hold the line on interest rates was a classic example of

"on the one hand, on the other hand".

Here's what I mean:

On the one hand: "Household spending is increasing gradually."

On the other hand: "(It) remains constrained by high unemployment, modest

income growth, lower housing wealth, and tight credit."

On the one hand: "Business spending on equipment and software is rising."

On the other hand: "Investment in non-residential structures continues to be

weak and employers remain reluctant to add to payrolls."

The Fed acknowledged that the pace of economic recovery has slowed in recent

months with housing starts at a "depressed level" while bank lending "continued

to contract".

But despite this, the FMOC reached a positive, albeit woolly, conclusion: "The

Committee anticipates a gradual return to higher levels of resource utilization in

a context of price stability, although the pace of economic recovery is likely to

be more modest in the near term than had been anticipated."

In the meantime, interest rates will remain at historic lows for "an extended

period" and the Fed will support U.S. government bonds by continuing to invest

in longer-term Treasuries as current holdings mature.

Not that U.S. Treasuries need a lot of help – as they do every time W-fever

raises its head, investors were selling stocks and piling into bonds at a frenzied

pace for most of last week. At the close of trading on Aug. 5, U.S. Treasury

bonds with a 10-year maturity were yielding 2.9 per cent.

One week later, on Aug. 12, the yield had dropped 15 basis points to 2.75 per cent as investors fled from the stock markets. In this country, the yield on 10-year Government of

Canada bonds fell 10 basis points in the same period to 3.01 per cent.

Of course, this isn't the first time this has happened. We're going through a

period of extreme volatility in both stock and bond markets as investors react

emotionally to the news of the day. And we're likely to see more of the same

until such time as fog bank obscuring the economic future begins to lift.

To make matters worse, we're in August, a notoriously slow month in the markets. As one

broker put it: "It's like trying to sail a boat with no wind. You haven't a clue

where you're going."

Personally, I don't believe a double-dip recession is likely, although we can't

discount the possibility entirely. We weren't going to emerge from the worst

financial meltdown since the Great Depression overnight and anyone who

thought otherwise was dreaming.

But we will come out of it eventually and in the meantime, if you are feeling brave you can take advantage of some of the great bargains that are out there.

In the end, how you respond to this situation depends on what type of person

you are. It would be great if someone could tell you with absolute certainty what

will happen over the next year or two. But no one can. There are many possible

scenarios, including a continued gradual recovery, a double-dip recession, a

Japanese-style stagflation, or a genuine depression.

Conservative investors should play it safe. Weight your portfolio towards highquality

fixed-income securities and focus your stock list on Canadian banks,

utilities, and leading telecoms such as BCE Inc., which just raised its dividend by

5 per cent.

More aggressive readers should look for opportunities with unusually strong

profit potential such as energy and mining stocks. But even if you are willing to

accept a higher degree of risk, cushion your downside by including some quality

bonds or bond funds in the mix.

It is easier to invest during periods of economic stability. But to succeed over

the long term, you must have the ability to ride out the bad stretches with

minimal or no damage to your finances. The starting point is to understand what

type of investor you are and then structure your portfolio accordingly.

For information on a three-month trial subscription to Gordon Pape's Internet

Wealth Builder newsletter go to

http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=562

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