Street scrambles to revise forecasts

Have stock prices gotten ahead of themselves? Some say yes

The summer stock-market rally has been more than just a pleasant surprise for beleaguered investors. It also caught some of the Street's top market watchers with their forecasts down.

When the S&P/TSX composite index surged past 11,000 this month for the first time in almost a year, it blew through the targets that many of Bay Street's most respected forecasters had predicted wouldn't arrive until the end of 2009. After many market strategists had updated their year-end targets in June and packed away their calculators for the summer, the Canadian market defied the traditionally listless investing season to stage its strongest summer rally in decades, rocketing 14 per cent from early July to the end of August – and then tacked on another 5 per cent in the first three weeks of September, usually the worst month of the year for the market.

Although several strategists scrambled to raise their year-end targets in the past week, an informal Globe and Mail survey found that the median forecast among top Bay Street prognosticators stood at 12,100 – a thin 5 per cent above the index's 2009 high of 11,585.73 reached last week. In the U.S. market, meanwhile, Bloomberg News reported that the S&P 500 was trading last week about 5 per cent above the average year-end target in its monthly survey of leading Wall Street forecasters, and had already surpassed all but one of the 10 targets in its poll.

With the biggest rally since the 1930s already in the books, but With the traditionally strongest quarter of the year for the market still to come, the strategists are now asking themselves: Are their expectations too conservative, or is the market too frothy?

“The truth is, nobody knows where all of this is going, short term,” said Kate Warne, Canadian market strategist for Edward Jones & Co. in St. Louis. She said the rapid moves of the market over the past year have made target-setting particularly difficult.

“It's difficult enough to get the direction right,” quipped David Rosenberg, chief strategist at Gluskin Sheff + Associates.

Even last week's trading caused forecasters to step back. After reaching their highest levels in almost a year, stocks spent the last half of the week in retreat (the S&P/TSX ended the week off more than 3 per cent from Tuesday's close), raising questions about whether investors were seeing a brief pause in the rally or the beginning of a long-anticipated correction.

Strategists said the rally, which has been built largely on expectations of an economic recovery that has yet to transpire, may need to see more concrete evidence of growth before it can go much further. “We've already bought and paid for a lot of the recovery we'll see in 2010,” said Myles Zyblock, chief equity strategist at RBC Dominion Securities Inc.

“We need to see the earnings [growth] come in,” Ms. Warne said.

She said the S&P/TSX could manage to claw its way to 11,800 before the end of the year, but predicted a “bouncy,” volatile ride to the end of the year – typical of a market searching for a new catalyst after a big move.

And, she predicted, the next few months could feature a rotation by investors out of the energy and financial sectors – which have led the gains during the rally and may have run their course – and into solid dividend-paying names that have lagged.

“It's a time of what I'd call ‘choppy consolidation,'” she said.

Chief strategist Stéfane Marion of National Bank Financial in Montreal, meanwhile, believes the Canadian stock market could be slowed by the U.S. dollar. The greenback's woes have been a major driver of this year's surge in the price of gold and, by extension, gold stocks, which make up 10 per cent of the S&P/TSX composite. But the currency has recently been showing signs of stabilizing, and could be about to turn upward.

“A U.S.-dollar appreciation will put some downward pressure on golds by the end of the year,” said Mr. Marion, who has decided to maintain his year-end target at 11,600.

But others argue that the growing global economic momentum, the Canadian market's resource-heavy tilt, and the country's relatively strong and stable economy leave the TSX well-positioned to extend its rally.

“My gut feeling is that we'll reach 12,000 closer to Christmas than next year,” said Vincent Delisle, strategist at Scotia Capital in Montreal. “I think it's going to be quick.”

Alberta authorities eye oilsands firm as Ponzi probe deepens

By Kelly Cryderman, Calgary HeraldSeptember 26, 2009

Milowe Brost, charged with operating an alleged Ponzi scheme, enters his home in Chestermere, Alta. on Sept. 17.

Photograph by: Leah Hennel, Calgary Herald

CALGARY — The Alberta Securities Commission has levelled its largest fine ever against Milowe Brost, one of two alleged Ponzi scheme architects, but the watchdog agency isn't done with the Calgary men.

A hearing in the new year will focus on a purported energy and oilsands company that the securities commission alleges Brost, 55, Gary Sorenson, 66, and another man were responsible for developing, Arbour Energy Inc.

The commission says Calgary-based Arbour collected more than $46 million from investors — mostly Albertans — over 16 months.

According to Arbour's website, the firm was engaged in oil and gas exploration, and environmentally friendly oilsands recovery. But at the time it sought money from investors, "Arbour had effectively no business or operations," the ASC alleges in its hearing notices.

"They were trying get the people — they wanted to invest their money in something that was environmentally friendly. And that was the shtick that they used with Arbour Energy, that they were actually trying to clean up the tarsands," said Graham McMillan, a chartered accountant who has studied the business dealings of Brost and Sorenson since his elderly parents invested $50,000 in a Brost-related company.

Lawyers representing Arbour officials contacted for comment declined to be interviewed. A news release from Arbour's president Dennis Morice in 2008 said "the company intends to aggressively defend its position both before the commission and through the courts."

Last week, the RCMP slapped Brost and Sorenson with theft and fraud charges related to an alleged Ponzi-like scheme that could, through a throng of companies, involve as much as $400 million, according to court documents.

At the same time, the Alberta Securities Commission continues to look into Arbour Energy, which was a publicly traded company.

The commission alleges the controllers of Arbour Energy, including Brost, Sorenson and their associates, "perpetrated a fraud on Alberta investors" and illegally distributed Arbour securities.

Brost in particular is singled out. In 2007, he was handed a $650,000 fine — the largest in Alberta securities history — and banned for life from operating in Alberta's capital markets for his role in a fraud against investors through the company Strategic Metals Corp.

None of the new allegations have yet been ruled on by an ASC panel.

In all, Arbour managed to raise $46 million through the sale of shares, ASC documents allege. Most of those shares were sold through the Institute for Financial Learning (IFFL), an entity the ASC alleges provided unregistered advice to investors.

The IFFL was one of the companies listed by RCMP when they charged Brost and Sorenson.

"The majority of the purchasers were IFFL members, and more than half the sales — $25,144,689 — occurred in Alberta," says a ruling from the commission.

About $43 million was loaned to Merendon Mining, a company controlled by Sorenson, according to the ASC. Sorenson is now believed to be living in Honduras, a country which does not have an extradition agreement with Canada.

After numerous delays caused by fillings from the respondents — who include Brost, Sorenson and other controllers of the company — the hearing for Arbour will begin on Jan. 18.

Commission spokeswoman Tamera Van Brunt said if the ASC panel finds the allegations to be true, Arbour officials could face a fine of $1 million per contravention of the Securities Act. The players could also be banned for life from participating in Alberta's capital markets.

Meanwhile, more information came to light Tuesday about an anonymous group calling itself The Agency, which is taking credit for distributing wanted posters around Sorenson's palatial home in Honduras.

The posters appeared last week when RCMP charges against Brost and Sorenson were announced. They depict Sorenson and his wife Thelma, along with the promise of a $100,000 reward for their arrest and the return of investors' money.

In an e-mail to the Herald, the group said it will co-operate with authorities and does not want to jeopardize any cases against Sorenson and Brost.

The group claims it has been contracted to recover lost money, but will not say specifically who it is working for.

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