Gun-shy investors sap markets' momentum

Alia McMullen, Financial Post Published: Monday, October 26, 2009

Volatility came back to haunt North American equity markets Monday, sending stocks tumbling after an early morning surge as investors, who have been dithering over further gains for days, took confusion over the U.S. homebuyer tax credit as excuse to sell and lock in profits.

"We've seen a market in the past two weeks that's been losing momentum, losing steam and pretty much finding any excuse to take some profits," said Vincent Delisle, the director of portfolio strategy at Scotia Capital. "Even tough earnings seasons have been far better than expectations, the market hasn't been able to generate any momentum."

Mr. Delisle said investors were taking time to cash in on the run-up in stock prices since early September. He said the correction was likely to be modest, falling a further 6%, because there was a lot of money on the sidelines ready to be invested in any equities dip.

"We do believe markets can go up another 10%-15% before it's time to rein in your horns," he said.

On a day where the markets appeared to be set to erase some of last week's losses, market sentiment turned on a dime, sending the VIX index, a measure of market volatility up more than 9%.

The S&P/TSX composite index fell 147.25 points, or 1.3%, to 11,234.88, with an added drag stemming from a decline in oil prices. Light sweet crude for November delivery fell US$1.82 to US$78.68 a barrel on the New York Mercantile Exchange, weighing down the Canadian dollar, which sank US1.35¢ to US93.72 during the erratic session.

In the United States, the S&P 500 dropped 12.65 points, or 1.2%, to 1,066.95, while the Dow Jones industrial average fell 104.22 points, or 1.1%, to 9,867.96 after trading through the 10,000 level early in the session. The Nasdaq slipped 12.62 points, or 0.6%, to 2,141.85.

The drop has come despite a "stellar" earnings season, Pierre Lapointe, an analyst at National Bank Financial said. He said so far 81% of the first 199 S&P 500 companies to report earnings had come in above expectations on their third-quarter 2009 results.

Eric Lascelles, the chief economist and rates strategist at TD Securities said market sentiment turned negative Monday on concern the U.S. Senate would discontinue a tax credit for first-time home buyers.

"I've heard contradicting information swinging back and forth, but I think there's really concern that the government may intervene in a way that is not as favourable to the markets," he said.

The negativity was compounded by downgrades of U.S. banks SunTrust Banks Inc. and Fifth Third Bancorp by prominent banking analyst Dick Bove. Economic data was also dismal. The Chicago Federal Reserve's National Activity Index, a measure of economic activity, worsened in September, coming in at a negative 0.81 from a negative 0.65 in August.

While the number was weak, Ian Pollick, an economic strategist at TD Securities said the index's levels over the past three months were consistent with the end of recession.

Robert Kavcic, an economic analyst at BMO Capital Markets said the performance of equity market sectors also appeared consistent with stronger economic growth ahead, despite the market correction in the past two weeks. He said defensive stocks, such as health care, staples, telecommunications, continued to underperform, while cyclical stocks, such as those in technology, materials, and industrials, continued to outperform the market average.

"Some other signs of recovery that surfaced early this year also remain intact - think copper prices, which are sitting at a 52-week high," he said.

Energy, mining deals seen accelerating

Calgary and Toronto
Energy, mining deals seen accelerating
Jeffrey Jones and Pav Jordan
RTGAM






Calgary and Toronto - Canada's energy and mining sectors are riding a wave of acquisitions by Asian companies that are flush with cash and hungry for resources to fuel rapidly expanding economies, a trend not expected to let up soon.

Deals such as Korea National Oil Corp.'s $1.8-billion bid for Harvest Energy Trust last week are aided by difficulties some Canadian companies have in funding their operations because of the financial crisis.

"We've been saying that the sectors which are the most susceptible to such M&A [mergers and acquisitions] are the resource and energy sectors, and I still believe this to be the case," said Alain Auclair, head of investment banking for UBS Securities Canada.

"You still see the Asian countries with access to capital or strong balance sheets that can deploy cash quickly to seize opportunities. I think it's a trend that we're going to keep seeing, especially for companies who might be under pressure from a balance sheet perspective."

That is the case with debt-heavy Harvest, known for its Western Canadian oil and gas operations and a refinery on the East Coast, one it could not afford to expand by itself.

Two weeks ago, China's No. 2 nickel miner, Jilin Jien Nickel Industry, and Canada's Goldbrook Ventures offered to buy mining developer Canadian Royalties Inc. for nearly $200-million to help feed China's appetite for metals.

The number of such deals will only increase as China, Korea and other Asian nations seek to own the production of resources such as nickel or oil, instead of having to buy them on international markets.

South Korea, for example, aims to pump 300,000 barrels of oil a day by 2012 as it expands its manufacturing economy. It is currently the world's fifth-largest oil importer.

In August, state-owned PetroChina paid $1.9-billion for a 60 per cent stake in two planned oil sands projects owned by Athabasca Oil Corp. That was China's largest Canadian oil acquisition to date.

The deal helped fuel the shares of small developers such as Opti Canada Inc. and UTS Energy Corp. , as investors wagered they might be the next to be absorbed by the Asian wave. Both are minority partners in large projects in Western Canada.

At a time when publicly traded businesses are struggling under the weight of a global economic crisis, state-owned oil companies can deploy cash for multibillion-dollar projects without having to seek shareholder approval.

"They couldn't care less about the balance of this year, or next year, even the year after," FirstEnergy Capital Corp analyst William Lacey said. "They're looking at the next 10-20 years, and the internal demands and they are going to meet those demands."

Bob Schulz, a professor of strategy and global management at the University of Calgary's Haskayne School of Business, said big, but not blockbuster, deals will continue to be the order of the day in Canada's oil patch.

"Big, positive and probably in $1-billion to $2-billion bite-size chunks," said Mr. Schulz.

Those transactions are large enough to give new companies a a foothold in long-term projects like oil sands developments, but not of a scale to cause alarm in the United States, Canada's largest energy and minerals export market, Mr. Schulz said.

Canada has been coveted as a storehouse for natural resources for hundreds of years, and investors in oil, gas and minerals enjoy minimal political risk.

In energy circles, it is best known for the oil sands, the largest deposits of crude outside the Middle East.

Developing the unconventional oil using mining or underground steam techniques is costly, and numerous small players have been culled to make way for major companies with deep pockets.

Harvest is not an oil sands developer, but KNOC made a foray into that part of the business in 2006 by acquiring an oil sands property from Newmont Mining Corp.

Analysts say buyers will get a boost from legal changes in Canada that force most Canadian income trusts to convert to traditional corporations by 2011, when their favored tax status terminates.

The changes will force many, sometimes highly leveraged, trusts to either become corporations, merge or get squeezed financially, making many into attractive targets.