Go bulls go!

Go bulls go!
The chase by Frances Horodelski:

Are we there yet? Are we there yet? According to Angela Merkel and as reported by Reuters, “we’re not yet where we need to be” and “hours of the most intensive deliberations lie ahead of us.” It seems to now be down to the fine print with a final deal breakthrough anticipated in the next 48 hours and end-of week sign-off. The calendar remains tight because the Greek Parliament has to approve the plan by the end of the month – not a slam-dunk. So pockets of risk exist – but markets are taking it as a done deal. Around the world it is green with the Nikkei at a 15 year high (what do they care about Greece if the pension program in the country is looking to sell bonds and buy stocks). China opened after a holiday to the upside on PMI data (see below). European markets are green, green and green. Peripheral bonds are bid higher and U.S. futures are benefitting too. The U.S. dollar is up and the euro is down. Oil is a touch lower and gold is down about $5 and last week’s $20+ rally all but gone.

On the economic front today, the early look at June manufacturing globally has been benign to good. China showing some stabilization with the PMI slightly better than May and estimates (although still below 50), the Eurozone picked up steam with some numbers across the region and for Germany while France resumed its expansion (with a number above 50 for the first time since April 2014. We have economic data points in the U.S. that could be market moving such as durable goods and new home sales.

On an entirely different note, according to weather watchers, the warming patterns of the Pacific Ocean suggest an El Nino similar to the record pattern of 1997. The National Oceanic and Atmospheric Association wrote extensively on the weather post that last El Nino. What happened? The first two months of 1998 were the warmest in 2014 years. The entire winter was the second warmest on record and the seventh wettest. California and North Dakota had their wettest February on record. Florida, Maryland, Nevada, Rhode Island and Virginia had the second wettest February since 1895 and the warmest February on record occurred in the upper Midwest and parts of the east (including states that bordered Canada). Energy savings were estimated at 10% on lower heating costs. The summer of 1997 however, whether El Nino or not, wasn’t particularly kind to California with extensive flooding, mudslides and more than $1.1 billion in damage.

What’s on the agenda today – BlackBerry, Greece, economic momentum, and Canadian housing (we’ll be speaking to the Chief Operating Officer of Mattamy Homes, Canada’s largest new home builder. We’ll also look at numbers from Darden Restaurants which came in better than expectations and boosted its 2016 outlook. The company is also pursuing a REIT structure for its real estate that will trade as a separate company. What is it with the real estate world? How many new REITs have been and will be created? Is it so easy to do? The valuation boost can be massive but what are the risks? DRI’s shares are up 6.7% after rising 7% this month.

BlackBerry’s results came in a touch light on revenue and handset sales. But the big number was software which rose 150% year over year to $137 million substantially above street estimates and now represents (with licensing) 21% of the company’s revenue. Ebitda was a positive $157 million +5% while the company’s cash position rose to $3.32 billion and free cash flow was reported at $123 million. The stock is rallying in the pre-market on the software beat.

If you want to be bullish (and traders seem to be in still low volume), David Rosenberg from Gluskin Sheff has some reasons for you. First, the market bends, but doesn’t break. Even after more than 1350 days without a 10% correction. He notes that while long it isn’t the longest in history (2500 between 1990-1997 and 1600 days from 2003 to 2007). Second, by the time the Fed tightens, we are typically one-third of the way through a market cycle. They haven’t begun to tighten and it isn’t even a slam-dunk for September. Third, market leadership is pro-cyclical. Four, sentiment remains poor which is a contrary positive. And five, there has never been a market bear without a recession and that appears highly unlikely. So go bulls, go.

Bye-bye

Francis says...

Is the earth moving in China? Chinese stocks tumbled this week (the Shanghai down 13.9% on the week including last night’s 6.4% decline) and the headlines are talking Bubbles but maybe earthquakes. According to Bloomberg, 25 IPOs were priced in the country this week with more than $1 trillion worth of bids! I note however that an article quoting a Blackrock Chief Strategist is considerably different than the financial institution’s own very large report on the country “Climbing China’s Great Wall of Worry”. While the quote talked bubbles, the big report noted “It is tempting to simply dismiss buying Chinese assets: too much debt, too little growth and too policy-driven. This is a mistake, in our view. One can worry about the economy and rising risks in the long run but be bullish on markets in the short to medium term.” They recommend buying Chinese “H” shares where valuation is more attractive that Chinese “A” shares.

Chinese weakness aside, the bull market is alive and well in the rest of the world. European stocks are up (but now off their highs) as Alexis Tsipras says a deal can get done and special meetings are planned. The Nikkei is close to its cycle high again. And of course, yesterday, the Nasdaq surpassed its intra-day high yesterday (5132.52 versus last night’s close of 5132.949). The S&P 500 is again within spitting distance of its all-time high. And everything is good!

What am I reading this morning? Today’s Globe & Mail has an interesting article on how banks and other institutions have to alter the way they raise funds because there is currently no appetite for the previous issue of choice – rate reset preferred shares. They have plummeted in price as government rates stay low and concerns rise about the floating rate coupon when these preferred shares reset. More interestingly, perhaps, is the fact that even on a reset basis, the running yields at today’s low rates would be in the area of 4%. Add in the benefit of the dividend tax credit, the equivalent fixed income yield would be 5.2%. There are risks of course. These are perpetual preferred shares and rates could go lower (these preferred shares re-set their yield against, usually, a 5-year bond). But rates are historically low and there could be some interesting income oriented opportunities for people doing their homework.

On BNN, we’re talking gas prices (why are they so high?), spin-offs (big banks in the U.S. could be candidates for parts being broken off), BlackBerry (is it set to rise?), IPOs (how much is money raised for companies and how much is exits from Venture Capital and Private Equity), gold (BMO initiated coverage this week with a buy on Goldcorp and Barrick and a strategist told us earlier in the week that resource stocks today are as cheap now as they were at the peak of the technology bubble in 2000), Egyptian Cotton (on Commodities), the telecom pricing in the G7 (how much does your phone service cost?). Oh, and we just might talk a little bit about Greece too.

It is the end of the week. Traders say the weekend trade is setup for dollar bulls – so watch the currency markets. And according to history, the week after quadruple witching tends to be soft. Today, we get the S&P 500, Russell indices and the S&P/TSX rebalancing today. Additions to the TSX include Computer Modelling Group, Enghouse systems, Mitel, Intertain and Seven Generations (out AGF, Canexus, Capstone and RMP Energy). For the S&P 500, according to S&P Capital IQ, the rebalancing will result in an estimated 1% reduction in Apple’s weight while Alexion Pharma could see a more than 10% increase in its weight. 232 issues will see weighting increases while 248 will see declines. The biggest weight reduction will be in telecom while energy, interestingly is estimated to have the largest increase as a sector (although very small).

And it is Father’s Day this weekend – celebrate with your own or someone else’s. Enjoy.