Dubai casts shadow on global economic recovery

On Thursday, news that Dubai’s Investment Company, Dubai World, may default on an upcoming maturity, rocked financial markets. Dubai World asked creditors for a six-month delay in the repayment a portion of its massive US$60-billion debt – much of it owed to foreign banks. While some worry that a default could derail the global economic recovery, the numbers pale in comparison to the US$2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have made between 2007 and 2010 as a result of the global credit crisis. German banks are currently already facing 75 billion Euros (US$113 billion) of write-offs on bad loans, according to the Deutsche Bundesbank. The U.S. dollar strengthened on the Dubai news as investors sought safety. The U.S. dollar had fallen to a one-year low on Wednesday when Russia’s Central Bank said it will invest some of its foreign exchange reserves in other currencies, and specifically in Canadian dollars.

Britain reported its economy shrank for a sixth consecutive quarter, but at a slower pace, keeping alive expectations of a return to growth by year-end. The U.K. is suffering its longest stretch of GDP declines since records began in 1955, while many of its trading partners – including France, Germany, and the United States – have already emerged from recession. The worst of the global economic crisis is over and government stimulus spending on infrastructure is flowing well, according to the Executive Vice President of Cisco Systems Inc., one of the world’s largest technology companies.

Markets

World markets rattled by Dubai debt

World stock markets and commodities fell sharply after news of a potential Dubai default unnerved investors. After hitting a record high mid-week, gold prices tumbled 5% on Friday as investors sought safety in dollars and cash, and the price of oil dropped 7%.

In the markets, Manulife Financial Corporation announced it will buy a 49% stake in a Chinese wealth management company to broaden its exposure to the fast-growing Asian market. Hewlett-Packard Company tripled the size of its share repurchase program to US$12 billion, as profits rose 14% on strong performance in China. Social networking website Facebook signalled it may be preparing for a public offering. In car news, Saab faces extinction as Swedish carmaker Koenigsegg backed out of a deal with General Motors. Porsche AG reported its debt ballooned to 11.4 billion euros (US$17.1 billion) in 2009 and predicts a loss of at least 1 billion euros (US$1.5 billion) in 2010. Volkswagen AG will acquire a 49.9% stake in Porsche AG by year-end as the first step of a merger to be finalized in 2011. Jewellery retailer Tiffany & Co. sparkled in the beaten-down luxury market, posting a better-than-expected third-quarter profit.   

China on the rise

China’s economy continued to improve in October – industrial production jumped to a 19-month high, up 16.1% from a year ago, while retail sales also beat expectations, up 16.2%. Exports were down 13.8% over the year, but that was a smaller decline than September (15.2%). China signalled it may be ready to allow the yuan to appreciate, a move that would be welcomed by countries around the globe that have complained the persistently weak yuan is a giant subsidy for China’s exports. Global shipping is still weak, with Maersk, the world’s largest shipping container company, expecting to lose US$1 billion this year.

The U.S. dollar hit a 15-month low on Wednesday as Fed officials warned that high unemployment and reluctant consumers would likely make a U.S. economic recovery weak and erratic. U.S. unemployment hit 10.2% in October, but new claims for unemployment insurance fell more than expected last week. The Bank of England said it may extend its extraordinary efforts to stimulate growth, as it forecast a long, slow economic recovery. Last week, the U.K. central bank expanded its bond-buying program to £200 billion (US$334.56 billion) from £175 billion. In Canada, new home prices rose 0.5% in September, the largest month-over-month increase since January 2008, with the biggest hikes in Vancouver, Ottawa and Calgary.

Markets

Dow breaks six-day winning streak

Canadian stocks surged early in the week as commodity prices jumped on better-than-expected industrial production in China, but on Thursday, gains were erased as commodity prices retreated because of a stronger U.S. dollar. The Dow broke a six-day winning streak as a guarded outlook from Walmart fueled consumer fears. Walmart reported higher-than-expected third-quarter profits due to cost cutting, but softened their expectations for the key holiday shopping season.

Hewlett-Packard plans to buy 3Com for US$2.7 billion, as it battles Cisco for market dominance. BCE earnings beat estimates, with its Bell division posting a 26% rise in operating income in the third quarter. Shoppers Drug Mart also showed strong results, with quarterly sales rising 8%. Jean Coutu, Canada’s second largest pharmacy, said it expects to double or triple revenues in its generic drug division in the next five years as patents expire on drugs like Lipitor, with annual sales of $1.8 billion in Canada. Apple beat Nokia with a third-quarter profit of US$1.6 billion, making it the most profitable cellphone maker just two years after entering the market. Cellphone sales are expected to grow between 5% and 8% next year, according to Gartner Research.

Malcolm Burrows – Head of Philanthropic Advisory Services

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Fred Ketchen – Managing Director, Stock Trading ScotiaMcLeod

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U.S. manufacturing grows amid rising unemployment

Showing unexpected strength, the U.S. manufacturing sector grew in October at its fastest pace since April 2006, suggesting U.S. gross domestic product is growing at an annualized rate of 4.5% in the fourth quarter. The manufacturing index rose for the third consecutive month in October after 18 consecutive months of contractions. The services sector grew for a second straight month in October, but at a slower pace than in September. Despite this growth, the unemployment rate rose to 10.2% in October, the highest since April 1983, with the largest job losses in construction, manufacturing and retail.

The Bank of Canada (BoC) is still predicting growth in the second half of 2009, even though recent GDP data indicated that the economy contracted in the third quarter. The BoC predicts the economy will grow 3.0% in 2010 and 3.3% in 2011. Finance Minister Jim Flaherty said on Monday that Canadians should not expect the employment market to recover as quickly as the general economy. “The recovery in jobs will lag recovery of the economy. That is to be expected. That is the lesson of past recessions. It takes time for businesses to regain confidence, to reinvest in their businesses and thereby create jobs.” Canada’s unemployment rate rose to 8.6% in October from 8.4% a month earlier as the economy shed 60,000 part-time jobs. Full-time employment increased slightly.

Markets

Stocks rally; GM does a U-turn

The TSX surged this week as gold prices reached a record US$1,101 after a pledge from the Federal Reserve to keep interest rates low weakened the U.S. dollar, and billionaire Warren Buffett bet big on the U.S economic recovery. North American markets also rallied on strong U.S. manufacturing data and better-than-expected earnings by technology bellwether Cisco, although the TSX was hit by surprise losses from Sun Life and Manulife.

General Motors did a U-turn, scrapping plans to sell Opel to Canadian auto parts supplier Magna. Unions are seething as GM Europe will now revert to a reorganization plan that chops fixed costs at Opel by 30%. Enbridge reported third-quarter profit more than doubled to $300 million versus one year ago. Warren Buffett will make his biggest ever investment, buying Burlington Northern Santa Fe Railway for US$44 billion in what the billionaire described as “an all-in wager on the economic future of the United States.” BlackBerry maker Research In Motion fell more than 6% on Monday after an analyst told investors to sell the stock because of mounting competition and an influx of new phones and applications.

Topic: Bond Market Strategy

Recorded: September 2009

Chris Kennedy, CFA – Associate Director, Sales and Trading, Fixed Income Portfolio Advisory Group

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U.S. recovery slow and fragile

Housing and manufacturing are driving the early stages of an  economic recovery in the U.S., however the most recent Federal Reserve survey pointed to a slow and fragile turnaround. Some economists fear the fledgling housing revival could be derailed when the first-time home buyers credit expires on November 30. The survey reported that the weakest links in the recovery were consumer spending, which accounts for 70% of economic activity, and commercial real estate.  

Prime Minister Stephen Harper said his biggest concern is how the recovery plays out in the U.S., and he cautioned that, despite Canada’s strength, spillover effects could cause a double-dip recession. The Bank of Canada (BoC) announced it would keep its key rate unchanged at a record low of 0.25% and BoC Governor Mark Carney gave his clearest warning yet that he will take steps to stop  the dollar’s rise if it continues at the current pace, warning that the strong dollar was hampering Canada’s recovery. Mr. Carney is also monitoring the surge in Canada’s housing market, with average house prices up 13.6% in one year. A top adviser to French President Nicolas Sarkozy complained that the euro’s strength, at US$1.50, was a disaster for European industry, and could lead to printing euros and inflation.

Markets

Ups and downs

Markets were volatile this week as investors reacted to the Fed survey results, Canada’s interest rate announcement and earnings news. The Canadian dollar slid almost two cents when the Bank of Canada announced its key rate would remain at 0.25%. However, on Wednesday, U.S. dollar weakness sent the loonie back up. Oil reached a fresh 2009 high of US$81.36 a barrel as U.S. gasoline inventories fell by 2.3 million barrels last week.

Apple posted record quarterly sales, pushing its stock to all-time highs. Meanwhile, Nokia filed a lawsuit claiming the iPhone infringes 10 of its patents. Research In Motion rolled out an updated BlackBerry Bold and Microsoft launched its new Windows 7 operating system in efforts to fend off Apple’s gains in the cellphone and PC markets. Microsoft announced Bing will search Twitter and Facebook for up-to-the-minute content. Within hours, Google announced a similar deal with Twitter. Caterpillar posted stronger-than-expected earnings and raised its full-year forecast. Hit by the sharpest drop in potash demand on record, Potash Corp. reported its quarterly profit fell 80% from a year ago. Cadbury posted strong sales, fueling speculation that Kraft will have to raise its bid. McDonald’s profit climbed almost 6% on the success of its expensive new Angus burger.

Canada’s GDP growth stalls

The latest reports on the Canadian economy unexpectedly showed no GDP growth in July, throwing into question the strength of the country’s recovery. Wednesday’s report from Statistics Canada dashed economists’ expectations of a 0.5% increase, blaming shutdowns at mines, lower oil-and-gas extraction, civic strikes and poor weather. On the bright side, employers added 27,000 jobs in August, and new applications for employment insurance fell. Prime Minister Stephen Harper reported that 90% of the economic stimulus funding has been allocated and that the money will create or support 200,000 jobs over two years by funding 7,500 infrastructure projects, training for 44,000 Canadians, $5.8 billion in added EI benefits and $131 billion in business financing.

Bank of Canada Governor Mark Carney said, “A powerful and sustained restructuring of the global economy has begun, but the efforts required of us will be historic,” as he called on consumers and businesses to spend and hire. Consumer confidence in Canada rose for the seventh month in September, but fell unexpectedly in the U.S. on job security worries. U.S. home prices rose for the third month in July, but still are down 32.6% from their 2006 peak. In Germany, stocks surged as Chancellor Angela Merkel was re-elected and pledged to form a centre-right coalition.

Markets

A bumpy road to recovery

Early gains in the week were erased on Thursday as weak U.S. manufacturing and jobless data sent stocks lower. It was one year ago that the Dow Jones Industrial Average suffered its biggest point drop ever – but also its largest gain soon after. In the fourth quarter of 2008, the S&P 500 moved 3% in one day a stunning 29 times. The extreme market volatility seen last year has abated, but stocks are expected to remain in a volatile environment as the recovery picks up.

On Monday, Bombardier shares surged when its joint venture in China won a US$4-billion contract to build 80 high-speed trains. Apple’s iPhone will go on sale in China in October for about US$700. The iPhone App Store hit 2 billion downloads, with users buying 6 million apps per day. Mergers and acquisitions continued with Xerox buying Affiliated Computer Services, while Abbott Laboratories will acquire a division of Solvay. Meanwhile, British regulators gave Kraft a November 9th deadline to make a formal bid for Cadbury. In the lead-up to the holiday season, Wal-Mart unveiled a list of 100 toys for $10 each, and Toys “R” Us is hiring 35,000 seasonal employees.

The month in review

September: One year later, recovery intact but fragile

September 15th marked one year since Lehman Brothers declared bankruptcy, setting off the worst financial crisis since the Great Depression. Canada’s economy is recovering faster than previously thought. Nonetheless, the Bank of Canada kept its lending rate at an all-time low of 0.25%, and renewed its pledge to hold rates until mid-2010. Canada’s banks

were ranked the soundest in the world for the second year in a row by the World Economic Forum, while U.S. banks were ranked 108th. Prime Minister Stephen Harper cautioned that while the recession technically may be over, the recovery is extremely fragile. Finance Minister Jim Flaherty insists that it would be a major mistake for developed economies not to continue stimulus.

Federal Reserve Chairman Ben Bernanke said the U.S. recession is technically over, with growth expected to show in the third quarter. The Federal Reserve kept interest rates unchanged at 0.25%, while giving its most upbeat assessment of the U.S. economy in 18 months and voting to end its US$1.45-trillion program for buying mortgage debt three months early.

G20 leads economic cooperation

At London’s G20 meeting, finance ministers agreed the world economy is stabilizing, but recovery is not established enough to start unwinding stimulus programs. Bankers’ pay is at the centre of discussions; Britain’s finance minister says “the party is over” for bankers who were at the heart of “this almighty car crash.” Bank of England Governor Mervyn King revealed that the Royal Bank of Scotland and HBOS had been just hours away from collapsing last October.

Loonie shows strength; gold tops US$1,000

As the Canadian dollar approached 94 cents U.S., the Bank of Canada repeated warnings that economic recovery may be hampered by the strength of the currency, but said it would ignore short-term volatility in its exchange rate. Gold climbed above US$1,000 an ounce as investors sought a hedge against a falling U.S. currency.

Canadian stocks regain October 2008 levels

Markets advanced in September, reaching levels last seen in October 2008. The TSX has gained 50% since its March 2009 low.

Mergers and acquisitions marry superheroes with princesses

Disney will buy Marvel Entertainment for $4 billion in its biggest deal since buying Pixar in 2006, T-Mobile and Orange will merge to create the U.K.’s biggest wireless operator, and Swedish sports car maker Koenigsegg has teamed up with a Chinese company to buy Saab from General Motors. Magna plans to buy a stake in Opel, GM’s European car division, but risks alienating customers VW and BMW. Canada’s biggest IT services player, CGI, surged on takeover speculation after Dell bid US$3.9 billion for Perot Systems, a 68% premium.

Smart phone wars

In technology news, new hardware and an alliance with Facebook could see Nokia catching up with rivals such as Apple and Research In Motion. Apple unveiled an updated line of iPods this month, while RIM’s quarterly profit and outlook fell short of analyst expectations, sending its shares down sharply. Google’s new Internet phone service, Google Voice, is expected to draw scrutiny from regulators.

Alternative energy: changing the tide

Nova Scotia was given the green light to test turbines in the Bay of Fundy. If viable, sea power could meet 10% of the province’s energy needs. First Solar struck a 10-year deal with the Chinese government to build the world’s largest solar field. Solar panels will blanket a desert area larger than Manhattan and generate enough energy to light 3 million homes. A123 Systems, a U.S.-based battery maker for electric cars, jumped 43% in one day after raising US$380 million through an initial public offering.

One year later: Growth emerges

Tuesday marked one year since Lehman Brothers declared bankruptcy, setting off the worst financial crisis since the Great Depression. U.S. President Barack Obama spoke to a Wall Street audience, lauding his administration’s moves to prevent future financial calamities and warning that further bailouts are unlikely. Legendary investor Warren Buffett also praised the U.S. government for its efforts to heal the economy. Federal Reserve Chairman Ben Bernanke said the U.S. recession is technically over, with growth expected to show in the third quarter, but warned the economy may remain weak for some time.

In Canada, Finance Minister Jim Flaherty insisted that it would be a major mistake for developed economies not to continue stimulus, and the Bank of Canada repeated warnings that economic recovery may be hampered by the strong loonie. Inflation was negative for the third straight month, but economists said it’s not deflation – taking energy out of the calculation, inflation would have been a healthy 1.4%. The Bank of England may reduce the Bank’s deposit rate to discourage banks from hoarding reserves and encourage them to buy more assets. Beijing filed a complaint with the World Trade Organization as the U.S. raised tariffs on Chinese-made tires, which have cost 5,000 U.S. jobs since 2004. 

Markets

Stocks rally and book sellers rejoice

The TSX index had a three-day run-up, hitting its highest level in almost a year on Wednesday as commodities and financial shares rallied. But on Thursday, stocks in Canada and the U.S. slipped on concerns whether recent market gains were justified, despite the latest round of solid economic data. The benchmark S&P 500 is now up 58% since its early March lows.

Magna’s second-largest customer, BMW, warned that their relationship could be in jeopardy if the parts supplier turns into a competitor. Magna plans to buy a stake in Opel, GM’s European car division. Nova Scotia was given the green light to test turbines in the Bay of Fundy. If viable, sea power could meet 10% of the province’s energy needs. Suncor is making deep cuts after its $22.7-billion takeover of Petro-Canada, eliminating 1,000 jobs, selling properties and reducing natural gas production. Booksellers are rejoicing as bestselling author Dan Brown’s new book, The Lost Symbol, sold over a million copies in the first 24 hours of its release; however, Amazon reported the e-book edition for its Kindle reader had actually outsold the hardcover version.

Canada bouncing back, but rates stay on hold

Canada’s economy is recovering faster than previously thought, the Bank of Canada (BoC) said Thursday. Nonetheless, the BoC kept its lending rate at an all-time low of 0.25%, and renewed its pledge to hold rates until mid-2010. Canada’s banks were ranked the soundest in the world for the second year in a row by the World Economic Forum, while U.S. banks were ranked 108^th.

At London’s G20 meeting, finance ministers agreed the world economy is stabilizing, but recovery is not established enough to start unwinding stimulus programs. Finance Minister Jim Flaherty said, “We agreed that we are not out of the woods . . . We must all remain focused on fully implementing our stimulus packages.” The International Monetary Fund called Canada’s economic strategy “large, timely, well-diversified and structured for maximum effectiveness.” The IMF raised its estimate for global economic growth in 2010 to 2.5%, from 1.9%. Rating agency Moody’s said on Tuesday that the U.S. government’s triple-A credit rating was safe and that the U.K. and Spain are unlikely to lose their top credit ratings.

Markets

Stocks rise as oil and metals rally; gold breaks $1,000

Rising prices for oil and metals helped push the TSX index to an 11-month high this week and the S&P index extended its gain to five straight days, its longest winning streak since November. Oil prices rose 6% since last Thursday and gold rallied above $1,000 an ounce for only the third time in history. The Canadian dollar surged as high as 93.56 cents, but fell back as investors weighed the risk of central bank intervention.

First Solar struck a 10-year deal with the Chinese government to build the world’s largest solar field. Solar panels will blanket a desert area larger than Manhattan and generate enough energy to light three million homes. Apple chief executive Steve Jobs unveiled a new iPod Nano equipped with a video camera and announced price cuts. In merger and acquisition activity, Telus bought Black’s Photo, adding 113 stores to its retail base; Cadbury rejected Kraft’s merger offer of US$16.7 billion; T-Mobile and Orange will merge to create the U.K.’s biggest wireless operator; and Swedish sports car maker Koenigsegg has teamed up with Beijing Automotive Industry Holding Co. (BAIC) to buy Saab from General Motors.