Why metals are beating metals stocks

Desjardins Securities may be one of the few observers to stick with its forecast of no – repeat, no – U.S. recession in 2008. But if there is a recession, metal markets should be able to absorb the shock, according to John Redstone, an analyst at Desjardins.

“In our view, a U.S. recession would have much less impact on metal markets than in previous cycles,” he said in a note to clients. “Indeed, we would argue that metal consumption in the U.S. has already been reduced to a recessionary level.”

He showed that U.S. copper demand fell 4 per cent in 2007, aluminum demand fell 6 per cent, nickel demand fell 7 per cent and zinc demand fell 10 per cent – and Mr. Redstone does not expect a significant rebound through to 2009, when demand will still be below 2006 levels. Yet prices for these base metals have remained strong thanks to continuing demand from other places. (Yes, China.)

Still, the stock market appears to have a different view. Equities of commodity producers are underperforming their underlying commodities out of concern about the U.S. economy. According to Mr. Redstone, the mines and metals sub-index of producers had risen just 9.5 per cent for the 12 months ended Mar. 7, 2008. But over the same period, the London Metals Exchange Index of actual commodities rose 28 per cent.

“We believe the upward metal price movements on the LME in part reflect a more positive view for incremental world metal demand as driven by the BRIC countries (Brazil, Russia, India, China),” Mr. Redstone said. “Ultimately, the more positive market supply/demand fundamentals for base metals worldwide should reassert themselves in higher share prices for companies on the mines and metals sub-index.”

Jobs, Jobs, What Jobs?

Clearly, Canadian investors are in no mood for good news. Or, they simply just don’t care that Canada can churn out jobs when the U.S. is cutting them.

The S&P/TSX composite index dipped 130 points at the start of trading on Friday morning, down 1 per cent o 13,230, after Statistic Canada said the Canadian economy pumped out 43,000 jobs in February. Once again, banks were a major drag on the index. It has become something of a sport to watch Bank of Montreal plumb new depths. In early trading, the beleaguered bank was down another 1.8 per cent, to $41.23.

In the United States, the Dow Jones industrial average fell 120 points, or 1 per cent, to 11,921. No surprise here: Payrolls declined by 63,000, far worse than expected. The broader S&P 500 fell to 1294, down 11 points or 0.8 per cent in early trading. There is sport in watching Citigroup Inc. fall as well. It declined another 2.4 per cent in early trading, falling to $20.67 (U.S.).

Besides being force-fed awful jobs numbers for February, some investors may also be rattled by the fact that the broader S&P 500 broke through an important technical barrier on Thursday, closing lower than its January trough to a new 18-month low – a sign that maybe there is no floor to this stock market correction after all. Now, many investors will be looking at the index's intraday January low as another technical indicator. That low is 1270, or just 24 points away.

In Europe, the selling accelerated after the U.S. jobs numbers were released. The U.K.’s FTSE 100 fell 1.4 per cent and Germany’s DAX index fell 1.8 per cent.

Looking for good News, It may be hard to find right now

Jobs, jobs, jobs – that’s what investors have on their minds on Friday morning before stock market trading begins in North America.

In Canada, the news was upbeat: The economy added more jobs than expected in February for the second month in a row, with payrolls rising by 43,300 – many of them in loonie-scarred Ontario.

In the United States, where – let’s face it – the majority of eyeballs are focused right now, the news was far less sunny: Payrolls shrank by 63,000 in February, defying an expectation among economists for a slight bounce and confirming some of the worst suspicions about the declining health of the U.S. economy. The unemployment rate decline 4.8 per cent, but only because many job seekers had simply given up looking for work.

Just before the jobs data was released, U.S. index futures were pointing down. Futures for the Dow Jones industrial average fell 109 points, to 11,961. For the broader S&P 500, futures fell 9 points to 1299.

Overseas, major stock market indexes followed the big declines in North America on Thursday. The U.K.’s FTSE 100 and Germany’s DAX index each fell 0.9 per cent on Friday. In Asia, Japan’s Nikkei 225 feel 3.3 per cent and Hong Kong’s Hang Seng index fell 3.6 per cent.

Margin calls, a realy bad sign, drives down market

North American stocks fell on Thursday at midday amid more concerns about blow-ups, writedowns and margin calls, unsettling a market that is already operating with frayed nerves.

The Dow Jones industrial average fell to 12,124, down 130 points or 1.1 per cent. The broader S&P 500 fell to 1316, down 18 points or 1.3 per cent. Both indexes are once again approaching their low-closes in January, a trough that many observers had hoped (and perhaps still do) would serve as a benchmark for a sustained rebound among equities.

Thornburg Mortgage and Carlyle Capital Corp. both missed margin calls, leading to concerns that credit-driven market mayhem is entering a new phase of rippling defaults. The downturn was widespread, with about 90 per cent of the stocks in the S&P 500 down, led by General Electric Co., Exxon Mobil Corp., JPMorgan Chase & Co. and American International Group Inc.

The S&P/TSX composite index is still well above its January low-point, thanks to the spectacular surge in commodity prices, but the trend is not looking favourable. The benchmark index fell to 13,454, down 150 points or 1.1 per cent.

See if you can spot a trend among the biggest drags on the index: Royal Bank of Canada fell 2.2 per cent, Barrick Gold Corp. fell 2.5 per cent, Bank of Nova Scotia fell 2.3 per cent, Toronto-Dominion Bank fell 2.1 per cent and embattled Bank of Montreal slid another 4.8 per cent.

In Europe, major indexes fell further later in the day there. The U.K.’s FTSE 100 fell 1.5 per cent and Germany’s DAX index fell 1.4 per cent.

Wild Ride on the Markets

Unless you had any doubts, Wednesday’s trading activity confirmed that the stock market is a nutty place right now. Major indexes rallied at the start of the day, partly on the hope that Ambac Financial Group Inc., the troubled monoline bond insurer, would be on the receiving end of a bailout that would remove a tremendous weight from the market’s shoulders.

It did, in the form of plans to raise $1.5-billion (U.S.) in common shares and equity units – and then the market gasped.

“The market was looking for between $2 billion and $3 billion. It got one and a half billion. It looks like the private equity money walked away from the deal, leaving Ambac short of market expectations,” said DealBreaker, the online business gossip site.

The Dow Jones industrial average went on a wild ride. It was up as much as 136 points before the Ambac news. It then fell more than 200 points, before recovering near the end of the day. It closed at 12,254.99, up 41.19 points or 0.3 per cent. The broader S&P 500 closed at 1333.70, up 6.95 points or 0.5 per cent.

In Canada, surging commodity prices weren’t enough to protect the S&P/TSX composite index from a similar ride. Before Ambac: up 173 points. After Ambac: down 160 points. The close: 13,603.32, up 126.51 points or 0.9 per cent.

The benchmark index was helped, of course, by rising commodity prices. Oil rose to a new record of $104.52 a barrel in the late afternoon, up $5. Gold also hit a new high of $988.40 an ounce, up $24.40.

The falling market and the net that may or may not be there

There is a lot of talk about the precarious situation the U.S. Federal Reserve is in these days. To borrow the analogy of the day, Ben Bernanke, the Fed’s chairman, is walking a tightrope between the competing demands of economic growth and inflation.

Enough, argues James Hamilton, professor of economics at the University of California, San Diego, on Econbrowser. The tightrope analogy is misleading because it implies there is an ideal solution for the Fed, in setting its key interest rate, that will accommodate both demands.

“In my opinion, there is no such ideal target rate, and the notion that we can address the difficulties with a sagely chosen combination of monetary and fiscal stimulus and regulatory workout is in my mind doing more harm than good. Better for everyone to admit up front just how bad the problem is, and acknowledge that there is no cheap way out,” Mr. Hamilton wrote.

“No, I don’t believe that Bernanke is walking a tightrope at all. But I do hope he’s checked out the net that’s supposed to catch him if he falls.”

The Big Banks Make Big Money no matter what

Royal Bank of Canada [RY-T], the country's largest bank, reported a 17 per cent drop in first-quarter profit on Friday to $1.245-billion.

The cash earnings of 97 cents per share fell short of analyst forecasts of $1.06 per share.

The profit, which was $249-million lower than a year ago, was hurt by $430-million (pretax) in writedowns related to U.S. subprime mortgages, the bank's municipal GIC business, its U.S. commercial mortgage-backed securities business and its U.S. auction rate securities portfolio.

The charges amount to $187-million after taxes and the resulting lower bonuses for employees are factored in.

“Almost all of our businesses within our four segments delivered solid performance this quarter and while a few have been affected by the difficult market conditions, our diversified business mix, proactive approach to risk management and rigorous operational discipline continue to underpin strong earnings,” stated chief executive Gord Nixon. The bank's profit one year earlier had been a record high.

The investment banking, or capital markets, division of RBC saw profit fall $92-million to $304-million primarily as a result of the writedowns. The stronger Canadian dollar also took a $24-million bite out of its earnings.

RBC's core Canadian consumer banking division showed no growth from a year ago, contributing $762-million to the bottom line, but profit was up 8 per cent once insurance gains a year ago are excluded.

Profit from the bank's insurance operations dropped by $96-million, or 52 per cent, to $89-million. Wealth management was down 14 per cent, or $30-million, at $181-million.

“We remain focused on aggressively growing this segment and, as our recent announcements demonstrate, we are committed to pursuing opportunities that leverage our strengths and position us to capitalize on favourable long term trends in wealth management,” stated Mr. Nixon. The bank recently announced plans to buy Phillips, Hager & North Investment Management Ltd. in Canada and Ferris, Baker Watts, Incorporated in the United States.

RBC's U.S. and international banking operations saw profits fall $36-million to $31-million this quarter, due to higher provisions for bad loans. The provision for credit losses rose to $61-million as the bank contends with more bad loans in its U.S. residential builder finance business as well as its commercial and consumer portfolios.

“Our U.S. residential builder finance business continues to face pressure as the U.S. economy remains under stress, but we are managing the current challenges and I am encouraged by the work being done to strengthen our retail banking operation in the U.S. Southeast,” Mr. Nixon stated.

Are things going Down??

U.S. stocks sold off on Thursday morning, following a worsening employment picture and a Wall Street Journal article in which Henry Paulson, the U.S. Treasury Secretary, called Washington’s aid proposals “bailouts” for reckless lenders and speculators.

The Dow Jones industrial average fell 95 points, to 12,599, in early trading. All 30 stocks in the blue-chip index were down, led by General Motors Corp., American International Group Inc. and American Express Co. All three stocks fell by about 2 per cent.

In the U.S., weekly jobless claims rose to 373,000, well above the consensus expectation for 350,000. As well, last week’s jobless claims were revised upward by 5,000.

“Of all the major indicators we use to signal recession, only the ISM manufacturing index is still some way above the usual trigger level,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a note.

In Canada, the S&P/TSX composite index rose 13 points in early trading, to 13,791. Canadian Imperial Bank of Commerce shares fell 1.5 per cent, to $68, after the bank reported a quarterly loss. But other banks that reported far rosier earnings were not faring much better. Toronto-Dominion Bank shares fell 0.4 per cent, to $67.47, even though the bank reported strong earnings in its first quarter. National Bank bucked the trend: its shares rose 0.3 per cent, to $51.24.

Energy stocks, led by Canadian Natural Resources Ltd., were a noticeable bright spot.

Savers, this budget's for you.

Get rid of your credit card debt first, then this change will help you more be able to use this savings plan to your advantage.

The new Tax-Free Savings Account introduced yesterday will help you earn more on your savings and investments by eliminating tax.

Prediction: If the government gets this budget passed, TFSAs will become ubiquitous in a few years. Even though the tax savings aren't dramatic, most households will have at least a few of these plans.

The TFSA is the sort of measure you rarely see introduced. It's simple to understand, almost universally applicable and free of restrictive rules.

Starting in 2009, Canadians 18 and older will be able to put up to $5,000 a year in a TFSA and rack up investment gains without paying taxes on them at any time, including withdrawal.

You don't get a tax deduction for contributing money to a TFSA as you do with a registered retirement savings plan, but the ability to invest in almost anything and be free of taxes is a huge offset.

TFSAs will be like RRSPs in that they're designed as an administrative label that can be attached to most any kind of investment, including stocks, mutual funds, bonds, guaranteed investment certificates and savings accounts.

The Finance Department envisions TFSAs as a complement or add-on to the RRSP, which is used to accumulate money to live on after you leave the work force. The TFSA, as the budget documents say, "is like an RRSP for everything else."

Saving for a car? You can drop $5,000 into a TFSA, invest safely in a high-interest savings account and then withdraw the money any time you want without paying a cent in taxes. Once you've pulled your $5,000 out, you can recontribute that money at any time. Likewise, you can catch up on contributions you didn't make in previous years, and you can contribute to a spouse's plan.

TFSAs will have a lot of appeal to people in their prime spending years. But the Finance Department expects that seniors will receive half the benefits of this plan because it will be an attractive place to invest funds they pull out of their retirement savings and don't need to cover living expenses. Seniors will be relieved to know that money withdrawn from a TFSA won't affect their eligibility to receive Old Age Security.

The TFSA will come as a serious disappointment to investors hoping the federal government would follow through on its election promise to provide a tax exemption on capital gains that are reinvested in six months. If you looked forward to being able to sell the family cottage and avoid taxes by reinvesting the money, the $5,000-a-year TFSA allowance won't cut it.

TFSAs will benefit a lot more people than the capital gains exemption, although the total cost to the federal government in lost taxes will be far less. If you invested the full $5,000 in a high-interest savings account paying 4 per cent, you'd pay $80 a year in taxes if you assume a 40-per-cent tax rate. In a TFSA, your tax bill would be zero. Those are modest savings, but they'll be welcome at this time of year when those tax slips roll in to tell us how much we owe on our savings and investments.

TFSAs will be administered in a way that's similar to registered investments like RRSPs and RESPs, and they'll be offered by banks, life insurers, credit unions and trust companies. Don't be surprised if these financial institutions charge annual administration fees for these plans, as they do for RRSPs and registered education savings plans.

You'll have a lot of freedom to invest using a TFSA, but the most obvious application is for the savings accounts that many people use to hold emergency funds or money to be used for a big expenditure like a car or home. Interest paid by these accounts is taxed at the highest rate, so the sheltering provided by a TFSA would be especially welcome.

Here are some other budget developments of interest to savers and investors:

The flexibility of RESPs is to be improved through measures that would allow them to remain open for 35 years, up from 25, and allow contributions to be made over a maximum of 31 years, up from 21.

The taxes individual investors pay on corporate dividends will rise slightly over the next four years to adjust for changes in corporate income tax.

Rules for Life Income Funds - they hold money taken out of pension plans when you leave a company - are being relaxed to make it easier to withdraw money.

Tax-free savings account

Capital gains and other investment income earned in a TFSA will not be taxed and withdrawals from the account are tax free.

CONTRIBUTING $200 A MONTH FOR 20 YEARS:

	Contributions	Investment income*	Tax savings
Taxable	$48,000	$28,480
Non-taxable	$48,000	$39,525	$11,045

*Based on a 5.5 per cent rate of return. For unregistered savings,

a 21-per-cent average tax rate is assumed.

SOURCE: BUDGET 2008

Euro soars to record $1.50 (U.S.)

It is getting very worrisome in the U.S. but on the bright side their exports are getting cheaper outside the U.S.

BERLIN — The euro climbed to a record high of $1.5057 (U.S.) in early European trading on Wednesday as sentiment increased that the U.S. Federal Reserve would continue its rate cut campaign.

The 15-nation currency hit the high around 8:30 a.m., local time, before falling back slightly to $1.5048, still above the $1.4967 it bought in late trading in New York on Tuesday, which was equal to the last record high it had reached, back in November.

Meanwhile, the Canadian dollar is continuing its surge against the American dollar. The loonie closed at $1.01, up 1.31 cents on the day after zooming as high as $1.02.

Along with the rise in the British pound, which is nearing $2 again, the surging euro will not be kind to Americans visiting Europe — they'll have to pay more for hotel rooms in Rome, entrance fees at the Louvre and chocolates in Belgium.

On the other hand, the stronger euro makes shopping trips to the U.S. more appealing to Europeans.

A higher euro also makes goods from the euro-zone more expensive for customers abroad, or cuts into manufacturers' profits if they try to keep the U.S. dollar price of products constant.

Gary Thomson, an analyst with CMC Markets in London, said the euro surged because markets are looking for clues from Fed Chairman Ben Bernanke about more rate cuts in the U.S. when he addresses legislators there later in the day.

“Inflation — or perhaps more to the point stagflation — remains a concern for the Fed as seen with yesterday's PPI data and as a result now that the most significant of psychological levels since parity has gone, we could see further downside pressures emerging for the greenback,” he said, referring to a string of disappointing economic reports out of the U.S. on Tuesday.

Those reports included the New York-based Conference Board's Consumer Confidence Index, which fell to 75 in February from 87.3 in January, its lowest level since February 2003. Meanwhile, the U.S. Labour Department reported that wholesale inflation rose by one per cent in January — more than analysts estimated — on rising oil and food costs. Finally, Standard & Poor's reported that U.S. home prices fell 8.9 per cent in the last three months of 2007 from a year earlier, its sharpest drop ever.

Those reports, along with remarks by Federal Reserve Vice-Chairman Donald Kohn that appeared to diminish inflationary concerns and focused instead on greater near-term risk to growth were seen as a clue that Mr. Bernanke is expected to signal more rate cuts.

But, at the same time, the European Central Bank, which has left its own rates unchanged since last summer, is expected to keep them at 4 per cent when it meets next week.

Lower interest rates can jump-start a nation's economy, but may weigh on its currency as traders transfer funds to countries where they can earn higher returns.

The British pound soared to $1.9920 from $1.9862 late Tuesday, while the U.S. dollar fell to 107.01 Japanese yen from 107.26 yen.

More Pain for Investors

With the dreadful fourth-quarter earnings season all but behind us, there's one thing we can say with certainty: U.S. profits will record their first back-to-back decline in nearly five years.

What's less certain is whether the first quarter, which has a little more than a month to go, will bring some relief after profits fell in both the third and fourth quarters.

Don't count on it.

As yesterday's ugly fourth-quarter results from Lowe's demonstrated, the housing slump is only beginning to leave its steel-toed boot marks on the bottom lines of Corporate America. Lowe's, the second-biggest home improvement retailer behind Home Depot, cited the “unprecedented” housing downturn in posting a 33-per-cent drop in profit.

And it warned there's more pain on the way.

“As we look to fiscal 2008, we know the next several quarters will be challenging on many fronts as industry sales are likely to remain soft,” said Lowe's chairman and chief executive officer Robert Niblock.

True, Lowe's stock rallied on the results, but that was only because the per share numbers, although awful, were a few pennies less awful than some analysts expected. It's hard to see how anyone can put a positive spin on a quarter in which same-store sales plunged 7.6 per cent. For fiscal 2008, Lowe's expects same-store sales to tumble by 5 to 6 per cent.

The ugly results from Lowes and other companies underline a key hurdle facing the stock market: How can stock prices rise when profits, a key driver of the stock market, have gone into reverse?

Lowe's has plenty of company. With 88 per cent of S&P 500 members having reported results as of last Friday, fourth-quarter profits are projected to plunge 21 per cent from a year earlier, according to Thomson Financial.

That is far worse than anyone predicted just a few months ago.

As of Oct. 1, profits were expected to rise 11.5 per cent, according to Thomson Financial. Why the massive reversal? A good deal of the blame goes to the financial sector, which has swung to an expected loss of $5.3-billion (U.S.) from a profit of $56.4-billion in the fourth quarter of 2006.

If the rapid deterioration in the earnings outlook has taught us anything, it's that estimates weren't nearly pessimistic enough to reflect the extent of credit-related losses piling up on Wall Street and spilling into the broader economy. Which is why the current first-quarter forecast – earnings are expected to slip just 0.3 per cent from a year earlier – should be viewed with suspicion.

Indeed, first-quarter estimates have already come down sharply, just as they did in the fourth quarter.

On Oct. 1, the expectation was that first-quarter profits would rise 10.6 per cent. By Jan. 1, the number had fallen to 5.7 per cent. Now, the projection has dipped into negative territory.

The trajectory here isn't encouraging. With tens of billions of subprime-related paper still sitting on the books of financial institutions, more writedowns are a certainty.

And that all but guarantees that the first quarter will be the third in a row in which profits tumble from year-earlier levels.

To be sure, there will be some pockets of strength. The technology sector, for example, is expected to post fourth-quarter earnings growth of 26 per cent, followed by energy, up 21 per cent.

As yesterday's triple-digit gains on the Dow Jones industrial average and S&P/TSX composite index prove, there's no shortage of hope out there. But until the profit recession shows signs of bottoming out for real, it's hard to see how such rallies can be sustained.

Your Money

What's your best response to market volatility?



With the wild swings in the market, you're sure to be inundated with advice. Buy. Sell. Hold. What should you do?


Here's how our professionals see it:

1. Don't make any move out of panic
In the last decade alone, we've seen the Mexican peso crisis, the collapse of Barings Bank, the Asian flu, 9/11…and more.

There is always a risk of some volatility in the market. But there have also been rebounds from the extremes. Over-reacting too soon is, in itself, the biggest risk. Stay calm.

2. Have a sound written financial plan
Your ability to stay calm will be enhanced if you have a sound written financial plan in place. A solid financial plan and roadmap must be the foundation of financing your dreams. Make sure you have a process in place that keeps you on track and in line with your investment objectives.

Put it in writing. This will ensure that you and your advisor are covering all the bases.

3. Ensure that the plan is being monitored constantly
Economic and market conditions change – frequently. As well, there is a plethora of new financial products and instruments. “Set it and forget it” no longer works.Your plan must be monitored constantly – if possible, through an automatic process that doesn't depend on your advisor being busy or not busy. In an ideal world, your portfolio should be revisited at least on a monthly basis.

4. Ensure that the plan is being rebalanced whenever necessary
Rebalancing is critical, and your portfolio should be adjusted according to current economic conditions.Your investment mix should be realigned, and replacements made, when and as frequently as possible. It's imperative that this occur on a proactive and ongoing basis – as opposed to reactive and according to the market. Make absolutely sure this is happening. Are you hearing from your advisor regularly?

5. Don't fall into the strategic inertia trap
Diversification strategies that may have worked well in the past are not guaranteed to work well now. Some diversification strategies may no longer be effective – your strategies must keep up with the times.A well balanced and diversified portfolio is the critical element in surviving volatility in the market.

6. Stay true to the plan
If your portfolio is being monitored constantly – and if your portfolio is being rebalanced proactively – then it becomes easier to stick to the plan. Don't get side-tracked by dramatic events or the swings of market volatility, but trust the plan to respond to new challenges (as well as new opportunities).

Of course, if your plan is stale and your advisor isn't monitoring it constantly and rebalancing it as needed, then you are at much greater risk and it becomes much easier to fall prey to the crisis mentality of market swings.

So the key first step right now is to take a good hard look at that plan, in the light of the points made above.

Thanks to the Investment Planning Counsel