The Toronto Stock Exchange (TSX) Index did not participate in the Obama mania yesterday. The index fell 3.8% as a “relentlessly” gloomy and deteriorating global economic outlook sparked a broad based sell-off for the stock market led by the influential energy and financial companies (although, I give a lot of credit to Canadian banks for currently avoiding the worst of the mess but they still have gotten dragged down).
While oil prices did jump 6% ahead of the expiration of the February U.S. futures contracts, energy shares led the TSX retreat, slumping 6.8%. Shares of Suncor Energy, slumped 15.84% after Canada’s 2nd largest oil sands producer reported a quarterly loss, slashed capital spending and halted a C$20.6 billion oil sands expansion. They are the latest oil sands producer to cut expansion plans and many analysts suggest new projects need oil prices to be much higher than the current levels. In short, in the future we’ll have shortages of oil and the oil price will go up as we lose supply (which won’t come back in short order).
The TSX opened slightly higher after the Bank of Canada (BofC) cut its overnight interest rate by 0.50% to 1% but the stock market quickly turned negative and stayed in the red all day (it was interesting to note that this is the 1st time the Canadian Central Bank said that we are in a recession).
Canadian Banks shares lost 5.8% over a lack of confidence in the global banking sector after Royal Bank of Scotland announced the biggest loss in British corporate history earlier in the week. The Royal Bank of Scotland did promise to make 6 billion pounds ($8.7 billion $US) available to U.K. borrowers as the lender took another step toward full government control and government obligations (the government now owns 70% of the common stock). In exchange for government guarantees (get this) on losses from ‘toxic debt’, the bank will have to sign a binding agreement with the Treasury (of the U.K.) on how much it will lend and on what terms. Auditors will move in to check if the bank is following the government directive (in short, lend the money, don’t hoard it and get the money in motion to get the economy going in Britain). “We’ll be one of the first guinea pigs,” RBS Chief Executive Officer Stephen Hester said.
U.S. President Barack Obama’s highly anticipated inauguration failed to lift stock markets as the focus remained on a broader banking crisis. In short, there’s a lot of hype but no instant solution and the solutions that were implemented are not working. Although, investors thought there might be a silver bullet, Obama did not reveal any details on how to solve the crisis facing the U.S. economy in his inauguration address (but he did want to rally American’s to ‘rebuild’ America).
The Dow Jones industrial average fell 4.01%, the Nasdaq composite index fell 5.78%, the S&P 500 fell 5.28% and the S&P Financial index fell almost 17% to its lowest level in 14 years.
The Chicago Board of Options Exchange (CBOE) VIX index (my favourite index) spiked again yesterday by 10 points to 56 or more than 22%. The index was less than 40 last week and we really have seen these levels of fear since last November when stock markets touched their most recent low point. Stock markets remain ahead of this key ‘support’ level but stock markets have lost a significant amount of momentum and are off to their 2nd worst calendar year since 1933 (last year was the worst start). This sounds a little like Ground Hog day again but…. There is some good news in all this – banks shares have dropped so much they are no longer a significant weight in the global equity index but yet they control all the flow of money around the world. The lack of accessible credit, trust and confidence is causing investors to sell and ask questions later. Stock markets hit a low on November 20th but we are back at the December 1st levels!
Thus, will it ever turn around? First Congress and the Senate in the United States will not be allowed to adjourn until they agree on next steps and a stimulus package which must help stabilize banks, place a floor on real estate prices and get people working again (with a token tax cut). This will likely mean either splitting certain banks into two (good bank and bad bank) or nationalizing the bank. Investing in infrastructure, giving certain tax credits and allowing certain business to fail or complete an order bankruptcy or restructuring.
There are some other positives. IBM did beat analyst estimates after the bell yesterday, stocks are very cheap from a valuation perspective and governments are willing to avoid a major bank bankruptcy at almost any cost (at least that currently seems to be the case). The next step is to have Central Banks and Governments announce a financial structure for Banks that actually works (which is either a good bank/bad bank scenario or the nationalization of a bank both less than desirable but both likely more effective than the current strategy).
Europe is off 1% this morning (not bad) and U.S. futures are currently pointing toward a small rebound.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
