You have to be invested to catch a rebound and you don’t want to miss the big days on the upside (as painful as the bad days can be on the downside).
Yesterday, Canada’s main stock index surged more than 5% to its highest close in 6 weeks (yes, only 6 weeks but… these 2 ½ weeks were started by a really painful 3 ½ weeks) as a massive takeover of Petro Canada (the former government controlled crown corporation) and a 2nd massive U.S. plan to “rid” banks of their so called “toxic assets” helped boost investor sentiment. A United States plan to buy up to $1 trillion in toxic assets is a move that will be critical for a U.S. economic recovery (more on this later).
Energy advanced as the price of oil hit a 3-month high and as Suncor Energy agreed to buy rival Petro Canada for about C$18.43 billion creating a global energy giant. Shares of Petro Canada jumped 20.4%. The Toronto Stock Exchange’s S&P/TSX composite index rose 5.32% to close at a session high of 8,598.51 (that is 1,500 points since the most recent low). The financial sector led all gains with an 8.9% gain while the energy group followed with a gain of 7.4%. The Canadian dollar also appreciated relative to the U.S. dollar.
In the United States, stocks jumped and the S&P 500 and the Dow industrials index posted their biggest single day percentage gains since late October after Wall Street finally got what it was asking for from the government. In short, relief for the battered banking sector and more data suggesting the housing market could be on the mend or at least not getting worse.
The success of the Treasury’s newly announced plan is dependant on the private sector and private investment. Investors were encouraged when several large investors said they would participate in what has become a key part of the government’s efforts to unlock credit markets and revitalize the recession-hit economy.
Banks led the rally, with Citigroup up 19.5% to $3.13 and Bank of America up 26% to $7.80, the S&P financial sector index rallied nearly 20%, though they remain down more than 23% year-to-date. Removal of toxic assets from banks’ balance sheets is seen as a crucial step in allowing banks to make new loans and rebuild trust and confidence.
The Dow Jones industrial average jumped 6.84%, the Standard & Poor’s 500 Index jumped 7.08% and the Nasdaq Composite Index jumped 6.76%.
An unexpected rise in housing sales, seen as a key to an economic recovery, also boosted investor sentiment. Data showed the pace of sales of existing homes in the United States rose 5.1% in February, the biggest increase since July 2003.
Even with the rally, analysts said the market had been due for a bounce given the damage incurred when stocks slid to 12-year lows earlier this month. Global stocks remain down year-to-date and still have had one of their worst starts to the calendar year for a very long time (but a lot of that doesn’t seem to matter anymore).
The government’s bank plan involves generous government financing (just like last time) to get investors to buy up toxic assets with tax payers and the government. The Treasury Department will kick off the financing for its Public/Private Investment Program with $75 billion to $100 billion that will come from the $700 billion financial bailout fund approved by Congress last fall. This amount will be matched by private investors and other government agencies and could add up to $1 trillion (just remember that the Fed announced a trillion initiative last week of their own).
For every $100 in mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan provided in many cases by the Federal Deposit Insurance Corp.
In announcing the program, Treasury Secretary Timothy Geithner pleaded for patience. Geithner also defended the decision to have the government carry so much of the risk. He said the alternative would have been to do nothing and risk a more prolonged recession or have the government carry all of the risk.
Geithner also said there would be significant advantages from having private market participants bidding against each other to set prices for which the bad assets will be purchased. “There is no doubt the government is taking risks,” he told reporters. “You can’t solve a financial crisis without the government taking risks.” Geithner has said that the country cannot afford to simply wait for banks to work off these bad assets over time.
This morning oil prices are down about 1 per cent and US futures are also pointing down.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
