Canada’s main stock marketed finished lower for a 2nd straight day yesterday as worries about the dangers of a possible swine flu pandemic pulled down commodities prices. Commodity & energy related stocks account for about 40% of the Canadian stock market and these stocks led the way lower.
The energy sector dropped 1.22% as oil prices fell below $50 a barrel on expectations of a swine flu related drop in demand (less travel). Oil prices have been fairly volatile but they’ve been trying to hold around $50 level.
The materials sector fell 1.63% as gold, the precious metal, fell below $890 an ounce on “technical selling”.
The S&P/TSX composite index closed down 0.5%. Not bad considering earlier in the day (and in the week) the index fell as much as 1.3%, its lowest level in nearly a week. It clawed back some losses after data showed U.S. consumer confidence in April had its biggest jump in more than 3 years.
Fears that swine flu may spread has put pressure on global stock markets but the losses have been relatively minimal. New Zealand and Israel confirmed cases of swine flu to become the latest countries hit by the virus that has killed 149 people in Mexico. Canada’s swine flu cases jumped to 13 but all cases were considered mild.
U.S. stocks fell as new worries that major U.S. banks may need to raise more money offset the more reassuring economic data that suggested the worst may be over. A big dividend boost from IBM also helped offset some of the bad news.
U.S. regulators (running the bank stress tests) have told Citigroup it may need to raise more capital, sources told Reuters. The Wall Street Journal reported that Bank of America also is talking to the government about its capital condition and the shortfall could amount to billions of dollars.
Data showed the decline in U.S. house prices slowed in February while consumer confidence in April had its biggest jump in more than 3 years (as mentioned).
IBM stated that its board of directors approved a 10% increase in its dividend and authorized a stock buyback, highlighting resilience in a tough economic climate. Although Wall Street closed out the session down, the major indexes recovered from their session lows when they slid more than 1%.
The Dow Jones industrial average slipped 0.10%, the Standard & Poor’s 500 Index slipped 0.27% and the Nasdaq Composite Index slipped 0.33.
Citigroup is talking to the U.S. government about its capital levels after receiving early results of its stress test, but if it needs more capital, the bank does not expect to get it from the government, people familiar with the matter told Reuters. Bank of America’s stock dropped 8.6% while Citigroup dropped 5.9% to $2.89 (dropping over 25% in a week). The banks issues could be compounded if unemployment goes up and consumer credit losses climb.
The Conference Board said its sentiment index climbed to 39.2 this month from an upwardly revised 26.9 in March. The April reading, which was above economists’ median expectation of a reading of 29.8, was the highest since November 2008. It followed news showing U.S. house prices tumbled nearly 19% in February. But for the 1st time in 16 months, the fall did not set a new record, according to the Standard & Poor’s/Case-Shiller Home Price Indices.
Together, the two reports support arguments that the U.S. economy is at least reaching bottom, even though huge problems in the financial sector and severe job losses mean growth may still be a distant prospect.
While hopes on the economy appear to be rising, sentiment faces tough obstacles based on fears of a possible global flu crisis and renewed worries about the health of some U.S. banks. Analysts attributed some of the confidence recovery to the rebound in stock prices, which staged an astounding rally of about 30% between mid March and the end of April.
Chrysler must have their act together before Thursday’s U.S. government deadline, to prove that the company can be viable again. Chrysler employs more than 40,000 factory and salaried employees. The company has been racing to overhaul its cost structure and secure the lone option the Obama administration believes is workable an alliance with Italy’s Fiat SpA.
Fiat’s Chief Executive Sergio Marchionne was quoted by the president of the Canadian Auto Workers (CAW) late yesterday as saying that Chrysler would likely enter Chapter 11 bankruptcy for a period. U.S. officials, including Senator Carl Levin of Michigan, told Reuters that a bankruptcy filing, if needed, would be launched with survival in mind.
The deal reached with major banks late on Monday would wipe out $6.9 billion in Chrysler debt in exchange for $2 billion in cash but no equity in a new company.
The development with lenders came after a weekend agreement between Chrysler and the United Auto Workers to modify the union’s labor contract and reduce the amount of money Chrysler would need to contribute to a retiree healthcare trust.
The UAW would end up owning 55% of the automaker under the concessionary contract. Members must vote on it by tonight. The Canadian Auto Workers ratified a deal with Chrysler last weekend. Fiat would eventually own 35% of Chrysler stock.
Chrysler has been kept afloat with $4 billion in federal loans since the start of the year and could get another $500 million to complete its restructuring.
GM has received $15 billion in government subsidies and could tap another $3 billion before its June 1 deadline to prove it can survive on its own.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
