Yesterday was “catch-up” for the Canadian stock market and it did it with style and conviction. Toronto’s main stock index rallied sharply reclaiming most of last week’s losses, as higher oil prices boosted the energy sector. The TSX caught up with a rise by global stocks on holiday Monday when the Toronto stock market was closed. The energy sector jumped 5.5% to lead the market rally as oil prices hit a 6 month high.
The Toronto Stock Exchange’s S&P/TSX composite index added 3.46% finishing well above 10,000 again at 10,100.95, with all 10 of the index’s main sectors firmly in the black. The gains nearly recovered the commodity heavy index’s 4.6% loss for last week. Investors were largely “playing catch-up” with global stocks, which rose almost 3% on Monday, partly because of stronger than expected earnings results from Lowe’s, the #2 U.S. home improvement retailer. The commodity heavy TSX got a big boost from firmer commodity prices, with oil climbing more than 1% to settle at $59.65 (it has added another $1 this morning but expect trade to be volatile and gas prices at the pump have also increased by 3.4 cents) a barrel as a flurry of U.S. refinery problems fueled supply fears.
With so much cash sitting on the sidelines and many investors being underweight in commodities we are likely to start seeing some institutional buying as investors start putting their money to work again to ensure they don’t miss a market rally in commodities. In short, investors are willing to take on risk. Financials rose 3.7% as investors were reassured by news that several major U.S. banks are seeking to repay government bailout funds (see below).
In the United States, the Dow and S&P 500 dropped as financial shares declined and based on disappointing housing data (see below), but the Nasdaq advanced as investors bought up technology shares ahead of results from Hewlett Packard, a leading bellwether for the industry. After market close, Hewlett Packard, the world’s top personal computer maker, gave a more pessimistic revenue forecast for the fiscal year as it reported in line results, sending its shares lower. HP fell 3.9% in extended trade and stocks are looking slightly down to sideways for today (this morning).
Financial shares fell as the U.S. Senate passed a bill to curb sudden credit card interest rate increases and hidden fees, a move that analysts said would hurt the profits of major credit card issuers (this still needs some Congress input).
The Dow Jones industrial average fell 0.34%, the Standard & Poor’s 500 Index fell 0.17% and the Nasdaq Composite Index advanced 0.13%. The S&P 500 has climbed from a 12 year closing low on March 9th, rising 37.4% through May 8th but the benchmark index gave up some ground last week and is now up 29.8% since March 9th.
U.S. housing starts and permits fell to record lows in April, weighed down by a slump in multifamily units, according to data that still hinted the U.S. recession may be drawing to a close. The Commerce Department said housing starts fell 12.8% to an annual rate of 458,000 units last month, the lowest since records began in January 1959. The drop reflected a 46.1% drop in breaking ground for multifamily units and indicated homebuilding remains a drag on the economy. However, starts for single family homes, rose 2.8%, a 2nd straight gain that showed the worst hit part of the market was stabilizing.
Analysts said the decline in starts should help the housing market work through a huge stock of unsold homes and lay the foundation for a recovery from a 3 year slump. This was the main trigger of the economic downturn which was then compounded by the Collateralized Debt Obligation (CDO) and other derivatives. Compared to the same period last year, housing starts were down 54.2%. “This is essentially a good thing. It means supply will eventually come back in line with demand,” said Joseph Brusuelas, an economist at Moody’s.
While housing activity continues to fall, the report still offered glimmers of hope for an economy in its 17th month of recession. A National Association of Home Builders survey on Monday showed U.S. home builder sentiment surged to an 8 month high, with industry leaders hopeful the slump was nearing a bottom and market stability was around the corner. High unemployment and strained incomes are cooling consumer demand.
JPMorgan Chase and several other banks eager to escape the restrictions and stigma linked to government bailout funds may get the chance to do so in the next few weeks. Regulators are talking to big banks that want to repay funds received under the government’s $700 billion Troubled Asset Relief Program (TARP), the Federal Reserve said. No announcements on returning funds will come until around June 8th . JPMorgan Chief Executive James Dimon told shareholders he expects regulators will let a few strong banks repay TARP funds within weeks. Dimon made it clear that he was eager to escape strict regulations on compensation and other areas for TARP participants. Similar concerns have been voiced by other TARP recipients Goldman Sachs, Morgan Stanley. Bank of America the largest U.S. bank, which has said it hopes to fully repay TARP funds within the next couple of years, priced an offering of about 800 million shares, raising some $8 billion after the market closed. The stock sale may help the bank raise capital, after regulators told it to bolster its finances following a government “stress test” of its ability to handle a deep recession.
Last October, the Treasury stepped in with $125 billion of bailout funds for 9 of the largest U.S. banks, part of a plan to stabilize a system rocked by the collapse of Lehman Brothers. Regulators wanted banks to have enough capital to lend during one of the worst recessions since the 1930s. Banks asking to repay TARP are among the 19 institutions that submitted to the stress tests to determine their ability to withstand a sharp economic downturn, the Fed said. Supervisors will seek more information from the banks and then recommend to Treasury whether to approve repayments. Before they make repayments, banks must show they can raise funds from private sources without any government guarantees. These conditions have fuelled a wave of stock and debt sales in recent weeks. Government officials have expressed concern that banks, in their eagerness to repay TARP (and avoid the headlines), may return the capital too soon, only to need it again later.
U.S. and European options are trading at their lowest levels since Lehman Brothers September collapse. The VIX, as the Chicago Board Options Exchange (CBOE) Volatility Index is known and Europe’s VStoxx Index have both retreated to their lowest levels since September 12th, the last trading day before Lehman filed the biggest bankruptcy in U.S. history. Volatility has fallen of a cliff (likely because it was too high to begin with) I don’t get the sense that many investors believe that there is going to be a complete meltdown of the economy, credit markets and capital markets. Government stress tests of banks reassured investors and better than expected forecast corporate earnings have helped. There is more comfort, there is more clarity and there is less fear and panic.
The VIX has tumbled 64% since jumping to 80.86, the highest in its 19 year history, on November 20th. The VIX reached an intraday record of 89.53 on October 24th. If you look at what caused the index to shoot to 90, it was the fear of the entire banking system imploding. Now investors believe that we have seen the worst and that less bad news turns to good news sooner rather than later. Two thirds of the 450 companies in the S&P 500 have released 1st quarter results which beat analyst projections.
Many people are feeling like the current ‘green shoots’ that we are seeing will eventually lead to a sustainable rebound and renewed growth but it will be a long road ahead although, the early bird will get the greatest reward.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
