Canada’s main stock index rose yesterday as commodity prices ticked higher and shares of Potash rallied after billionaire investor George Soros’s hedge fund raised its stake in the company. The news was a bullish indication for investors who pushed the stock price higher. Strength in commodity-linked stocks came as the price of oil settled above $79 a barrel, while bullion and base metals prices were higher.
The S&P/TSX composite index finished the day up 117.74 points, or 1.02%, at 11,630.00, closing higher for a 3rd straight day. Earlier in the day the index touched its highest level since late September. The market is now within striking distance of its 2009 high of 11,648.55. A move above this would bring it to levels not seen since October of last year when the global financial crisis was in full swing. A break above the 2009 high would cause certain investors to cover positions and other investors to jump in.
Oil prices rose slightly as demand for oil products supported crude prices, outweighing pressure from a stronger U.S. dollar. Investors have scrutinized economic data in recent months for signs of global recovery and a potential rebound in energy demand. Markets expect the Federal Reserve to keep interest rates near zero for some time, and this sentiment has weighed on the dollar and fueled gains in raw materials in recent weeks. Gold prices inched up to touch another record high as inflation worries and economic uncertainties continued to encourage buying in the commodity. The view that the U.S. dollar will remain weak is a key support that is helping gold stay above $1,130 per ounce. Gold is seen as a hedge against inflation, which erodes the value of paper assets. The International Monetary Fund (IMF) said it sold 2 tons of gold to the central bank of Mauritius at prevailing market prices on November 11th. The report follows news that the IMF sold 200 tons of gold to India early in November, a factor that drove gold prices to record highs above $1,100.
In the United States stocks rose to fresh 13-month highs as upbeat broker reports on improving prospects offset disappointing holiday spending outlooks from Target and Home Depot which are key retailers. Even so, the underlying tone was negative as investors fretted about the strength of the recovery and the recent rally, and more stocks fell rather than rose even though the overall market was up.
A weak outlook for the key holiday season weighed on investor psychology since consumer spending accounts for about 2/3rds of the U.S. economic activity and is a key factor in corporate profits. The Dow Jones industrial average rose 0.29%, the Standard & Poor’s 500 Index rose 0.09% and the Nasdaq Composite Index rose 0.27%.
The consumer is restrained and we are still in a very tough economy, with a 26-year high in unemployment and consumer credit being reduced. So retailers have to work really hard to get through this holiday season. Data also showed that U.S. industrial output rose less than expected in October making this another headwind, overshadowing news that the Producer Price Index (PPI), a gauge of wholesale inflation, was tame last month.
This suggests that the economy’s recovery from a severe recession was losing some steam as government stimulus faded. The reports painted a picture of a sluggish recovery from recession with ample slack to cool inflation. They were likely to reinforce the U.S. Federal Reserve’s commitment to keep interest rates near zero for an extended period.
In short, expect a very “tepid” recovery. The economy is still very dependent on government stimulus, including monetary stimulus. Industrial output edged up 0.1% in October after a 0.6% advance the prior month, the Federal Reserve said, as auto manufacturers scaled back following the end of the popular “cash for clunkers” incentive in August.
Treasury Secretary Timothy Geithner said yesterday that the economy was likely to grow at a more moderate rate than in past recoveries as households worked to reduce their debts.
High unemployment and untapped industrial capacity after the worst U.S. recession in 70 years have suppressed prices, but some fear massive efforts by the government and the Fed to restore growth could ignite inflation although, with high employments and low capacity utilization that may take some time. The Fed’s report on industrial output underscored the level of “inflation-cooling” slack in the economy. Capacity utilization inched up 0.2% to 70.7%, a rate 10.2% below the 1972-2008 average.
Top home improvement chain Home Depot reported quarterly results that beat analysts’ estimates, but made a forecast that suggested weaker results at the end of the year and said a recovery might not take hold until the 2nd half of 2010. Home Depot and rival Lowe’s have suffered from the protracted U.S. housing slump as customers have put off expensive renovations. Lowe’s said on Monday it did not expect a housing market recovery to start until the middle of 2010.
The Obama administration last week extended an $8,000 1st time home buyer tax credit, added a $6,500 provision for move-up buyers and increased income limits. Eligible borrowers must sign contracts by April 30th and close loans by June 30th 2010 instead of closing by the end of this month. Although, don’t expect the expanded home buyer tax credit to be a permanent cure for the U.S. housing market. As the economy emerges from a recession triggered by the housing market crisis, increasing home sales is viewed as essential. Housing and related business account for about 20% of the economy, and more sales means more spending on everything from dishwashers to energy-efficient windows.
The housing credit has pulled many a wary buyer off of the fence, but it is not a fix to the mess of troubles that spawned the deepest housing slump since the Great Depression. This is a slow, tentative recovery, evidenced by the most recent reading of builder sentiment of the National Association of Home Builders. Its index remained at a low 17 in November while a reading above 50 indicates more builders view sales conditions as good than poor. In short, a sustainable recovery in residential real estate is still a long way off in the United States. In turn, if you see which sectors or stocks that have led the rally from March 9th they either have nothing to do with housing or are no long priced for bankruptcy (i.e. financial shares).
This morning European stock markets rose modestly after a mixed trading day in Asia as investors looked for renewed direction from key U.S. economic figures on inflation and housing due for release later today. Commodity prices and the Canadian dollar are up this morning as well.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
