Canadian stock markets closed higher Friday after Federal Reserve chairman Ben Bernanke said the U.S. central bank has the tools to keep America’s economic recovery on track.  The S&P/TSX composite index was down over 200 points in the morning but ended the day up 43.2 points at 12,327.51.  The index was up 2.66% for the week.

Bernanke did not specify what tools the Fed could use but markets were reassured as he said that the Fed’s scheduled meeting on interest rates next month would be expanded to 2 days instead of just 1 to allow for a “fuller discussion” on what the central bank could do.

Bernanke told an annual economic conference in Jackson Hole that while record-low interest rates will promote growth over time, the weak economy requires further help in the short run. He hinted that Congress may need to act to stimulate hiring and growth.  While expressing long-term optimism, Bernanke said the Fed found recent developments troubling and saw a low inflation as staying low.

The Fed chairman’s comments came on a day after the U.S. Commerce Department said the economy grew at a 1% pace in the 2^nd quarter.  That means the U.S. economy expanded only 0.7% in the 1^st six months of the year.

So corporate profits are at near record highs and the U.S. economy is on the edge of a renewed recession.

In the United States, Wall Street posted its 1^st weekly gain in more than a month as Fed Chairman Ben Bernanke raised hopes for more stimulus for the economy at the U.S. central bank’s September meeting.

Initially stocks fell after Bernanke stopped short of describing detailed plans to strengthen the ailing economy. But the market turned higher, as investors concluded the Fed was leaving the door open for action even though many traders believe it has limited power to pull the economy out of a rut.

He did not give the market the green light for QE3 but he also did not give the market the red light for QE3.

The Dow Jones industrial average markets ended up 134.72 points, or 1.21%, at 11,284.54, the Standard & Poor’s 500 Index was up 17.53 points, or 1.51%, at 1,176.80 and the Nasdaq Composite Index was up 60.22 points, or 2.49%, at 2,479.85.

For the week, the Dow rose 4.3%, the S&P gained 4.7% and the Nasdaq rose 5.9%.

As Irene bore down on North Carolina, tens of thousands of people evacuated and East Coast cities, including New York, and braced for a weekend hit from the powerful storm.  The New York Stock Exchange plans to open for trading as usual this week, but because of the possibility of flooding, a decision was not be made until the weekend.

This morning stock index futures advanced as European and Asian equities were boosted partly on a possible merger between two big banks in Greece.

The Greek stock market rose more than 11% in response and Greek banks jumped 30%.  Investors appeared to ignore a call by the new head of the International Monetary Fund for global policymakers to pursue urgent action to prevent another recession, including forcing European banks to bulk up their capital.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

The Canadian stock market had a triple-digit loss on Friday as investors worried a bit more about whether the U.S. and global economies are headed for another recession that could hurt corporate earnings or profits while hitting consumer confidence.

The S&P /TSX composite index lost 179.24 points to 12,007.47, down another 1.5%. It’s still slightly ahead of its lowest close for the year of 11,671 points from August 8^th of this year.  In early trade, the index had been in positive territory at several points but the selling accelerated throughout the afternoon as investors digested comments from Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney, who testified before the Parliamentary finance committee about the state of Canada’s economy after 2 weeks of excessive volatility in stock markets (after a downgrade of the U.S. government’s credit rating and worsening fears about Eurozone debts problems.)

Canadian Finance Minister Jim Flaherty told a Parliamentary committee Friday that the current global economic turmoil will impact the Canadian economy, but so far his budget projections remain on track.  “While Canada experienced greater than expected growth in the first quarter, that is expected to be balanced out by a softer than anticipated second quarter,” the minister said. The committee also heard from Bank of Canada governor Mark Carney, who said the U.S. is facing its weakest recovery since the Depression, but is not headed toward another recession. On Thursday, economists with Morgan Stanley said that the U.S. and Europe are “dangerously close to recession,” adding, “it won’t take much in the form of additional shocks to tip the balance.” JPMorgan Chase & Co. followed suit on Friday, slashing its 4^th quarter growth forecast to 1% from 2.5%.

The S&P/TSX lost 4.3% for the week alone and is now 15.9% below its April 5^th high of 14,270.53 for the calendar year making this a clear stock market correction.  The Canadian stock market took a big hit on Thursday, losing nearly 400 points, or 3% in another day of volatility after relative calm earlier in the week. The sell-off was sparked by a spate of bad economic news from the U.S. and around the world that raised fears another recession may be on its way.

StatsCan said on Friday that the pace of inflation eased in July to 2.7%, slower than the 2.9% economists had expected. It was the 1^st time that inflation was below a pace of 3% since February.

Gold prices added $30.20 to close at its latest record high of US$1,852.20 per ounce (this morning they have added another $18.00).  Crude prices lost 12 cents to US$82.26, finishing down about 4% for the week.  Canadian financial companies were one of the biggest decliners, with the sector down 3.2% ahead of the start of earnings season this week and on fears of exposure to embattled European banks.

In the United States, Wall Street ended a 4^th week of losses on a down note on Friday on growing fears of another U.S. recession and destabilization in Europe’s financial system.  Investors already reeling from big losses were hit by a dismal outlook from Hewlett-Packard, which dropped nearly 20% a day after the company said it may spin off its PC business, the biggest in the world, and lowered its outlook, its worst day since the stock-market crash of 1987.

It was the latest discouraging event in a month full of bad surprises ranging from the U.S. credit rating downgrade to a sharp slowdown in world growth. The S&P has lost 13.1% month to date on track for its worst month since October 2008.  The losses follow a day of sharp declines on Thursday.

In short, there is a crisis of confidence, more so than an economic crisis or financial crisis but worries that the United States and the global economy may be headed for another recession have shocked investors in recent weeks. Thursday marked the 6^th time in the past 2 weeks that the S&P 500 has moved 4% or more. Stocks dropped on Thursday amid speculation that European banks lack sufficient capital. Lars Frisell, the chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze. The market also declined after U.S. jobless claims rose with Philadelphia-area manufacturing shrinking by the most since 2009 and hopes for more stimulus from the Federal Reserve receded.

The Dow Jones industrial average fell 172.93 points, or 1.57%, to end at 10,817.65, the Standard & Poor’s 500 Index dropped 17.12 points, or 1.50%, to 1,123.53 and the Nasdaq Composite Index slid 38.59 points, or 1.62%, to close at 2,341.84.

For the week, the Dow ended down 4%, the S&P 500 dropped 4.7% (now down 11% year to date) and the Nasdaq lost 6.6%.  Cyclical companies most-tied to economic growth lost 10% last week, extending its loss since July 22^nd to 26% and falling to the lowest level since August 26, 2010.

The S&P 500 fell below 1,130, a key resistance level during last summer that is becoming strong support. Technical analysts see the next support at 1,100.  The S&P 500 is down 17.6% from its April 29^th closing high, edging close to bear market territory.  Wall Street typically defines a correction as a drop of 10% from a recent peak, while a slide of 20% from a recent peak is a bear market.

U.S. stock futures are up (things could change), indicating the Standard & Poor’s 500 Index may halt its biggest 4-week drop since 2009, as investors weighed concern that the global economy is stalling with the cheapest valuations since 2009.  Current valuations of 12.2 times reported earnings are the lowest level since March 2009. Its price-earnings ratio is now 12.3, compared with the average of 16.4 since 1954, according to data compiled by Bloomberg.

Of the 485 companies in the S&P 500 that have reported quarterly results this earnings season, 71% have reported earnings above analyst expectations, according to Thomson Reuters. However, what will the 3^rd quarter look like?

Investors just want to stop the financial pain. Investors are buying safety, stability and downside protection. Although the stock market may be getting cheaper and cheaper, not many investors really care about valuations right now. Investors are concerned about a recession. They are investing based on the headlines.

There is some optimism that European Union regulators may push for joint bond sales by euro-area nations to help contain the debt crisis, putting pressure on Germany to drop its opposition. German Chancellor Angela Merkel attempted to stop speculation about common bonds, saying yesterday that she won’t let financial markets dictate policy.

Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben S. Bernanke to signal that the central bank will begin a 3^rd round of asset purchases to boost the economy, a scenario that some consider unlikely and would rather see the Fed do something creative and surprise the financial markets.

This Friday, Ben Bernanke is scheduled to speak in Jackson Hole, Wyoming, at an annual conference of central bankers. At the same meeting last year, Bernanke signaled plans for a 2^nd round of quantitative easing, or QE2, setting off a months-long rally in stocks.  Earlier in the month, the Fed in its Federal Open Market Committee (FOMC) statement, said it was likely to keep rates “exceptionally low” until at least mid-2013.

We are also seeing some developments out of Libya this morning which would suggest that oil production could resume from this country at some point in the near future which will keep oil prices in check.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

Things gathered some more steam this morning, reflecting mounting concerns the economy is heading into another recession and as some European lenders faced a short-term funding crunch, highlighting the risk of another banking crisis.

Nervous investors fled to the safety of core government bonds, Swiss francs and gold, which hit a record high.  European shares extended steep losses from yesterday, when they suffered their biggest daily slide in 2 ½ years.  U.S. stock index futures pointed to a weaker open on Wall Street, a day after the Nasdaq dropped more than 5% and the S&P 500 tumbled 4.5%. Futures for the S&P 500, the Dow Jones and the Nasdaq 100 were down between 1 and 1.2%.

A short selling ban imposed on financial stocks by some European stock markets last week appears to have had little impact. Shares in Europe’s biggest banks fell to their lowest in more than 2 years on funding fears, taking the weekly fall to near 10% and leaving the battered sector on course for a 4^th straight week of declines.

The MSCI world equity index was down 1.3%, with $1.4 trillion being wiped off valuations on Thursday and early on Friday which is equivalent to the size of the Spanish economy (one wonders why paying higher taxes but preserving equity values is not a better solution over the long-term.)

The sharp decline in stock markets is expected to have an adverse impact on household wealth, further undermining consumer confidence and demand in coming months (potentially more than just raising taxes or reducing government expenditures).

While investors fled stocks, spot gold hit a record high of $1,867.30 an ounce, putting it on track for the largest weekly gains since February 2009. The gold metal has rallied nearly 14% so far this month the best month since September 1999.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

The Canadian stock market followed global stock markets lower today.  The Canadian index closed nearly 400 points lower amid a global sell-off sparked by weak economic reports that spooked already nervous investors with an increased possibility of another recession.  The S&P/TSX composite index was down 392.9 points at 12,186.71 or 3.12%.

These fears sent gold up $28.20 to its latest record close at US1,822 as traders sought to store their money in the perceived safety of this asset.  The precious metal had earlier traded as high as US$1,830 per ounce.

Rising fears of another recession hit U.S. stocks, sending major averages sharply lower in a return to the extreme fluctuations endured a week ago.

New worries about the health of European banks set the tone before the market’s open, and a dismal report on regional U.S. manufacturing fueled a downward spiral in which the Dow dropped as much as 528 points, spurring a flight to safety.

The Nasdaq ended more than 5% lower, the S&P 500 more than 4% and the blue-chip Dow off more than 3%. Today marks the 6^th time in the last 2 weeks that the S&P has moved by 4% or more.

The Dow Jones industrial average fell 419.63 points, or 3.68%, to 10,990.58, while the Standard & Poor’s 500 Index declined 53.24 points, or 4.46%, to 1,140.65, and the Nasdaq Composite Index dropped 131.05 points, or 5.22%, to 2,380.43.  The losses were spread throughout various sectors.  However, American banks were hard hit, following losses in European financial shares, as Sweden’s financial regulator said his country’s lenders must do more to prepare for a worsening in Europe’s debt crisis. The KBW Bank Index of 24 stocks retreated 5.6%.  Banks also slumped after the Wall Street Journal reported that American regulators are intensifying scrutiny of the U.S. arms of Europe’s largest banks amid concern about the region’s debt crisis.

The losses resumed a slide in stocks that began in late July and seemed to moderate in the last couple of days.

Volatility jumped, with the Chicago Board of Options Exchange (CBOE) Volatility Index or VIX, a barometer of Wall Street anxiety or fear, up 38% at 43.56. More investors were taking out protective positions against declines in the market.  It really feels like a global buyers strike.  In short, we are dealing with a risk of a rapidly deteriorating negative feedback loop of weakening fundamentals (as analysts drop their earnings targets for corporations and increase valuations), inadequate sovereign policies (financial and monetary policies by various governments) and bad technicals (selling begets selling in the stock market as investors focus on liquidity and the increasing cost of accessing that liquidity).

The S&P 500 is now off 16.4% from its April 29^th closing high for the year, but the benchmark index still ended above last week’s low on August 9^th when the S&P 500 fell to 1,101.54.

Adding to the selling was a report from economists at Morgan Stanley that lowered the outlook for global growth and said the United States and the euro zone are “dangerously close to recession.”  The U.S. and Europe are “dangerously close to recession,” Morgan Stanley analysts said in the note. “Recent policy errors, especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence.”

U.S. equities slumped after a report showed that the Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009 (when stock markets hit bottom), from 3.2 in July. The August gauge exceeded the most pessimistic projection in a Bloomberg News survey in which the median estimate was 2. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.   This added to fears of an another recession.

History (if that is a gauge for the future) suggests the misery suffered by stock markets this summer should end soon, even if relying on precedent seems risky in this year of surprises.  Based purely on averages, the 4^th quarter of any year tends to be far better for equities than the 3^rd quarter.  Over the past 40 years, MSCI’s world index of developed stocks has gained an average of 3.7% in the 4^th quarter compared with a loss of 0.2% in the 3^rd quarter.

That might be little consolation for investors who have seen the index fall around 10% since the start of July.  Given that a number of analysts suggest that stocks are a good value today with the price-to-forward- earnings ratio for the index is 11.7 versus a 22-year average of 16.4 (not to mention the record low interest rates or the earnings yield spread) some have suggested that the time has come to buy.

Even with returns on many traditional safe-haven assets continuing to shrink (bond and gold prices continue to climb), investors might want to wait a while longer before jumping into shares, partly because the global economic climate is so fragile but also because historical precedent says they should.

The reason that the end of the year numbers look better than the rest of the year is in large part down to December or the Santa Claus rally. December is the best month for stocks, with average gains of 2.2% over the 40 years.  However, with averages you still have outliers, in the 4^th quarter of 2008, rather than rise the average 3.7%, the index crashed 22% when the collapse of Lehman Brothers accelerated a market drop that lasted well into the New Year.

This year it would not take too much for equities to get back into the black by the end of December.  Corporations are doing great. In the U.S. they are doing very well, Bank of America-Merrill Lynch reckons investor activity is now giving a “buy” signal.  However, there are big headwinds so the historical patterns may not repeat.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

The Canadian stock market finished with little change Friday as a strong U.S. retail sales report raised hopes that a market bottom is near after 3 weeks of intense volatility that brought the Canadian index well into official correction or bear market territory.

The S&P /TSX composite index added 2.4 points to 12,542.2, weighed down by declines in gold stocks as bullion prices declined. Investors were pleased with data showing that U.S. retail sales rose 0.5% last month; the best showing since a 0.8% advance in March. Investors also took in data showing the consumer sentiment index from the University of Michigan and Thompson Reuters tumbled to 54.9 in August - much lower than the 63.2 reading that had been expected. This is the lowest reading in decades.

Investors fretted about the European government debt crisis worsening, a growing feeling the U.S. is about to slip back into recession and the debate over raising the U.S. debt ceiling

Investors felt more positive about the financial sector after a short-selling ban on financial shares in four eurozone countries helped stabilize French banks. The stocks of French banks have been hit because of concerns they will be hit with massive losses from the European sovereign debt they hold. One European country after another has struggled with debt, with Spain and Italy becoming the latest to struggle.

The S&P/TSX has advanced by about 870 points over the last 3 days of the week as investors moved in to pick up stocks made much cheaper in the last few weeks. But the main index is still down more than 7% since July 22nd and down almost 13% from the highs of early March. Earlier in the week, it was down almost 20%.

The S&P/TSX ended the week up 380 points or 3.12%

In the United States after one of the most volatile weeks in a long time, U.S. stocks ended higher on Friday in a tentative sign that the worst of the selling may be over. Still, the market was down for the week and posted its worst 3-week decline since March 2009 when it hit 12-year lows.

The hope among investors is stocks are in the process of exhausting the selling and will stabilize at current levels and eventually resume an upward trend.

Analysts at Bank of America/Merrill Lynch said in a note the U.S. equities market is already fairly priced for a recession. This suggests any indication to even sluggish growth could boost stocks.

The Dow Jones industrial average gained 125.71 points, or 1.13%, to 11,269.02, the Standard & Poor’s 500 Index added 6.17 points, or 0.53%, to 1,178.81 and the Nasdaq Composite Index rose 15.30 points, or 0.61%, to 2,507.98.

It was the 1st 2-day rally on the S&P 500 since July 21-22.

For the week, the Dow fell 1.5% and the Nasdaq lost 1%. The S&P 500 fell on 11 of the past 15 days, dropping 12.4% in 3 weeks but stocks are off their lows especially their intra-day lows.

As mentioned the recent declines reflect softening U.S. and global economic data and a market perception that government leaders in Europe and the United States were running out of options to help their sputtering economies. The downgrade of the United States’ credit rating by Standard & Poor’s a week ago exacerbated those views.

This morning futures are looking marginally higher but expect the volatility to stay with stock markets in the short-term.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner

www.roicapital.ca
http://vosblog.roicapital.ca/

The Canadian stock market finished little changed Friday as a strong U.S. retail sales report raised hopes that a market bottom is near after 3 weeks of intense volatility that brought the Canadian index well into official correction or bear market territory.

The S&P /TSX composite index added 2.4 points to 12,542.2, weighed down by declines in gold stocks as bullion prices declined.  Investors were pleased with data showing that U.S. retail sales rose 0.5% last month, the best showing since a 0.8% advance in March.  Investors also took in data showing the consumer sentiment index from the University of Michigan and Thompson Reuters tumbled to 54.9 in August, much lower than the 63.2 reading that had been expected.  This is the lowest reading in decades.

Investors fretted about the European government debt crisis worsening, a growing feeling the U.S. is about to slip back into recession and the debate over raising the U.S. debt ceiling

Investors felt more positive about the financial sector after a short-selling ban on financial shares in four eurozone countries helped stabilize French banks.  The stocks of French banks have been hit because of concerns they will be hit with massive losses from European sovereign debt they hold. One European country after another has struggled with debt, with Spain and Italy becoming the latest to struggle.

The S&P/TSX has advanced by about 870 points over the last 3 days in the week as investors moved in to pick up stocks made much cheaper in the last few weeks. But the main index is still down more than 7% since July 22^nd and down almost 13% from the highs of early March. Earlier in the week, it was down almost 20%.

The S&P/TSX ended the week up 380 points or 3.12%.

In the United States after one of the most volatile weeks in a long time, U.S. stocks ended higher on Friday in a tentative sign that the worst of the selling may be over.  Still, the market was down for the week and posted its worst 3-week decline since March 2009 when it hit 12-year lows.

The hope among investors is stocks are in the process of exhausting the selling and will stabilize at current levels and eventually resume an upward trend.

Analysts at Bank of America/Merrill Lynch said in a note the U.S. equities market is already fairly priced for a recession. This suggests any indication to even sluggish growth could boost stocks.

The Dow Jones industrial average gained 125.71 points, or 1.13%, to 11,269.02, the Standard & Poor’s 500 Index added 6.17 points, or 0.53%, to 1,178.81 and the Nasdaq Composite Index rose 15.30 points, or 0.61%, to 2,507.98.

It was the 1^st 2-day rally on the S&P 500 since July 21-22.

For the week, the Dow fell 1.5% and the Nasdaq lost 1%. The S&P 500 fell on 11 of the past 15 days, dropping 12.4% in 3 weeks but stocks are off their lows especially their intra-day lows.

As mentioned, the recent declines reflect softening U.S. and global economic data and a market perception that government leaders in Europe and the United States were running out of options to help their sputtering economies. The downgrade of the United States’ credit rating by Standard & Poor’s a week ago exacerbated those views.

This morning futures are looking marginally higher but expect the volatility to stay with stock markets in the short-term.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

The Canadian stock market jumped yesterday by more than 400 points as investors bought up stocks across all sectors that had been beaten down in price during a series of drops that brought the TSX to its lowest level in a year.

The S&P /TSX composite index jumped 438.3 points or 3.76% to 12,109.26, even as the U.S. Federal Reserve acknowledged that the U.S. economy is weaker than it had thought with increasing risks, yet offered no new stimulus measures to soften the blow of deteriorating conditions.

The U.S. Federal Reserve concluded its meeting on interest rates with the announcement that it was keeping interest rates near zero. And the central bank added that it expects to keep rates low through mid-2013. The Fed had previously only said that it would keep rates low for “an extended period.”

The main Canadian index has fallen sharply the last 2 weeks, losing almost 9% in just the last 3 days, reflecting a lack of confidence that political leaders and central bankers can manage Europe’s debt crisis and mounting expectations of the U.S. going back into recession.

A downgrade of U.S. government debt by Standard and Poor’s last Friday cut investor sentiment and they sold.

As mentioned the Federal Reserve yesterday took the unprecedented step of promising to keep interest rates near zero for at least 2 more years and said it would consider further steps to help growth, sparking a rebound in stocks.

The Fed painted a gloomy picture, saying that U.S. economic growth was proving considerably weaker than expected, inflation should remain contained for the foreseeable and unemployment, currently at 9.1%, would come down only gradually.

The announcement demonstrated just how long the central bank expects it will take before the fragile economy can gather significant momentum.

U.S. stocks sank initially and then see-sawed wildly before a strong rally. The Dow ended up 4% at 429.92. Treasury yields sank with the 2-year note plunging to a record low of 0.1647% and the U.S. dollar sinking.

Markets will now be looking to Fed Chairman Ben Bernanke’s yearly speech at the upcoming Jackson Hole meeting for further clues into any additional policy easing the Fed might consider at its next policy meeting, in September.

There is plenty of doubt about the Fed’s power to stimulate the economy with rates already so low. Japan provides a disheartening example of a country that has kept borrowing costs low for many years without any notable spike in growth.

The Fed’s decision comes amid financial market turmoil as worries about the global economy escalate after an embarrassing downgrade of U.S. debt. In addition, fears remain that European efforts to put a safety net under heavily indebted Italy and Spain may not suffice to avert wider credit market disruptions.

Officials had been pinning hopes for an acceleration of U.S. growth in the second half of the year on a healing of supply chain disruptions from Japan’s natural disasters, a calming of Europe’s debt problems as governments committed to more sustainable fiscal paths and steady gains in business and consumer confidence in the United States.

But those expectations, along with the Fed’s forecast for a growth rate of between 2.7% and 2.9% in 2011, have appeared increasingly over-optimistic in recent weeks

This morning but Canadian and U.S. stocks are looking to open lower by about 1%

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

Things are rebounding this morning!

Today the U.S. Federal Reserve is scheduled to release a statement later this afternoon and investors will look for clues on how it may combat a market meltdown linked to fears of a new recession.

In the 1^st day since the United States lost the highest credit rating, equities suffered a massive slide on Monday, with the S&P posting its worst loss since December 2008 and nearing bear market territory.

Both the S&P and Nasdaq dropped more than 6% and the Dow lost more than 5% on the heaviest trading volume since the “flash crash” in May 2010.

The headlines of “fear and greed” will push the volatility both up and down – big time!

S&P 500 futures rose 17.2 points, the Dow Jones industrial average futures added 149 points, and Nasdaq 100 futures rose 34.5 points.

Even though fear remains, analysts said stocks could be nearing a bottom. They noted the S&P 500 was now more technically oversold than at any other time in the last 10 years.

The technical perspective would suggest that a 14-day relative strength index was at 16.5 percent. Generally a level below 20 attracts buyers.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

The S&P/TSX composite index closed with a loss of 491.75 points, or 4.04%, at 11,670.42. It has now lost 1,145 points over 3 trading days.   The Canadian stock market followed global equity lower; it was the news of the United States that moved everything around the world today.

In the United States stocks plunged, taking the S&P 500 down more than 6% on growing fears of a recession, exacerbated by the loss of the country’s triple-A credit rating.  Selling begat selling as more and more investors couldn’t handle the pain and hit sell thereby forcing prices lower and lower.  Traders also cited expected redemptions and margin calls for the sharp early afternoon declines.  In short, panic selling on heavy volume resulted in the S&P 500’s worst day since December 2008, with every stock in the benchmark index ending in negative territory (1^st time each stock declined in the index since 1996).

Analysts have highlighted that we are starting to see real disorderly selling.  The Chicago Board of Options Exchange VIX or Volatility Index which is Wall Street’s “fear gauge”, jumped 50% to end at 48. This marked the 1^st time the VIX has topped 40 since May 2010, when the “flash crash” occurred.

Perceptions that Washington is incapable of addressing the problems of rising debt and slowing growth have contributed to the selling. This was underlined by selling that picked up during a statement from President Barack Obama that offered few concrete ways to resolve the fiscal and economic problems.  In short, there is not a lot of future visibility.

The anxiety about the U.S. economy was matched by rising worries about Europe’s debt problems, where the latest initiative to buy Italian and Spanish bonds is far from enough to solve the euro zone’s debt crisis.

The S&P 500 is down 17.9% from its 2011 closing high, reached on April 29^th, putting the index close to the 20% decline from a recent peak that Wall Street defines as bear market territory.  European shares entered a bear market, the Stoxx Europe 600 Index has now fallen 21% from this year’s high on February 17^th of this year, the Russell 2000 Index of small companies slumped 8.9% today and is down 25% from its April 29^th high of this year.

Monday’s slide marked the 1^st time since last November that the Dow has fallen below 11,000.

Irrespective of the underlying issues it is panic.  The Dow Jones industrial average lost 634.76 points (6^th biggest point drop in history), or 5.55%, to end at 10,809.85, the Standard & Poor’s 500 Index dropped 79.92 points, or 6.66%, at 1,119.46 and the Nasdaq Composite Index plunged 174.72 points, or 6.90%, to close at 2,357.69.

Volume was extremely heavy, with 17.5 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, sharply above last year’s daily average of 8.47 billion.

While all 10 S&P sectors lost more than 3.5%, the sectors most sensitive to the economy, such as banking and commodities, were the hardest hit. The S&P financial index lost 10% while the S&P energy index lost 8.3%.  Oil prices dropped 7.3%.  Bank of America (BofA) dropped by 20.3% to $6.51. The Dow component was the most actively traded name on the New York Stock Exchange and the S&P 500’s biggest loser.

Monday’s global stock market sell-off wiped out more than $1.35 trillion in investor wealth worldwide, according to the 5.2% drop in the MSCI World Index. The index entered the week with a value of $26.42 trillion (that is more than $5.3 trillion from the recent peak).

Late on Friday after the market’s close, S&P cut the United States’ perfect long-term credit rating of AAA by one notch to AA+ on concerns about debt levels in the world’s largest economy. The downgrade could eventually raise borrowing costs for the U.S. government and companies, as well as for consumers.  Today, President Obama blamed the downgrade on political gridlock in Washington and said he would offer some recommendations on how to reduce federal deficits.

Investors wanted more specifics from Obama, but that did not happen and until it does investors could see more volatility.   Even the European Central Bank’s dramatic intervention in bond markets, which pushed down yields on Spanish and Italian bonds, was not enough to stem selling.

So are we getting close to the bottom of this thing?  Some analysts noted the mass selling has made some stock prices attractive at much lower prices.  In short, based on historical corrections, you would expect a rebound in the more oversold sectors of the market, given how far down and how fast we have come. Equity valuations are at levels not seen since the early 1980s.  When it gets this bad and you can’t possible think about buying you are probably getting closer to the bottom.

However, we have never dealt with a situation when the Standard & Poor’s stripped the United States’ top-tier AAA credit rating which may threaten consumer confidence and could push the frail economy into recession.  A sustained drop in stock values could have a negative impact on “wealth”, and likely force both consumers and businesses to “hunker” down. Economists said the steep decline in share prices could have a psychological impact on households, causing them to cut back on spending, and force businesses to defer hiring and spending on capital.  This “negative feedback loop” needs to be broken!

Consumer spending accounts for about 70% of U.S. economic activity and this massive move in the equity market does dim the economic outlook for the next 6 months.  U.S. consumer spending barely grew in the 2^nd quarter, while business investment in equipment and software slowed a bit from the 1^st quarter.  The recession odds have jumped dramatically but there is still hope that it can be avoided with some prudent moves by the leadership of Central Banks and governments.   However, the stock market drop comes at a time when there is limited monetary and fiscal policy moves available to shore up the economy (maybe Quantitative Easing phase 3, 4, 5, 6…)

It is interesting to note that today U.S. Treasury bonds rallied despite the credit rating downgrade. Yields on benchmark 10-year Treasury notes fell by 0.23% (in yield) today to 2.34%, their lowest level since January 2009, as investors looked for the safe place to invest.

Hopefully, in the next couple of weeks or months we will look back at this as a “non-event” if it helps the U.S. government articulate a viable financial plan to repay its financial obligations.

It is clear that the U.S. credit downgrade spooked investors, causing investor sentiment to grow very bearish in the short-term.  Corporate fundamentals, including balance sheets with more cash than debt and earnings growth, will continue to push the S&P 500 higher by the end of the year, strategists at Barclays Plc, Citigroup Inc. and JPMorgan Chase & Co. said today. While Goldman Sachs Group Inc. cut its year-end target for the S&P 500 to 1,400, Barclays held its 1,450 estimate (that could be a 20% move from these levels but the negative feedback loop needs to be broken prior to hitting those levels).

The benchmark for the S&P 500 is still up 65% from a 12-year low on March 2009 following government stimulus measures and higher-than-estimated corporate earnings.

Per-share earnings increased 18% among the S&P 500 companies that have released quarterly results since July 11^th according to data compiled by Bloomberg. About 75% of the companies have topped the average analyst profit forecast, the data showed. Sales or revenue rose 13% during that same period.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

The Canadian stock market was down sharply Friday as a stronger than expected U.S. jobs report failed to provide investors with sufficient comfort to offset worries about a slowing American economy and a lack of leadership in coming to grips with the U.S or the European debt crisis.

It was another “yo-yo” day, with the S&P/TSX composite index dropping 217.96 points or 1.76% to 12,162.17, after having dropped almost 450 points earlier in the day. Investors took some comfort that it wasn’t worse.

Friday’s drop, which came a day after the index had its biggest single-day drop in more than 2 years, were led by sliding resource stocks amid investor sentiment that slowing economic conditions will heavily impact demand for commodities.

On the week the index dropped 6.3% or 783 points, leaving the S&P/TSX down almost 10% year to date.

Late Friday, Standard & Poors said it had downgraded the United States’ credit rating for the 1^st time in history. It slashed the country’s top AAA rating by one notch to AA+. It said it made the move because the deficit reduction plan passed by Congress did not go far enough to stabilize the country’s debt situation.

Earlier Friday, markets moved off the worst levels of the day as Italy pledged to work for a constitutional amendment requiring the government to balance its budget in 2013, a year before previously scheduled.

Italian and Spanish bonds have traded at levels that threaten the ability of those countries to raise money in the bond markets to pay off debt.  In short, the European debt crisis is no longer limited to just Greece.

Canadian job numbers did not exceed expectations but at 7,100 it was still not bad, especially if you looked into the details.

Stock markets were no better in the United States this past week. Stocks closed out their worst week in more than 2 years in a volatile week.

On Friday more than 15.9 billion shares traded (more than twice the daily average).  The market moved, initially jumping up on the employment news, and then down and then up again.  The Dow Jones industrial average covered 416.41 points from its day high to its intraday low.

The intense selling last week reflects frustration with sluggish economic growth and politicians’ inability to address pressing concerns over high public debt in Europe and the United States.

The Chicago Board of Options Exchange (CBOE) Volatility Index or VIX, Wall Street’s so-called “fear” gauge, rose as high as 39.25 within the day, its highest level since May 2010.  The volatility index is up almost 90% during the past 2 weeks, as fears about the European debt crisis, the global economy and earnings have taken a heavy toll on investor sentiment.  The S&P 500 is now down 12% from its April 29^th closing high for the year (14% if you count the intra-day low on Friday).

Markets have been looking to European officials for guidance as to how the region’s debt crisis will be managed.  The loss of confidence is coming from the inadequate response to the growing threat to large euro-zone economies Spain and Italy and banks’ exposure to their troubled debt.

In the United States, non-farm payrolls data showed a gain of 117,000 jobs in July compared with a forecast for an increase of 85,000, while the country’s unemployment rate dipped to 9.1% last month from 9.2% in June.

The Dow Jones industrial average rose 60.93 points, or 0.54%, to end at 11,444.61. However, the Standard & Poor’s 500 Index edged down 0.06%, to finish at 1,199.38. The Nasdaq Composite Index slipped 23.98 points, or 0.94%, to close at 2,532.41.

For the week, the Dow fell 5.8%, the S&P 500 was down 7.2% and the Nasdaq was off 8.1%.

Italian Prime Minister Silvio Berlusconi said his country will introduce a constitutional principle of a balanced budget in an effort to reduce debt levels.  Helping the market erase big losses in afternoon trade, sources said the European Central Bank was ready to buy Italian and Spanish bonds if Berlusconi commits to bringing forward specific reforms.

The impact of a downgrade of U.S. government debt by Standard & Poor’s isn’t higher interest rates. It’s the hit to the nation’s fragile economic spirit and rattled capital markets.  This action will deal a blow to the confidence of consumers and businesses at a dangerous time, economists say.

The timing could hardly be worse for the U.S. The economy added 117,000 jobs in July, more than expected. But other economic indicators, including manufacturing, consumer spending and overall growth, are getting weaker.

And the markets just came through their most harrowing two weeks since the financial crisis of 2008. The Dow lost about 10% of its value on fears of a new recession and Europe’s spiraling financial problems.

In normal times, in another country, a downgrade in a country’s sovereign debt rating probably would force its government to pay higher interest rates to convince investors to keep buying its debt.  If that happened, it would drive up the rates that consumers pay on mortgages and auto loans, which are often tied to the government’s interest rate.  However, the United States is a special case. Treasury debt is considered the safest investment in the world — even after the downgrade. Investors don’t doubt the U.S. government’s ability to repay the trillions it owes.

Anytime there’s a problem anywhere on the world, investors will buy the safety of the U.S., and they don’t go anywhere else.

The Obama administration made its displeasure known quickly after the downgrade was announced. The Treasury Department said S&P had acted on an analysis that had a $2 trillion error.  Although, on the weekend President Barack Obama stated that he believes Washington “must do better” tackling the federal budget deficits.

The downgrade itself will become a volatile political issue ahead of next year’s Presidential election in the United States.

The rating agency also said the decision reflected its loss of confidence in the U.S. political system. Republicans and Democrats didn’t reach a deal on debt reduction until hours before the federal government’s borrowing limit was to expire, which would have triggered a U.S. default on its debt or massive, immediate government cuts.

Economists say the downgrade, the 1^st since the U.S. received the top rating from S&P in 1941, will rattle consumers and businesses already worried about the weak economy and the U.S. political system’s inability to handle the country’s problems.

America’s reputation has already taken a hit abroad. China, the largest foreign holder of U.S. debt, on Saturday demanded that the United States tighten its belt and overcome its “addiction to debt” in the wake of the S&P downgrade. China’s central bank holds an estimated $1.16 trillion in U.S. debt.

Analysts are quickly starting to “sing a different tune” predicting a volatile stock market with major highs and lows.  This will likely be around for months as hints of another possible recession begin to surface amid global economic uncertainty.

We have been there before, 3 years ago, when the Wall Street banking crisis sparked a global recession and trillions of dollars in losses on the world’s stock exchanges.  Experts advise investors not to panic, keep focused on quality stocks and try to ride out the storm of volatility, which should be around for months.

Some are concerned the economy could double dip from recession to tepid recovery and then back into recession, once government stimulus programs end.  They are also concerned that this could go on for another year of uncertainty.  News out of the United States has been grim as the country recorded weak manufacturing numbers, lower consumer spending, and on Friday announced it added just 117,000 jobs in July, bringing the country’s unemployment rate down to 9.1%.

Canada is well positioned to weather the economic troubles because of its resources, including oil, mining, and forestry. As countries like China grow and demand building materials, Canada stands to cash in. But the United States is still the largest buyer of Canadian goods, and some fear that country could be stumbling back into a recession.

Stock markets have fallen before and will likely fall again, but investors get riled up over the chaos each time which further compounds the volatility.  Last week’s steep sell-off wiped about $2.5 trillion off global market valuations and more than $4 trillion from the recent peak. The index has retreated 11% in the last 11 days.

This morning analysts said the S&P 500 index could test Friday’s intraday low of 1,168.09 or about a 2.0% drop today. However, some investors are arguing that “The market is grossly oversold”, valuations are attractive and a lot of “re-pricing” of assets have already materialized.

This morning we see Gold hitting another record high of $1,715.01 an ounce and it could post the 2^nd largest daily gain this year.  Resource-related stocks will be under pressure as crude oil prices fell 3.7% to below $84 a barrel on concerns over the economic outlook.

In a hope to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing nations issued a joint statement saying they were committed to taking all necessary measures to support financial stability and growth.  Interesting enough the value of U.S. government bonds has not changed during this rating cut.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner