Week Ending Feb 25/2011 - Democracy Gone Viral!

Who would have thought that 2 short months ago a harmless & voiceless Tunisian fruit seller (Muhammad Bouazizi) - who after having his small stand ruthlessly expropriated would set himself on fire in despair - and thereby - set the entire Middle East ablaze? Talk about a major error in judgement by the Tunisian retail licencing bureau!
The people of the Middle East have long suffered the tyrannical rule of their 'non elected' dictators and self serving autocrats. From my distance perch it sure looks to be a major 'spring time' house cleaning with the people throughout the region finally regaining the voice, respect, and dignity they have long desired.
Ongoing stability concerns have given the equity markets an opportunity to finally sell off and take profits on the eve of the 2 year anniversary of the great bull rally rebound. Those companies which have substantial direct interest in the Middle East may be in for a longer term volatile rocky ride if hostilities and protests continue to escalate. There may also be a focus on other multinational companies which derive a substantial proportion of their cash flow from similar dodgy political jurisdictions. I wonders if ol' Hugo Chavez subscribes to my blog?

Most major indices have easily absorbed any 'nervous' selling so far and have barely budged from recent high territory. The TSX/S&P/DJIA have all taken a short term breather to consolidate their well established up trends. If a major meltdown in the Middle East is not sufficient to reverse these powerful trends then a return to all-time high territory is potentially in the offing - and perhaps before the Blue Jays are mathematically eliminated from playoff contention. A further consolidations in the 8 to 10% correction range would be both healthy and productive - but not expected. Sovereign debt concerns, US mortgage refinancings, and US debt ceiling negotiations have all but disappeared from media coverage for the time being. GM cranks out a better than expected earnings/profits ($510m 4th quarter and first full year profit since 2004) albeit through a much different company. Retailers continue a very strong profit reporting parade and may be vulnerable to a profit taking correction. The US financial system appears to be in amazingly fine shape. The historical low interest rate Fed policy has been a major boon to corporate balance sheets throughout the industrialized world. It sure makes for good business and happy shareholders.

In Canada it seems like all news is good news. The world wide commodity consumption surge continues to accrue major dividends. It is a trend that does not look to end any time soon and more than likely will accelerate unless supply issues are methodically addressed. Cdn Financials are reporting yet another banner earnings season (surprise) with chatter of dividend increases not far behind. With the exception of the lagging Royal Bank most issues are breaking into fresh recovery high territory. Senior gold stocks are also reporting outstanding earnings and are having a heck of a time trying to reinvest and redeploy the capital. Most other Cdn companies that ship things on boats are experiencing banner profits and much improved financial conditions.

On the commodity front gold is marking time in the low $1,400 area with most indicator readings neutral to positive. The 'first bloom of spring' Silver has taken matters into it's own hands to recover into 35 year high territory in the $33-4 range. $40 looks like a layup and probably before the Liberals get their first chance to hurl pre-election political mud. The gold-silver ratio has improved to the 42x range. The Canadian Dollar is cleanly breaking into new recovery territory and looks head quickly into the $1.05 range. The price of oil has hardly reacted to all the geo-political excitement and is only marginally higher since the beginning of the year. Brent Crude was over $100 before the protest movement took hold. What has been reported is a new high consumption of almost 88 m/bls/day and a 2010 total increase of almost 2.5% world wide. Oil supplies continue to be constrained (other than Cushing Oklahoma) and relentless emerging market demand. Any sell off in the commodity complex should be treated as buying opportunities. Pullbacks in senior gold, base metal, forestry, fertilizer, oil drilling, and integrated oil stocks should be accumulated for a seasonally strong spring cycle.

Bottom Line: The Middle East political 'Genie' is definitely out of the bottle. Good luck trying to get that rascal back in! Concerns and solutions about leadership, rule of law, and freedoms will be addressed over the longer term. Should oil supplies get significantly disrupted it will be quickly reflected at the pump. The US economy does not fire on all cylinders @ $5/gal unleaded and really does not need yet another financial challenge. Agra soft commodity markets are also in very tight supply balance. Look for continued leadership in these and related areas throughout the spring and summer. North American mutual fund sales have accelerated considerably and will represent a higher 'octane' increase fueling further market advances. Domestically we are looking at an election before long with indications of a PC majority. South of the border the time line nears for a settlement for the ever extended/bloated debt ceiling and the major mortgage refinancing monster. If the Fed types can pull those two rabbits out of their hats a very warm and fuzzy feeling may sweep over the huddled masses. Asian and other emerging markets are in much better relative financial condition and have dealt responsibly with interest rate policy and growth/inflation issues. The 'Tiger's' will continue to represent the lion's share of world wide growth for the foreseeable future. If the Leaf's make the playoffs - anything is possible!      

Week Ending Feb. 18/2011 - Climbing the Wall of Worry

The DJIA slices through the key level of 12,000 like Swiss cheese. The S&P/TSX takes out major resistance of 14,000 as if it was hardly there. Corrections are sideways to fractionally lower. This bull leg has consistently ignored key psychological round numbers as the tidal wave of liquidity desperately searches for a home. Broad based 30+ month recovery highs are being recorded on most major indexes - much to the consternation of those who are under-exposed or perhaps short the market. North American corporations  are wrapping up a stellar record earnings reporting season. Corporate dividend yield gaps continues to widen to record levels as compared to the pittance the Bank of Canada or Fed offers investors.
Jim O'Shaughnessy (O'Shaughnessy Asset Management) noted this week that, "The first time the Dow Jones crossed 12,000 it was 2006. At that time, it had a P/E ratio of 23x, we now have a P/E of 14x to 15x." OAM have been table pounding bulls throughout this run. I guess this business is not algorythmic rocket science after all?
As economic & financial conditions continue to improve it is getting increasingly difficult to find bearish indicators or negative signals. From a contrarian standpoint - Dr. 'Doom' Nouriel Roubini did the 180 degree bullish reversal on American equities this week after the S&P has doubled which may make a few staunch bulls uneasy. Bank of American reported that investors are 67% 'overwieght' (aren't we all?) the S&P/DJIA and the most bullish in 10 years. VIX volaitility is getting dangerously low. Fannie Mae will have to contend with $5T of residential spring time refinancings - which will be quite a rabbit to pull out of their hat! 5 and 20 moving averages are pulling significantly away from the all important rising 200 ma's. That is a 'gap' that eventually will be filled and tested. And the Leaf's are starting to win?

In the US, the Sanofi-Genzyme saga ends in a $20b merger - the 2nd largest in bio tech history. Defense Contractors 'contracted' with the news that Obama intends to make major defense budget cuts. Home Builders continue to strengthen in the hopes the worst is over in the residential sector. Almost every stock with international multi-national exposure continue to lead this very impressive charge back to all-time high territory. Ownership posturing continues with the pending merger of the NYSE and German Bourse - with a  potential renaming to the 'Big Bourse!' It is a move which I am surprised the firing on all cylinders 'Fatherland' has made.

In Canada, I look forward to the TSX-LSE merger debate by the political types. I can't wait for their interpretation of the 'national strategic importance' issue and the 'net cumulative effect' which this concentration of interests brings. In my way of thinking we will be looking at less choice and less competition which is never good.  I would certainly think a TSE-Heng Seng merger would be much more preferable diversification option - especially considering that Hong Kong is now the source of 60% of all IPO financings.
As high tide liquidity washes upon our shores - a return to the Oct '07 monthly closing high of $1.055 Cdn appears to be in the offing. Internally the TSX is rotating from selected Agra and Material stocks into Financials and Transports issues. Most Canadian Banks have registered new record highs in the hopes of the much anticipated dividend increases. Any resource stock loaded with cash and pristine balance sheet is a target for the friendly/hostile takeover types. New recovery high commodity prices would trigger all kinds of excitement and hyperventilation. The PDA convention in early March will be swamped with interest and wheeling and dealing. Merger and acquisition lawyers have never been busier. Life is good!

Bottom Line: North American equity markets are only a month shy of their 2 Year sensational 'Recovery Rally Anniversary' from the gloom & doom, death & despair lows of March 2009. Low and muted expectations continue to be the order of the day. Nellies get more nervous as markets ratchet higher. Bears are being converted into Bisons. Autocrats are on the run in the Middle East which is both significant and entertaining.
Irrespective, it sure does 'feel' like the short term destiny for both the DJIA and TSX is new record high territory - and a chapter in the next edition of Ripley's Believe it or Not! Gold has begrudgingly given up a $35 bill (.25%) from it's recent record high level in spite of a very over bot weekly condition. Silver is just as impressive and appears to be the first 'bloom of spring' into $40+ territory before any shorts get squeezed. Agriculture markets are being held to the whims of Mother Nature and the 'next significant' crop report. Mutual Funds have finally benefited from a very positive upbeat RSP season and will be flush with rocket fuel and a new and improved lease on life. American political leadership continues to wrestle with serious fiscal policy issues and containing the omnipotent stimulus genie in a reality show like atmosphere. Ron Paul wins the straw vote!
I normally hate to look further than the next 48 hours of stock market future - but it sure feels like this over bot monster of a bull (headed) market rally wants to accelerate and perhaps even test or gap into new record high territory. I wish I could say, 'I told you so!'    

Week Ending Feb 11/2011 - Compelling Commodities

The beat goes on. Fueled by higher prices in the grain complex this week the 'Agra' related sectors continue to march into rarefied new high territory. Blow out earnings by Agrium which showed accelerating strength in all divisions added to the bullish momentum. The combination of persistent low interest rates, growing demand, and inclement weather factors have contributed to the stampede into the agriculture business. Up to this point the food processors and distributors have been willing to absorb the higher input costs - but at some point they will want/hope to pass the added burden onto consumers. Food inflation looks to be more of a short term issue for the emerging economies like Mexico, Egypt, and Asian jurisdictions who are very dependant on wheat, corn, and soy bean prices. The middle east tinderbox is very young, and hungry, and will be especially sensitive to higher costs considering relatively high unemployment levels and significantly dependant markets.
Looks like the newly minted Chinese Investment Company (CIC) office in Toronto sure isn't fooling around judging by it's recent mega purchase of half of a prolific shale gas project from Encana for an eye brow raising C$5.4b. I guess if your big enough it won't be long before your Chinese?
Gold and Silver continue to consolidate or distribute recent gains. It won't be long before we find out which it is. In spite of wide spread bullish sentiment crude oil remains contained in the $88-92 range. Natural Gas baffles the mind as it struggles to hold the psychological $4 level.
South of the border the American economy is beginning to percolate at an expanding 3.2% annualized rate -but significantly below potential capacity at this point of the business cycle. The American economy is running almost $1 trillion short of it's potential output. Although not entirely surprising considering much higher current healthy savings rate of over 5%. I am surprised that media outlets haven't made more hay out of the report late last Friday the the Fed wants to significantly and effectively reduce the dominant role of Fanny, Freddy, and the Federal Housing Authority in the $11 trillion mortgage market. It looks like the Fed is finally 'fed up' with the $150 b/yr that they pump into both of those basket cases. Definately very bullish real estate bottoming news in my opinion. Also a potentially explosive catalyst for the US economy.

Bottom Line: In spite of a significantly short term over bot condition in the TSE/DJIA/S&P indicies - look for equity markets continue to march to higher levels fueled by continuing low interest rates, massive liquidity levels, a very positive earnings season, and very healthy corporate balance sheets. Major beneficiaries will be those companies exposed to multi-national global opportunies and off shore growth. Higher interest rates will be a significant head wind at some point. In Canada we are in the midst of what looks like a very positive RSP season also. I was a tad surprised at the 'ho hum' shoulder shrug to the DJIA easily surpassing the major resistence level of 12,000. The S&P/TSX is within a whisker of the 'wild and wooly' 2007 levels of 14,000 and also refuses to correct significantly. Any selloff is of the low volume, shallow, and muted variety. The tidal wave of takeover money hardly gets a chance to be redeployed.
Looks like we have a very tough crowd out there to please? I am impressed. Not sure what the heck the markets have to do to cheer up people now a day?    

Week Ending Feb 4/2011 - The Bulls Continue to Stampede

A very positive and constructive week chalked full of positive 'upside' earnings surprises in a variety of mixed industries on both sides of the border. Inflation is becoming more of a 'talking point' and dominant theme. The State of the Union address had a definite self congratulatory and delusional tone. Goals of increasing manufacturing, education, and innovation targets were set without the corresponding strategy to attain them. Debt levels have almost become a 'shoulder shrug' after thought. I suppose all that is to be expected considering Obama had his first 'uptick' in popularity in quite a while. A major 'downtick' to be considered is the weak and sputtering long end of the US treasury market. Yields have headed into fresh recent new high territory with continued potential pressure in the offing. As single mindedly bullish as the S&P/DJIA/TSX has been for weeks - I cannot see further 'acceleration' in a significantly deteriorating bond market environment. Wall Street is out and about trying to generate interest in spankin' brand new 50 and 100 year maturity treasury offerings. The feedback should prove very interesting indeed. Copper, sugar, and selected grains have hit life of the contract new high territory. Crude Oil continues to be contained in the $88-$92 range. Next week the quarterly earning barrage continues. It is fair to assume in many cases the surprises will continue to be on the 'upside!'

Bottom Line : Both of the 'bullet proof' Teflon TSX & DJIA averages look to inscrutably continue it's upward march toward 2007 levels. A cautious eye should be fixed on the debt markets and interest rate movements. Expect a few air pockets and turbulence along the way to the 'increasing-the-national-debt-threshold' south of the border discussion! I can't wait!