Investors were greeted with some significant news on Monday morning concerning a merger and the Obama administration's "Toxic Asset" plan. Both news items were met with positive reactions from global equity markets. The S&P/TSX index climbed 5.32%, the Dow Jones 6.84% and the S&P500 7.08%. The broader S&P 500 closed above 800 points - a key technical indicator that analysts said had represented a significant barrier to gains.
Suncor Energy Inc. and Petro-Canada released a joint statement early Monday morning announcing the details of an all-stock deal that will see the companies form an entity with a combined market capitalization of $43.3-billion. The new corporation would continue to operate and trade under the Suncor name.
According to the companies, Petro-Canada shareholders are to receive 1.28 shares of the merged company for every Petro-Canada share they hold, while Suncor stockholders would receive a share in the new venture for each Suncor share they own. The companies say the deal represents a 25 per cent premium on the 30-day weighted average of Petro-Canada shares. The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange. Existing Suncor shareholders would hold 60 per cent of the new company, while Petro-Canada shareholders would hold 40 per cent.
One challenge to the deal will be the Petro-Canada Public Participation Act, which states no person or company can own or control more than 20 per cent of the company's voting shares and the head office must remain in Calgary. Suncor could potentially get around the act by lobbying the government to change the law stressing the takeover is coming from a domestic company. The Act was created to prevent foreign majority ownership. Suncor could also structure the deal as a reverse takeover when Petro-Canada, legally speaking, would be taking over Suncor.
The Obama administration unveiled a program on Monday that may generate as much a $1 trillion in financing to buy illiquid assets using $75 billion to $100 billion from the U.S. bank rescue fund. The effort relies on a Federal Reserve partnership with private investors to buy the securities and FDIC guarantees to entice buyers. Tresury Sectretary Timothy Geithner said Monday the government will invest alongside private parties in funds that will buy troubled loans and securities from banks. The government will also lend the buyers money.
By providing a source of cheap, abundant financing, officials are hoping to bring together buyers and sellers in the troubled-asset marketplace. That market has been at a stalemate for months, with banks unwilling to accept the distressed prices vulture investors have been dangling.
The Treasury proposes a hypothetical transaction in which a bank would seek to sell a pool of residential mortgages with $100 in face value through an auction process and receives a bid of $84 for them. The FDIC would then provide cheap financing to the winning buyer. In essence $7 will come from the private sector which in an auction process will help determine a price for these mortgages, $7 will come from the federal government and the remaining $84 from a government backed loan. Markets reacted favorably as the concerns over the credit situation with the banks seems to have been addressed - at the very least there is a plan in place. Geithner had announced the plan about a month ago but with no specifics and as we all know the markets want to see details and does not like surprises. Time will tell if this plan will put us on the path to recovery.
Source: The Globe and Mail, CNN Money.com, Wall Steeet Journal, Bloomberg
Tuesday, March 24, 2009
Tuesday, March 3, 2009
March 3 2009 Bank of Canada Press Release
Bank of Canada lowers overnight rate target by 1/2 percentage point to 1/2 per cent
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3/4 per cent.
The outlook for the global economy has continued to deteriorate since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in major economies. The nature of the U.S. recession, with very weak auto and housing sectors, is particularly challenging for Canada.
Stabilization of the global financial system remains a precondition for the global and Canadian economic recoveries. The timely implementation of ambitious plans in some major countries to address toxic assets and recapitalize financial institutions will be critical in this regard.
National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January. Potential delays in stabilizing the global financial system, along with larger-than-anticipated confidence and wealth effects on domestic demand, could mean that the output gap will not begin to close until early 2010. These factors imply a slightly lower profile for core inflation than was projected in the January MPRU.
The effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010. Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies.
The Bank's decision to lower its policy rate by 50 basis points today brings the cumulative monetary policy easing to 400 basis points since December 2007. Consistent with returning total CPI inflation to 2 per cent, the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up.
Given the low level of the target for the overnight rate, the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures.
The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve its 2 per cent inflation target over the medium term.
Information note:
The next scheduled date for announcing the overnight rate target is 21 April 2009. A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on 23 April 2009.
Source: The Bank of Canada
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of a percentage point to 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3/4 per cent.
The outlook for the global economy has continued to deteriorate since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in major economies. The nature of the U.S. recession, with very weak auto and housing sectors, is particularly challenging for Canada.
Stabilization of the global financial system remains a precondition for the global and Canadian economic recoveries. The timely implementation of ambitious plans in some major countries to address toxic assets and recapitalize financial institutions will be critical in this regard.
National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January. Potential delays in stabilizing the global financial system, along with larger-than-anticipated confidence and wealth effects on domestic demand, could mean that the output gap will not begin to close until early 2010. These factors imply a slightly lower profile for core inflation than was projected in the January MPRU.
The effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010. Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies.
The Bank's decision to lower its policy rate by 50 basis points today brings the cumulative monetary policy easing to 400 basis points since December 2007. Consistent with returning total CPI inflation to 2 per cent, the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up.
Given the low level of the target for the overnight rate, the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures.
The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve its 2 per cent inflation target over the medium term.
Information note:
The next scheduled date for announcing the overnight rate target is 21 April 2009. A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on 23 April 2009.
Source: The Bank of Canada
Putting It All In Perspective
Yesterday's business headlines were not for the faint of heart. AIG announced a $62billion loss - the largest in US history, Canada's GDP contracted at an annual rate of 3.4% in the 4th quarter of 2008 - the worst since 1991, the Dow is at it's lowest level in 12 years and the TSX at 2003 levels.
The ongoing global recession has taken a significant toll on investor confidence. Economic news from all the world’s major centres continues to paint a grim picture of corporate profitability. Consumers give every appearance of continuing their retrenchment as spending declines and savings rates rise. Recent employment reports from both Canada and the U.S. provided the weakest figures in a generation. Not surprisingly, these kinds of headlines focus attention away from the longer term as market participants dwell on reports of the most recent developments. Nevertheless, by looking beyond today’s market environment and paying attention to the bigger picture, investors can gain a useful frame of reference to gauge future prospects.
When digesting all this economic news, we need to be able to take a step back and distinguish the Stock Market Cycle from the Economic Cycle. The stock market is a leading indicator meaning it signals the direction the economy is headed. Most economic statistics are either co-incident indicators (signal what is happening currently) or lagging indicators (confirm what has already happened). Based on historical figures, the stock market traditionally moves 6-9 months ahead of the economy. For example, the S&P 500 peaked October, 9th, 2008 at 1,565 and June 30th, 2008 was the last positive growth quarter for US GDP (the beginning of the recession). This is close to a 9 month period. Historically , the average recession has lasted 15 months. Most agree that this is a more severe recession than normal so even if it lasts into 20-24 months this would mean the US would emerge from recession in the first or second quarter of 2010. Backing up 9 months would suggest possible market recovery beginning in the 2nd or 3rd quarter of 2009. Make no mistake, over the next 12 months we will continue to see a lot of bad ecomomic news in the areas of employment, bankruptcies, housing, etc.
The key challenge at this juncture is maintaining that longer-term view. This is particularly true when the financial markets appear to be at their worst. After surviving the market maelstrom of 2008, investors can be forgiven for having remained pessimistic entering the first quarter of 2009. Many had hoped that the move higher, seen on the world’s stock markets very late in 2008, would continue in the new year. So far, this has not been the case. Still, one positive trend has emerged: equity market volatility has begun to ease. While the light at the end of the tunnel appears dim and a full recovery remains elusive, the reduction in extreme levels of volatility will help establish the basis for more orderly equity markets moving forward.
Volatile trading is a normal reaction to an unexpected event in politics or the economy. The S&P 500 Index experienced trading days with a 5% or greater trading range1 on 41 instances between January 1, 1946 and September 14, 2008. Occasionally, these volatile days were clustered in groups. Until recently, the period of most frequent occurrence (nine trading days in total) appeared in the wake of Black Monday in October 1987. Nevertheless, over this entire 62-year period, on average one could expect to see this level of volatility during one trading day every 18 months. However, no one would describe the period between September 15, 2008 (when Lehman Brothers filed for bankruptcy due to the fallout from the subprime mortgage crisis) and December 14, 2008 as a typical market episode. During this three-month period,
there were 64 trading days of which 29 saw a 5% or greater trading range. A once-every-18-months occurrence had become an every-other-day event.
Canada' GDP contraction in the 4th quarter was a quicker and deeper decent into recession than the 1980's or 1990's when GDP fell less than 2%. With record low interest rates (as of 10am AST, the bank cut the rate to 0.5%) and hundreds of billions in government spending around the globe, Canada's recession may be be shortened. A few key factors remain, however, the ability of the stimulus package announced in the budget to offset the effect of the US recession on Canada and how quickly the US emerges from recession. One positive factor in the US is that the collapse of the housing market is stablizing with inventories leveling off, fewer residential construction is being completed and housing is becoming more affordable.
Taking a long-term market view is difficult, particularly when most of the recent news is dire. Still, history has shown that equity markets do recover and provide returns that give the best opportunity to grow wealth. We continue to reposition client portfolios to maximize the potential to fully participate in the market recovery. If you would like to discuss your portfolio specifically give me a call or send an email.
Chris
Source: The Globe and Mail, United Financial Corporation
The ongoing global recession has taken a significant toll on investor confidence. Economic news from all the world’s major centres continues to paint a grim picture of corporate profitability. Consumers give every appearance of continuing their retrenchment as spending declines and savings rates rise. Recent employment reports from both Canada and the U.S. provided the weakest figures in a generation. Not surprisingly, these kinds of headlines focus attention away from the longer term as market participants dwell on reports of the most recent developments. Nevertheless, by looking beyond today’s market environment and paying attention to the bigger picture, investors can gain a useful frame of reference to gauge future prospects.
When digesting all this economic news, we need to be able to take a step back and distinguish the Stock Market Cycle from the Economic Cycle. The stock market is a leading indicator meaning it signals the direction the economy is headed. Most economic statistics are either co-incident indicators (signal what is happening currently) or lagging indicators (confirm what has already happened). Based on historical figures, the stock market traditionally moves 6-9 months ahead of the economy. For example, the S&P 500 peaked October, 9th, 2008 at 1,565 and June 30th, 2008 was the last positive growth quarter for US GDP (the beginning of the recession). This is close to a 9 month period. Historically , the average recession has lasted 15 months. Most agree that this is a more severe recession than normal so even if it lasts into 20-24 months this would mean the US would emerge from recession in the first or second quarter of 2010. Backing up 9 months would suggest possible market recovery beginning in the 2nd or 3rd quarter of 2009. Make no mistake, over the next 12 months we will continue to see a lot of bad ecomomic news in the areas of employment, bankruptcies, housing, etc.
The key challenge at this juncture is maintaining that longer-term view. This is particularly true when the financial markets appear to be at their worst. After surviving the market maelstrom of 2008, investors can be forgiven for having remained pessimistic entering the first quarter of 2009. Many had hoped that the move higher, seen on the world’s stock markets very late in 2008, would continue in the new year. So far, this has not been the case. Still, one positive trend has emerged: equity market volatility has begun to ease. While the light at the end of the tunnel appears dim and a full recovery remains elusive, the reduction in extreme levels of volatility will help establish the basis for more orderly equity markets moving forward.
Volatile trading is a normal reaction to an unexpected event in politics or the economy. The S&P 500 Index experienced trading days with a 5% or greater trading range1 on 41 instances between January 1, 1946 and September 14, 2008. Occasionally, these volatile days were clustered in groups. Until recently, the period of most frequent occurrence (nine trading days in total) appeared in the wake of Black Monday in October 1987. Nevertheless, over this entire 62-year period, on average one could expect to see this level of volatility during one trading day every 18 months. However, no one would describe the period between September 15, 2008 (when Lehman Brothers filed for bankruptcy due to the fallout from the subprime mortgage crisis) and December 14, 2008 as a typical market episode. During this three-month period,
there were 64 trading days of which 29 saw a 5% or greater trading range. A once-every-18-months occurrence had become an every-other-day event.
Canada' GDP contraction in the 4th quarter was a quicker and deeper decent into recession than the 1980's or 1990's when GDP fell less than 2%. With record low interest rates (as of 10am AST, the bank cut the rate to 0.5%) and hundreds of billions in government spending around the globe, Canada's recession may be be shortened. A few key factors remain, however, the ability of the stimulus package announced in the budget to offset the effect of the US recession on Canada and how quickly the US emerges from recession. One positive factor in the US is that the collapse of the housing market is stablizing with inventories leveling off, fewer residential construction is being completed and housing is becoming more affordable.
Taking a long-term market view is difficult, particularly when most of the recent news is dire. Still, history has shown that equity markets do recover and provide returns that give the best opportunity to grow wealth. We continue to reposition client portfolios to maximize the potential to fully participate in the market recovery. If you would like to discuss your portfolio specifically give me a call or send an email.
Chris
Source: The Globe and Mail, United Financial Corporation
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