October 7th, 2011 Newsletter
Dear Friends,
Tangents:
“…Thanksgiving like contentment is a learned attribute. The person who hasn’t learned to be content will not be thankful, for he lives with the delusion he deserves more or something better…” – Robert Flatt
Photo of the Weekend:
President Obama, center, with daughters Malia, far right, Sasha, second from the right, pardoning the National Thanksgiving Turkey, Courage, in a ceremony at the White House with the chairman of the National Turkey Federation, in 2009. (AP Photo by Pablo Martinez Monsivais) October 7th, 2011
Market Commentary:
Canada
By Matt Walcoff
Oct. 7 (Bloomberg) — Canadian stocks fell, wiping out the week’s gain, as raw-materials and energy shares dropped after Fitch Ratings downgraded the government debt of Spain and Italy.
Canadian Natural Resources Ltd., Canada’s second-largest energy company by market value, declined 4 percent as natural gas futures retreated. Goldcorp Inc., the world’s second-biggest gold producer by market value, lost 2.3 percent as precious metals slipped. Potash Corp. of Saskatchewan Inc., the world’s largest fertilizer producer by market value, decreased 4.1 percent after a Citigroup Inc. analyst said U.S. ethanol legislation may weaken grain prices.
The Standard & Poor’s/TSX Composite Index fell 191.71 points, or 1.6 percent, to 11,588.36 at the close in Toronto for a weekly retreat of 0.3 percent. “In the last few days, the markets had a bit of an upside, but the cloud on Europe continues to be there,” Sadiq S. Adatia, chief investment officer at Sun Life Financial Inc.’s Sun Life Global Investments unit, said in a telephone interview. The unit oversees C$3.2 billion ($3.1 billion) for clients. “I don’t think anyone is holding stocks for the long term. They’re all worried about what’s going on in the economy.”
The index jumped 5.4 percent during the previous two days, the most in a similar period since May 2009. Stocks rose from a 14-month low after the Institute for Supply Management’s monthly index of the U.S. service industry fell less than most economists in a Bloomberg survey had forecast and investors speculated European officials will reach an agreement to aid the continent’s banks.
Debt Downgrades
Fitch reduced its ratings on Spain to AA- from AA+ and cut Italy to A+ from AA-. The agency cited the vulnerability of the countries to the European debt crisis. The S&P/TSX Energy Index retreated for the first time in four days as natural gas dropped to an 11-month low on speculation U.S. inventories will approach a record.
Canadian Natural declined 4 percent to C$30.20. Encana Corp., the country’s largest natural gas producer, lost 4.6 percent to C$19.71. Oil-sands developer MEG Energy Corp. decreased 6.6 percent to C$37.74 after jumping 16 percent in the previous two days.
Gold and silver retreated as investors sold precious metals to cover losses in other assets, Adatia said. Goldcorp dropped 2.3 percent to C$48.12. Barrick Gold Corp., the world’s largest producer of the metal, lost 2.1 percent to C$48.44. San Gold Corp., which mines in Manitoba, slumped 8.6 percent to C$2.12 after reporting third-quarter production that trailed the estimate of Andrew Kaip, an analyst at Bank of Montreal.
‘Clear Negative’
Fertilizer producers fell after David Driscoll, an analyst at Citigroup, said bills in Congress to reduce ethanol requirements for gasoline represent “a continued assault on the ethanol industry and a clear negative.” Corn futures also fell on forecasts for warm, dry weather in the U.S. Midwest.
Potash Corp. declined 4.1 percent to C$46.40 after surging 11 percent in the previous two days. Agrium Inc., a fertilizer producer and farm retailer, lost 3.5 percent to C$71.16. A gauge of base-metals and coal producers in the S&P/TSX retreated 4.6 percent after soaring 24 percent, the most since January 2009, in the previous three days. Teck Resources Ltd., Canada’s largest company in the industry, decreased 4.7 percent to C$33.65. Inmet Mining Corp., a copper and zinc producer, dropped 6.5 percent to C$49.21. Uranium One Inc., a mining company controlled by Moscow-based ARMZ Uranium Holding, lost 6.6 percent to C$2.11.
Financials Retreat
The S&P/TSX Financials Index declined. Royal Bank of Canada, the country’s largest lender by assets, slipped 1.4 percent to C$47.30. Bank of Nova Scotia, the country’s third- biggest bank, fell 1.4 percent to C$51.78. Manulife Financial Corp., North America’s fourth-biggest insurer, retreated 2.9 percent to C$11.88.
BlackBerry maker Research In Motion Ltd. dropped 4.3 percent to C$24.30 after soaring 19 percent from a seven-year low in the previous four days. Microsoft Corp. is unlikely to buy RIM, as Microsoft is reluctant to acquire a hardware business and RIM’s chiefs would oppose a deal, Pierre Ferragu, an analyst at Sanford C. Bernstein & Co., said in a note to clients.
US
By Rita Nazareth and Cordell Eddings
Oct. 7 (Bloomberg) — U.S. stocks fell, halting a three-day rally, and the euro reversed earlier gains versus the dollar after Fitch Ratings cut debt ratings on Spain and Italy. Treasuries slid, sending the 30-year yield above 3 percent.
The Standard & Poor’s 500 Index slipped 0.8 percent to close at 1,155.46 after rebounding more than 8 percent from a one-year intraday low on Oct. 4. The euro lost 0.4 percent to $1.3388, erasing a gain of as much as 0.7 percent. Ten-year Treasury note yields rose nine basis points to 2.08 percent and climbed 16 points in five days, its biggest weekly increase since July. Oil capped its largest weekly gain in seven months.
Early gains in U.S. equities faded today as faster- than- forecast growth in jobs was overshadowed by concern Europe’s debt crisis will worsen. Italy had its foreign and local currency long-term issuer default ratings cut to ‘A+’ from ’AA- ,’ while Spain had the same set of ratings cut to ‘AA-’ from ‘AA+.’ The outlook for both is negative.
“We’re still going to get a bad event in Europe,” Michael Strauss, who helps oversee about $27 billion as chief investment strategist at Commonfund in Wilton, Connecticut, said in a telephone interview. “What took the wind out of the stock market was the variety of downgrades.” The jobs data showed “it’s not an economic recession, but it’s slow growth.”
Stocks started the session higher after government data showed payrolls climbed by 103,000 workers, topping the median forecast in a Bloomberg News survey of economists for a rise of 60,000. The data followed reports earlier this week showing faster-than-estimated growth in manufacturing, construction and service industries and improving retail sales.
Swinging Between Gains, Losses
The S&P 500 then turned lower before staging a rally late in the day, reversing its loss and climbing as much as 0.4 percent, before finally giving up gains and closing lower.
Losses were led by smaller U.S. companies and banks, with the Russell 2000 Index slumping 2.6 percent today after surging 11 percent in the previous three sessions for the its strongest rally in more than two years.
The S&P 500 Financials Index lost 3.7 percent after climbing 8.8 percent over the previous three days. The group of banks, insurers and investment firms is up 4.8 percent after sinking to a two-year low on Oct. 3.
Bank of America Corp., JPMorgan Chase & Co., Travelers Cos. and American Express Co. lost more than 2.2 percent for the biggest declines in the Dow Jones Industrial Average, which slipped 0.2 percent to 11,103.12. Sprint Nextel Corp. tumbled 20 percent, the biggest loss in the S&P 500, after saying it needs to raise additional capital as it spends on a network upgrade and new handsets.
Rebound
The S&P 500 ended the session up about 7.5 percent from a one-year intraday low on Oct. 4 and capped a 2 percent weekly gain. The benchmark index sank 14 percent in the third quarter and this week came within 1 percent of extending its decline from its April peak to 20 percent on a closing basis, the common definition of a bear market. The slump pushed the index to 12 times reported earnings, the cheapest valuation level since 2009, according to data compiled by Bloomberg.
Alcoa Inc., the largest U.S. aluminum producer, will mark the unofficial start of the earnings-reporting season when it reports results on Oct. 11. Third-quarter profits for S&P 500 companies are projected to have grown 12 percent, according to analyst forecast compiled by Bloomberg, down from an estimate of
17 percent when the index traded at a three-year high at the end of April.
Jobs Revision
The government jobs data also showed hours and earnings both increased and revisions to previous reports added a total of 99,000 jobs to payrolls in July and August after last month’s jobs report showed no gain in non-farm payrolls for August. “This is yet another data point suggesting that the U.S. is not moving toward recession any time soon,” Richard Skaggs, senior equity strategist at Loomis Sayles & Co. in Boston, which manages more than $150 billion, said in a telephone interview. The revisions to prior months “were significant,” he said. “Last month, the unchanged number really sent stocks for a loop.”
The rate by which data on the economy has been trailing forecasts has been decreasing since June, according to the Citigroup Economic Surprise Index. The U.S. gauge, which fell below zero on April 29 as the S&P 500 was peaking, has climbed from a low of minus-117.2 on June 3 to minus-7.5.
The 30-year Treasury bond’s yield climbed six basis points to 3.01 percent increased 10 points this week, the biggest increase since August. Two-year yields climbed three basis points to 0.29 percent, up five points on the week.
‘Positive Surprise’
“We saw a positive surprise in payrolls and the market has to respect that and push yields higher on the optimism, but no one is too excited about the data given the uncertainty in Europe,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 20 primary dealers obliged to participate in U.S. debt offerings. “The uncertainty isn’t going away anytime soon.”
The Stoxx Europe 600 Index rose 0.8 percent to extend its weekly gain to 2.6 percent. Gauges of energy producers and auto companies climbed more than 1.7 percent to lead gains among 19 industries.
European markets closed before Fitch downgraded Italy and Spain.
The yield on 10-year Italian bonds rose seven basis points to 5.49 percent. The nation said it plans to sell securities maturing between 2016 and 2025 on Oct. 13. Spanish yields fell two points to 4.95 percent.
Greece Talks
German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet in Berlin on Oct. 9 to discuss Greece’s debt problems as the nation edges closer to default. It will be their eighth one-on-one summit in 20 months.
The MSCI Emerging Markets Index climbed 2.1 percent, extending its rebound from a two-year low on Oct. 4 to 6.1 percent. The BSE India Sensitive Index, or Sensex, added 2.8 percent after Citigroup raised its rating on the nation to “neutral.” The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong advanced 3.7 percent. Benchmark indexes gained more than 2.5 percent in Russia and South Korea.
Crude oil for November delivery rose 39 cents to settle at $82.98 a barrel on the New York Mercantile Exchange and rallied 4.8 percent this week, the most since March.
Among commodities tracked by the S&P GSCI Index, zinc and sugar rose more than 2 percent to lead gains and coffee and natural gas dropped more than 3 percent for the biggest losses.
Have a wonderful Thanksgiving long weekend everyone!
As Always,
Kyle,
For Carolann.