September 15, 2014 Newsletter

Dear Friends,

Tangents:

On this date in 2008, Lehman Brothers filed for bankruptcy protection, Merrill Lynch sold itself to Bank of America and AIG was on the verge of collapse before being rescued by the U.S. government.-Steven Russolillo, WSJ.  And so began the great global financial crises of 2008-2009.

1971- Greenpeace founded.

1940 – Battle of Britain.

We had a nice stroll through VanDusen Botanical Garden in Vancouver yesterday.  It doesn’t matter how many times I go, I still come away having seen something new and feeling awed by the beauty of nature.   With all the beautiful weather we’ve been having, the rose garden is just as beautiful as ever.  There is a sculpture exhibit on until September 30^th, entitled Touch Wood.  Two dozen wood sculptures by B.C. artist such as Brent Comber, Michael Dennis and Martha Varcoe Sturdy are featured,  offering another reason to visit this great outdoor space.

PHOTOS OF THE DAY

The Marseille’s Major cathedral is seen through the sculpture ‘Poseidon’ by French visual artist Sacha Sosno installed in front of the ‘Regards de Provence’ museum in Marseille. Jean-Paul Pelissier/Reuters

A fishing boat sails along the shore on the Isle of Lewis, in the Outer Hebrides of Scotland. The referendum on Scottish independence will take place on September 18, when Scotland will vote whether or not to end the 307-year-old union with the rest of the United Kingdom. Cathal McNaughton/Reuters

Market Closes for September 15^th, 2014    

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Eric Lam

     Sept. 15 (Bloomberg) — Canadian stocks fell a second day as commodity producers dropped on signs demand growth is weakening in China, the biggest consumer of energy and metals.

     Magna International Inc. and Linamar Corp., auto parts manufacturers, slumped more than 1.7 percent. TransCanada Corp. declined 1 percent after analysts at Goldman Sachs Group Inc. lowered their rating for the stock to a sell. Raging River Exploration Inc. and Shawcor Ltd. dropped more than 3.3 percent as oil producers retreated. Semafo Inc. slumped 5.4 percent to pace declines among materials producers.

     The Standard & Poor’s/TSX Composite Index fell 49.02 points, or 0.3 percent, to 15,482.56 at 4 p.m. in Toronto. The gauge has fallen 1.1 percent since closing Sept. 3 at a record. It has advanced 14 percent this year, the second-best performer among the world’s developed markets behind Denmark.

     Data last weekend showed China’s industrial output rose at the slowest pace outside the Lunar New Year holiday period of January and February since the 2008 global financial crisis.

     First Quantum Minerals Ltd. retreated 4 percent to C$23.16 and Teck Resources Ltd. lost 1.5 percent to C$23.34 as copper for December delivery retreated in New York.

     Raw-materials stocks slumped 0.5 percent as a group, third- most in the S&P/TSX. Nine of 10 industries declined on trading volume in line with the 30-day average today.

US

By Lu Wang and Joseph Ciolli

     Sept. 15 (Bloomberg) — Beneath the U.S. stock market’s record-setting gains, trouble is stirring.

     About 47 percent of stocks in the Nasdaq Composite Index are down at least 20 percent from their peak in the last 12 months while more than 40 percent have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index. That contrasts with the Standard & Poor’s 500 Index, which has closed at new highs 33 times in 2014 and where less than 6 percent of companies are in bear markets, data compiled by Bloomberg show.

     The divergence shows the appetite for risk is narrowing as the Federal Reserve reins in economic stimulus after a five-year rally that added almost $16 trillion to equity values. It’s been three years since investors saw a 10 percent decline in the S&P 500 and they’re starting to avoid companies that will suffer the most when the market stumbles, said Skip Aylesworth, a portfolio manager for Hennessy Funds in Boston.

     “The small caps have had big runs and tend to get ahead of themselves,” Aylesworth said in a Sept. 10 phone interview. Hennessy Funds oversees about $5 billion. “It’s kind of like the tortoise and the hare, and they’re the hare. But then they get expensive, and when the market corrects, they get whacked.”

     The proportion of technology companies, small-caps and newly listed stocks stuck in their own personal bear markets has risen from 30 percent in March 2013, when the overall equity market surpassed its 2007 record. S&P 500 stocks with at least 20 percent losses have fallen since then, the data show.

     Risk tolerance is declining just before Alibaba Group Holding Ltd. and its shareholders plan to sell as much as $21.1 billion of shares in what will be the biggest ever U.S. initial public offering. The price implies a $163 billion valuation, making it the third-most valuable Internet company traded in the U.S., after Google Inc. and Facebook Inc.

     “How Alibaba performs will really give us an indication to the health of the market,” Malcolm Polley, who oversees $1.2 billion as president and chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said by phone on Sept. 9. “Right now, bigger companies seem to do better. Large tech names tend to perform very well,” he said. “The bull market itself is getting rather long in the tooth. It needs to rest.”                       

     The S&P 500 ended a five-week winning streak on Sept. 12, capping a five-day decline of 1.1 percent on concern the Fed may raise interest rates sooner than anticipated. The index slipped 0.1 percent at 4 p.m. today, while the Russell 2000 lost 1.2 percent and the IPO index dropped 1.5 percent.

     While rallies in Apple Inc. and Microsoft Corp. have lifted the Nasdaq Composite up about 8 percent this year, 47 percent of the measure’s stocks are in bear markets, data compiled by Bloomberg show. FireEye Inc., an online security company, sandwich seller Potbelly Corp. and World Wrestling Entertainment Inc. have tumbled more than 50 percent from their 52-week highs.

     “A lot of stocks have actually made significant declines,” David James, director of research at Alpha, Ohio- based James Investment Research Inc., which oversees more than $5 billion, said by phone on Sept. 9. “Most people see the record highs on the S&P 500 and that makes them feel like, ‘Oh, the market is doing just fine,’’ without recognizing that most stocks really are not participating to that degree.”                           

     Stocks with weak or no earnings and fewer shares to trade fare worse during market turmoil, said Brad Thompson, director of research at Frost Investment Advisors LLC in San Antonio, Texas. More than 20 percent of companies in the Nasdaq Composite and Russell 2000 will be unprofitable this quarter, according to data compiled by Bloomberg of companies with analysts’ forecasts. Only 15 companies in the S&P 500 reported a loss for the past year.

     “There is a sense of ‘Well, we’ve had a lot of liquidity, we’ve had low rates,” and “once the punch bowl is taken away, the market is going to fall,’” Thompson, who helps oversee $10 billion at Frost Investment, said in a phone interview on Sept.10. “I’m not in that camp, but that’s one narrative that’s been played out.”

     Low volatility across financial markets may signal investors are underestimating how quickly the central bank will raise interest rates, researchers at the San Francisco Fed said in a report last week. Bond-market indicators for long-term inflation, growth and funding costs are all lower now than they were at the end of the central bank’s first two rounds of quantitative easing.

     Fed officials in their June economic forecasts predicted their target interest rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later. They are set to release updated projections Sept. 17.

     Dan Miller, director of equities at GW&K Investment Management in Boston, said he’s not worried about losses in some parts of the market because overall U.S. stocks are still one of the best investments. The weak performance in small caps in 2014 isn’t that bad after they surged almost 60 percent over the previous two years, he said.

     “With interest rates so low and our economy in good shape, that should continue to push the stock market higher,” Miller, who helps oversee more than $20 billion, said in a phone interview on Sept. 11.                       

     At the last market peak, losses across small-cap stocks, IPOs and technology companies were as widespread as they are today. About 45 percent of the shares were down at least 20 percent from a 52-week high in October 2007, data compiled by Bloomberg show. That compares with 18 percent for the S&P 500.

     In the current bull market, speculative stocks have still delivered better returns to investors. The Russell 2000 and Nasdaq Composite are up 250 percent on average since March 2009, compared with 193 percent for the S&P 500. The IPO index has posted a smaller gain at 157 percent.

     The stronger performance has led to higher valuations.  Excluding unprofitable companies, the small-cap gauge trades at 20.5 times earnings. That compared with a multiple of 17.9 for the S&P 500, data compiled by Bloomberg show.

     “The performance divergence is a valuation story,” Oliver Pursche, the Suffern, New York-based president of Gary Goldberg Financial Services, said by phone on Sept. 10. “As investors continue to be nervous about a correction, they’ll be more likely to sell off what they perceive to be riskier asset classes.”
 

Have a wonderful evening everyone.

Be magnificent!

Propaganda can never tell the truth; truth can never be propagated.

Krishnamurti

As ever,

Carolann

To be prepared is half the victory.

        -Miguel de Cervantes, 1547-1616

Carolann Steinhoff, B.Sc., CFP®, CIM, CIWM, FCSI

Senior Vice-President &

Senior Investment Advisor

Queensbury Securities Inc.,

St. Andrew’s Square,

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7