May 11th, 2011 Newsletter

Dear Friends,

There is always music amongst the trees in the garden, but our hearts must be still to hear it.

 

 

Space photos of the day: Spitzer Space Telescop

This new view of the North America nebula obtained on Feb. 16 combines both visible and infrared light observations, taken by the Digitized Sky Survey and NASA’s Spitzer Space Telescope, respectively, into a single vivid picture. The nebula is named after its resemblance to the North American continent in visible light, which in this image is represented in blue.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actress Melanie Laurent poses during a photo call in Cannes, France. Laurent will be the master of ceremonies for the opening ceremony of the 64th Cannes Film Festival which runs from May 11 to 22nd

Market Commentary:

Canada

By Matt Walcoff

Canada’s dollar snapped three days of gains against the greenback as crude oil slid after a report showed U.S. inventories rose to a two-year high and stocks fell, sapping demand for higher-yielding assets.

The loonie, as the Canadian dollar is also known for the image of the aquatic bird on the C$1 coin, weakened a day after Finance MinisterJim Flaherty said the government wants to avoid extreme currency fluctuations. Two-year government bonds rose after an auction of the debt.

“The primary driver for the decline in the Canadian dollar is the midmorning selloff in oil,” said George Davis, Toronto- based chief technical analyst for fixed-income and currency strategy at Royal Bank of Canada. “That points to a risk-off environment, which tends to be negative for the Canadian dollar.”

The loonie depreciated 0.5 percent to 96.19 cents versus the greenback at 5 p.m. in Toronto, from 95.68 cents yesterday. One Canadian dollar buys $1.0396. The currency touched 94.46 cents on April 29, the strongest level since November 2007.

Crude oil for June delivery fell 5.1 percent to $98.60 a barrel. The Standard & Poor’s 500 Index slid 1.1 percent. The S&P/TSX Composite Index dropped 1.6 percent.

Supplies of crude in America, Canada’s biggest trading partner, jumped by 3.78 million barrels to 370.3 million in the week ended May 6, the U.S. Energy Department said. The median forecast of 16 analysts in a Bloomberg News survey was for inventories to climb by 1.5 million barrels. The increase puts supplies at the highest level since May 8, 2009.

Loonie Versus Euro

The loonie advanced 1 percent to C$1.3652 against the euro on speculation Greece may restructure its debt while Canada’s economy grows stronger. The Canadian currency touched C$1.3636, the strongest level since April 1.

“In the context of trouble in the euro region, we’re seeing flows into Canada,” said Rahim Madhavji, president at Knightsbridge Foreign Exchange Inc. in Toronto. “Canada has what everyone wants. It has a sound and growing economy and fiscal prudence.”

Canadian employers added a net 58,300 jobs in April after a decrease of 1,500 in the previous month, Statistics Canada reported last week. The median forecast of 25 economists in a Bloomberg News survey was for an increase of 20,000. The jobless rate unexpectedly dropped to 7.6 percent.

The nation reported a fourth straight trade surplus in March, the longest stretch since November 2008 and a sign that exporters are recovering from the global recession.

Trade Surplus

The surplus widened to C$627 million ($658 million), Statistics Canada said today, larger than the C$400 million median forecast in a Bloomberg survey of 21 economists. The agency also raised the combined total surplus for the prior two months by C$1.33 billion.

The Conservative Party will use its election victory last week to ensure the nation erases its budget deficit in three years, Flaherty said yesterday at the Bloomberg Canada Economic Summit in Toronto.

While Flaherty said a strengthening currency is a reflection of confidence in the Canadian economy, he added that the government wants to avoid “jerky” movements in the Canadian dollar and said the government wouldn’t intervene in currency markets without an extreme cause. Flaherty also said he doesn’t want to see increasing “weakness” in the U.S. dollar.

A gain today in two-year Canadian government bonds pushed the yield down three basis points, or 0.03 percentage point, to 1.69 percent. The price of the 1.75 percent security maturing in March 2013 increased 5 cents to C$100.10.

Canada sold C$3.5 billion ($3.7 billion) of two-year debt, drawing an average yield of 1.873 percent. The government received bids of C$8.8 billion for the 2 percent securities maturing in August 2013, according to a statement on the Bank of Canada’s website.

Canadian Finance Minister Jim Flaherty said his governing Conservative Party will use its decisive election victory last week to ensure the nation erases its budget deficit in three years.

Speaking at the Bloomberg Canada Economic Summit, Flaherty said the Conservatives will introduce a budget next month that will forecast a balance by 2014, even as the country moves ahead with planned corporate income tax cuts to help sustain the expansion.

“We have a majority government in Canada now,” Flaherty said late yesterday in Toronto. “Businesses can rest assured we will stay on track.”

Prime Minister Stephen Harper won a majority of seats in Parliament for the first time on May 2, giving him a mandate to bolster the economic recovery with additional tax cuts and erase the deficit with curbs on government spending.

The Conservatives’ election victory ended seven years of minority governments that have fueled government spending, and put the party in control of the federal agenda for the first time since the early 1990s.

Harper pledged to balance Canada’s budget with a review of government spending to find C$4 billion ($4.3 billion) in annual savings. TheConservative platform, which commits to reintroduce measures from the 2011 fiscal plan that wasn’t passed before the election was called, projects a C$2.8 billion surplus in the fiscal year that begins April 2014.

Re-introduce Budget

The government will re-introduce the budget that was rejected by opposition parties before the May 2 election, with some minor adjustments, Flaherty said yesterday.

Flaherty spoke a week after investors knocked $99 billion off the value of commodities, products that are among Canada’s biggest exports. The Bloomberg Canada Economic Summit featured 11 panels including Frank Stronach, the founder of Aurora, Ontario-based Magna International Inc. (MG), Peter Munk, chairman of Toronto based Barrick Gold Corp., and Donald Guloien, CEO of Toronto-based Manulife Financial Corp. (MFC)

Goldcorp Inc. Chairman Ian Telfer said at the summit he expects commodity prices to rise this year. He said he is “bullish” on the price of gold, which he said will reach $2,000 per ounce by the end of 2011. He also predicted copper averaging $4 to $4.50 per pound and uranium around $65 to $70 per pound over the same period. His Vancouver-based company is the world’s second-largest producer of gold.

Canada is the only G-7 economy that is a major exporter of commodities.

Not Draconian

Eliminating the budget deficit is a priority and Canada won’t make “draconian” moves to reduce it, Flaherty said separately in a Bloomberg Television interview, adding he wanted to ensure sustainable economic growth that he estimated at about a 3 percent annual rate this year and next. Other Group of Seven countries must also deal with their deficits and debt, he said in the interview.

Flaherty has been finance minister since 2006 without the government holding a majority, meaning he’s had to rely on support from opposition lawmakers to pass laws. Under Flaherty, program expenditures have increased by 40 percent to C$245 billion as he sought to placate opposition parties and win favor with voters.

“One of the realities of minority governments is you have to run two tracks at the same time,” Flaherty said referring to the need to formulate policy while ensuring at the same time the government can retain power.

“It makes planning very difficult,” he said.

Income Splitting

The Conservative government’s most expensive pledge during the campaign was a measure that would let families with children under 18 split up to C$50,000 in income for tax purposes. It would come into effect in 2014 and cost C$4 billion through March 2016.

The Conservative platform also budgets C$2.2 billion in compensation to Quebec for harmonizing its sales tax with the federal government. There is also new funding for the Canadian Coast Guard, crime legislation, fishing and agriculture.

The Conservative platform projects a 2011-12 deficit of C$30.3 billion, C$20.1 billion in 2012-13, and C$7.7 billion in 2013-14. The federal government’s fiscal year begins April 1.

While Flaherty said a strengthening currency is a reflection of confidence in the Canadian economy, he added the government wants to avoid “jerky” movements in the Canadian dollar, and said the government wouldn’t intervene in currency markets without an extreme cause. Flaherty also said he doesn’t want to see increasing “weakness” in the U.S. currency. The Canadian government has proposed legislation for the country’s covered bond market to increase disclosure for investors while setting minimum standards in the C$30 billion ($31 billion) market.

The proposals include a framework for bond issuance and establishing an agency that would oversee the rules, the Department of Finance said today in a discussion paper on its website. The Canadian government pledged to set up legislation governing the covered bond market in its 2010 budget.

The government is proposing that borrowers set up a separate special purpose vehicle to hold the assets that back the covered bonds. The assets would be sold by the issuing company to the separate entity, according to the proposed legislation.

Canadian banks have issued more than C$30 billion in covered bonds since 2007, tapping a market that dates back 230 years in Europe. In comparison, the outstanding stock of Canada Mortgage Bonds is about C$170 billion.

Comments on Canada’s proposals should be received by June 10, the finance department said.

Covered bonds are typically backed by mortgages or public- sector loans and the collateral underlying the debt remains with the borrower, which also guarantees the debt.

US

By Rita Nazareth – May 11, 2011 1:57 PM PT

U.S. stocks slumped, giving the Standard & Poor’s 500 Index its biggest decline since March, as commodities tumbled amid a strengthening dollar and concern that accelerating global inflation may curb economic growth.

Freeport-McMoRan Copper & Gold Inc. (FCX) and Halliburton Co. (HAL) fell at least 4 percent as data from China raised expectations about higher interest rates. Yahoo! Inc. dropped 7.3 percent on concern that its stake in a Chinese Internet business may lose value after a transfer of ownership in the company’s online payment business. Walt Disney Co. (DIS), the biggest theme-park operator, slumped 5.4 percent after profit missed estimates.

The S&P 500 dropped 1.1 percent to 1,342.08 at 4 p.m. in New York, snapping a three-day rally. The Dow Jones Industrial Average slid 130.33 points, or 1 percent, to 12,630.03. Oil fell below $100 as a report showed that U.S. supplies surged.

“Inflation seems to be rearing its ugly head,” said Cliff Remily, a money manager at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees $80 billion. “Some countries are raising interest rates as a way to combat inflation. That’s putting pressure on stocks. We’ve got a lot of the consumer staples. These are the companies you want to be in this kind of environment. We’ve avoided materials.”

The S&P 500 has fallen 1.6 percent this month, as gauges of energy and raw-materials producers have slumped at least 4.3 percent. Indexes of companies less-tied to economic growth, including utilities, health care, consumer staples and phone, outperformed the benchmark. The S&P 500 is still up 6.7 percent this year amid government stimulus measures and higher-than- estimated corporate profits.

Inflation in China

Global stocks and commodities prices fell as figures showed inflation in China stayed above the government’s target, stoking concern about further monetary tightening that may curb demand. Chinese inflation remained higher than 5 percent in April and lending exceeded analysts’ estimates.

The pound rose as Bank of England Governor Mervyn King said inflation remains “uncomfortably high” and officials signaled they may raise rates later this year. Reports showed growth in prices in Germany topped estimates and Poland unexpectedly increased its benchmark rate.

“Governments around the world will be a little less accommodative,” said Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York. “People are concerned that we may see slower growth because of that. In addition, we’re seeing some unwinding of that trade of people buying commodities and the euro, while selling the dollar.”

Euro Slides

The euro slipped against the majority of its most-traded peers on speculation European leaders are slowing the drive to grant Greece additional aid, fueling concern the nation may be forced to restructure its debt. German Chancellor Angela Merkel said yesterday that Greece needs to stay the course on budget cuts to deserve an extension of the 110 billion-euro ($158 billion) lifeline granted last year.

The MSCI All-Country World Index of shares in 45 nations fell 0.6 percent. The Thomson Reuters/Jefferies CRB Index of commodities slumped 3 percent.

Energy and raw-material producers had the biggest declines within 10 S&P 500 groups, falling at least 2.7 percent. Freeport, the world’s largest publicly traded copper producer, dropped 5.6 percent to $48.27. Halliburton, the second-largest oilfield services provider, fell 4.1 percent to $46.43.

CME Suspends Trading

CME Group Inc. (CME) suspended trading of gasoline, crude and heating oil on the Nymex for five minutes starting at 12:06 p.m., said Laurie Bischel, a spokeswoman for the exchange in Chicago. Trading was stopped after June-delivery gasoline fell 25 cents, the daily limit. Limits were widened to 50 cents a gallon for gasoline and heating oil and $20 a barrel for crude.

Equities also fell after the U.S. trade deficit widened more than forecast in March as the highest oil prices in more than two years boosted imports, eclipsing record exports. The trade gap rose 6 percent to $48.2 billion, the biggest since June, from $45.4 billion in February, the Commerce Department reported. The median forecast of 72 economists surveyed by Bloomberg News projected it would widen to $47 billion. Sales abroad climbed by the most in 17 years.

The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, jumped 6.5 percent to 16.95.

‘Lighten Up’

“Lighten up on risk-taking now and don’t wait for October 1 as previously recommended,” Jeremy Grantham, the chief investment strategist for Boston-based Grantham, Mayo, Van Otterloo & Co., which manages more than $108 billion, wrote in a report today. The S&P 500 “may still get to 1,500 before October, but I doubt it, especially without a QE3,” he wrote. “And whether it will reach 1,500 or not, the environment has simply become too risky.”

The S&P 500 has rallied 26 percent since Fed Chairman Ben S. Bernanke suggested on Aug. 27 that he would pursue a second round of asset purchases to stimulate the economy, a tactic known as quantitative easing.

Yahoo fell 7.3 percent to $17.20. The payment business of Alibaba Group Holding Ltd., which is partly owned by Yahoo, was restructured so that a different company now holds 100 percent of its outstanding shares.

The transfer may diminish the value of Yahoo’s holding in Alibaba, Jordan Rohan, an analyst at Stifel Nicolaus & Co. in New York, wrote in a research note. In a worst-case scenario, profit from the payment business could be diverted to the new entity, away from Alibaba Group, he wrote.

Park Shortfall

Walt Disney declined 5.4 percent, the most in the Dow, to $41.52. The world’s biggest theme-park operator reported less second-quarter profit than analysts estimated as a shrinking box-office, a park shortfall and the Japanese tsunami overshadowed gains in TV.

Macy’s Inc. (M) jumped 7.7 percent to $28.36. The retailer reported first-quarter earnings that exceeded analysts’ estimates and increased its annual profit forecast as sales accelerated faster than expected.

Intel Corp. (INTC) gained 1.7 percent to $23.41. The world’s largest chipmaker raised its dividend for the second time in six months as increasing corporate spending on technology boosts its earnings. The quarterly payout rises 16 percent to 21 cents a share. On Nov. 12, it raised the dividend to about 18 cents.

Deutsche Bank AG’s Bankim Chadha boosted his profit estimates for companies in the S&P 500 for 2011 and 2012, citing first-quarter profit margins and sales that have beaten estimates. Combined earnings by stocks in the benchmark gauge this year will be $99 a share, up from an earlier forecast of $96, Chadha wrote in a note dated yesterday. Profit in 2012 will be $106 a share, a $4 increase from his previous prediction.

Earnings-per-share have beaten analyst estimates at 72 percent of the 425 companies in the S&P 500 that reported results since April 11.

Be magnificent!

Warm Regards,

Summer for Carolann

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

Senior Vice-President &

Senior Investment Advisor