August 2, 2012 Newsletter

Dear Friends,

Tangents:

To get where you’re going, you have to be good, and to be good where you’re going, you have to be damned good.  Every once in a while, you’ll succeed.  Most of the time you’ll fail, and most of the time  the circumstances will be well beyond your control. – Aaron Sorkin, Syracuse University Commencement Speech, 2012.

On this day in…

1876 – Wild Bill Hickok is shot while playing poker.

1934 – Hindenburg dies, Hitler becomes Fuhrer.
1939 – Einstein urges U.S. Atomic action.

1965 – (Toronto-born Canadian) Newsman Morley Safer films the destruction of a Vietnamese village by U.S. Marines.
1990 – Iraqi forces invade neighbouring Kuwait.

Trust your intuition and be guided by love. –Charles Eisenstein

photos of the day August 2, 2012

Buddhist monks walk in thick mist during a monsoonal rain in Dharmsala, India. The area receives heavy rainfall during the summer monsoon season though this year it has been lighter than usual.

Ashwini Bhatia/AP

The English National Ballet troupe waits to perform a pre-show for the artistic gymnastics women’s individual all-around competition at the 2012 Summer Olympics, in London.

Gregory Bull/AP

Market Closes for August 2, 2012:

North American Markets

International Markets

Bonds

Currencies

Commodities

Market Commentary:

Canada

By Eric Lam

Aug. 2 (Bloomberg) — Canadian stocks declined for a fourth day as natural gas and oil prices slumped after European Central Bank President Mario Draghi failed to reassure investors on immediate efforts to bolster the economy.

Suncor Energy Inc. lost 1.9 percent as oil tumbled 1.3 percent. Canadian Natural Resources Ltd. and Cenovus Energy Inc. sank at least 2.4 percent as the price of natural gas plunged 5.6 percent. Energy shares contributed most to the decline in the Standard & Poor’s/TSX Composite Index among 10 industries.

The S&P/TSX fell 78.23 points, or 0.7 percent, to 11,540.30 at 12:59 p.m. in Toronto. The benchmark gauge has lost 1.9 percent this week, bringing its 2012 decline to 3.5 percent.

“What we’ve seen from Europe to date has been talk, not specific plans or actions,” Brian Belski, chief investment strategist with BMO Capital Markets, said in a phone interview from New York. “Markets and investors around the world — and it doesn’t matter if it’s today or next week — they want and deserve answers. That’s why you see these reactions and are most likely going to continue to see these reactions.”

Draghi, who pledged last week to do “whatever it takes” to preserve the euro, said the bank will join forces with governments to buy sovereign bonds. Details of the purchase plan will be fleshed out in the coming weeks, Draghi said at a Frankfurt press conference. Earlier, the ECB kept its main interest rate at 0.75 percent.

Suncor lost 1.9 percent to C$30.19. Canadian Natural Resources slid 2.4 percent to C$26.95. Cenovus slipped 2.5 percent to C$30.49 as natural gas futures declined in New York after a government report showed that U.S. stockpiles climbed more than expected last week.

Potash Corp. of Saskatchewan Inc., the world’s largest fertilizer producer, fell 3.7 percent to C$42.30, and Agrium Inc. decreased 0.8 percent to C$93.94 after analyst Charles Neivert with Dahlman Rose & Co. in New York cut his rating on both companies to a hold from a buy.

“The severe drought in the major growing areas of the U.S. may be about to apply the coup de grace to the fertilizer shares,” he wrote in a report today.

US

By Rita Nazareth

Aug. 2 (Bloomberg) — U.S. stocks fell, sending the Standard & Poor’s 500 Index down for a fourth straight day, after European Central Bank President Mario Draghi failed to reassure investors on immediate efforts to bolster the economy.

Alcoa Inc., JPMorgan Chase & Co. and DuPont Co. dropped at least 1.8 percent to pace losses in the biggest companies.

Knight Capital Group Inc. plunged 63 percent after saying losses from a trading breakdown are $440 million, more than some analysts had estimated, as it explores strategic and financial alternatives. General Motors Co. slid 2.6 percent as the automaker said second-quarter profit slumped 38 percent.

About five stocks fell for every three that rose on U.S. exchanges at 4 p.m. New York time. The S&P 500 lost 0.7 percent to 1,365, dropping 1.5 percent in four days. The Dow Jones Industrial Average declined 92.18 points, or 0.7 percent, to 12,878.88. Volume for exchange-listed stocks in the U.S. was 7.3 billion shares, or 8.6 percent above the three-month average.

“It’s status quo,” said Hayes Miller, who helps oversee about $48 billion as the Boston-based head of asset allocation in North America at Baring Asset Management Inc. He spoke on a phone interview. “I don’t know why people feel that authorities can come up with magic solutions. I don’t know that the magic bullet exists. There are limits to what the ECB can do.”

Stocks joined a global slump as Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s crisis, while conceding that Germany’s Bundesbank has reservations about the plan. Details on the plan will be fleshed out in coming weeks, he said after keeping the interest rate on hold at 0.75 percent.

Yesterday, the American central bank also failed to bolster confidence. The Federal Reserve’s pledge to provide additional support for the economy disappointed investors anticipating a more definitive sign of further monetary easing. The S&P 500 rose as much as 29 percent from its October 2011 low amid bets the central bank would add economic stimulus.

Tomorrow’s jobs report may provide more direction toward the Fed’s next steps to ensure the recovery is not derailed.

Payrolls rose by 100,000 after an 80,000 gain in June and the unemployment rate held at 8.2 percent, according to a Bloomberg survey. Data today showed orders placed with U.S. factories unexpectedly fell and jobless claims rose less than forecast.

Pacific Investment Management Co.’s Mohamed El-Erian said the world economy is suffering its severest slowdown since the recession ended in 2009. The chief executive officer of Pimco predicted global growth of 2.25 percent over the next 12 months.

That’s down from the 3.9 percent in 2011 and 5.3 percent in 2010 recorded by the International Monetary Fund. The world economy contracted 0.6 percent in 2009.

“This is a serious, synchronized slowdown,” El-Erian said in an interview today.

Companies which are most-dependent on economic growth tumbled today, with the Morgan Stanley Cyclical Index slumping 1.1 percent. Nine of 10 groups in the S&P 500 retreated as commodity companies had the biggest losses. Alcoa, the largest U.S. aluminum producer, slipped 3 percent to $8.18. JPMorgan dropped 2.3 percent to $35.17. DuPont, a chemical maker, declined 1.8 percent to $49.02.

Investors watched the latest developments with Knight Capital. The shares plunged 63 percent to $2.58, extending a two-day tumble to 75 percent. Knight has “all hands on deck” and is in close contact with clients and counterparties as it tries to weather trading errors that cost it $440 million, Chief Executive Officer Thomas Joyce said.

Joyce said it’s “hard to comment” on discussions with creditors and the firm explored strategic and financial alternatives following a loss almost four times its annual profit. The problems were triggered by what Joyce called “a bug, but a large bug” in software as the company, one of the largest U.S. market makers, prepared to trade with a New York Stock Exchange program catering to individual investors.

“Technology breaks,” Joyce said in an interview on Bloomberg Television’s “Market Makers” program with Erik Schatzker and Stephanie Ruhle today. “It ain’t good. We don’t look forward to it.”

Investors also watched second-quarter corporate earnings.

About 73 percent of companies which reported quarterly results have beaten analysts’ estimates, according to data compiled by Bloomberg. Sales missed estimates at 59 percent of companies.

GM slumped 2.6 percent to $19.14. The automaker faces rising losses in Europe and a stagnating China market. Overseas challenges threaten to undercut the company’s recovery even as its domestic market is on pace for the best year since 2007.

Abercrombie & Fitch Co. plunged 15 percent to $29.06, the lowest since 2009. The teen retailer with more than 1,000 stores cut its annual forecast yesterday, citing an anticipated drop in same-store sales in the second half of 2012.

Monster Worldwide Inc. declined 14 percent to $6.10. The Internet recruiting service exploring a possible sale forecast earnings that fell short of analysts’ predictions, citing European economic weakness.

MGIC Investment Corp. sank 64 percent, the most ever, to 88 cents. The mortgage insurer reported its biggest loss since 2009 and its risk-to-capital ratio breached regulatory standards.

Apache Corp. dropped 4.9 percent to $82.58. The independent oil and natural-gas producer reported second-quarter profit that trailed analysts’ estimates after energy prices fell and maintenance hampered production.

Parker Hannifin Corp. slid 3.3 percent to $78.85 after the maker of fluid power systems and air-conditioning products forecast annual earnings lower than some analysts’ estimates amid a demand slump in Europe.

DirecTV fell 2.6 percent to $48.80. The largest U.S. satellite-television provider reported second-quarter profit that trailed analysts’ estimates after posting the company’s first net decrease in U.S. subscribers.

Sealed Air Corp. sank 17 percent, the biggest decline in the S&P 500, to $13.15. The maker of Bubble Wrap posted second- quarter earnings that trailed analysts’ estimates and announced plans to pursue “strategic options.”

Navistar International Corp. dropped 13 percent to $21.44.

The maker of International brand trucks disclosed a U.S. Securities and Exchange Commission inquiry and withdrew its full-year earnings forecast.

Bristol-Myers slumped 8.6 percent, the most since 2002, to $32.55. The company lost ground in the race to develop a stand- alone hepatitis C pill after it suspended testing of an experimental drug for the disease that cost it $2.5 billion to buy earlier this year.

Separately, executive Robert Ramnarine was charged with insider trading for making $311,361 in illegal profit by buying stock options in three companies targeted for acquisition.

Facebook Inc. dropped 4 percent to $20.04, a record low.

The shares are 47 percent below their initial public offering price of $38. The world’s largest social-networking service last week reported earnings that showed slowing growth.

Gap Inc. and Macy’s Inc. posted July same-store sales that beat estimates as promotions and warm weather boosted shopping traffic. Gap, the biggest U.S. specialty-apparel retailer, climbed 13 percent to $33.17. Macy’s, owner of its namesake and Bloomingdale’s department stores, added 3.8 percent to $36.40.

First Solar Inc. surged 21 percent, the biggest advance in the S&P 500, to $17.93. The world’s biggest maker of thin-film panels said profit jumped 81 percent after it recognized revenue for selling power plants.

MetLife Inc. rose 4.2 percent to $31.70. Profit beat estimates and more than doubled on gains from derivatives it uses to protect against a decline in interest rates.

Tesoro Corp. jumped 14 percent to $31.79. The largest independent refiner on the U.S. West Coast said profit surged 78 percent and announced a $500 million share buyback plan.

Time Warner Cable Inc. added 2.7 percent to $87.94. The second-largest U.S. cable-television provider reported second- quarter profit that beat analysts’ estimates after gaining broadband Internet subscribers.

Green Mountain Coffee Roasters Inc. rallied 27 percent to $22.66. The maker of Keurig brewers and single-serve pods said third-quarter profit rose 30 percent and it will repurchase as much as $500 million in shares over the next two years.

Yelp Inc. added 17 percent to $22. The online review website reported second-quarter sales that topped estimates as an expansion into new regions helped widen its user base.

Jeremy Siegel, author of “Stocks for the Long Run”, said Bill Gross, who runs the world’s biggest bond fund at Pimco, is wrong when he compares long-term returns from equities investing to a “Ponzi scheme.”

“I like Bill Gross a lot, but he’s got the economics wrong,” Siegel said on Bloomberg Television’s “In the Loop” with Betty Liu. Siegel is “obviously pushing at windmills,”

Gross said today in an interview with Liu. “He belongs back in his ivory tower,” Gross said.

In his monthly investment outlook July 31, Gross said that the so-called Siegel Constant, which purports to show a long- term history of inflation-adjusted equity real returns of 6.6 percent since 1912, may be a “historical freak” unlikely to be seen again. Presuming a 2 percent return for bonds and 4 percent nominal returns for stocks, a diversified portfolio produces a nominal return of 3 percent and inflation-adjusted returns near zero, Gross, who manages the $263.4 billion Total Return Fund at Pimco, wrote in the outlook.

“Those that are looking for double-digit returns for stocks to pay education, to pay for retirement, are bound to be disappointed and that’s why the cult of equity is dead,” Gross said today in the interview with Liu. “It’s hard to see how corporations and stocks can continue to earn 3 percent more than GDP going forward and that’s only common sense.”

Have a wonderful evening everyone.

Be magnificent!

I declare out loud to whoever wants to believe me:

I have no word in my mouth

that is not in your heart!

Kabir, 1440-1518

As ever,

Carolann

Great services are not canceled by one act

or by one single error.

-Benjamin Disraeli, 1804-1881

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

Senior Vice-President &

Senior Investment Advisor

Queensbury Securities Inc.,

St. Andrew’s Square

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7