June 22nd, 2011 Newsletter

Dear Friends,

 Tangents:  I’ve been in Vancouver the past couple of days attending a course at UBC on Financial Statement Analysis.  The instructor answered one of my questions with the statement, “Accounting is an art, not a science.”   Interesting perspective, but is obviously true nonetheless.  The emphasis during the course was on studying financial statements in order to determine the viability of a company and how companies like Enron and WorldCom (and perhaps) Sino-Forest get past the Auditors; what to look for, how to stand on guard….I picked up a copy of The Vancouver Sun this morning and a headline caught my eye, “ 7-billionth person expected this fall.”   The statistics are startling:

• About 1.1 billion people will migrate from the countryside into Asia’s cities in less than 20 years, according to the Asian Development Bank (ADB).

• India needs to build the equivalent of a city of Chicago every year to provide enough commercial and residential space for its migrants, according to McKinsey Global Institute (MGI) research.

• One hundred new cities from China will join the list of the top 600 urban centres – which generate about 60 per cent of global GDP – in the next 15 years, says MGI.

Journalist Tom Brokaw gave the commencement speech at St. Lawrence University this month.  He said,

“You cannot get through this world alone.  You need each other  – and we need you to celebrate one another in a common cause of restoring economic justice and true value, advancing racial and religious tolerance, creating a healthier planet.

  We do that by listening and reasoning, not by shouting and fighting.  Beware of ideological tyranny and uncompromising certainty.  Do not become hostage to the orthodoxy of others.  This country was built on big, bold ideas that served the common welfare.”

Photo of the day

June 22, 2011

Farmers harvest rice at a paddy field in Ha Hoi village, 12.5 miles south of Hanoi. Vietnam has contracted to sell around 100,000 tonnes of 25 percent broken rice to several African nations so far this month, helping to keep prices stable at the start of a harvest. Kham/Reuters

Market Commentary:

Canada

By Matt Walcoff

June 22 (Bloomberg) — Canadian stocks fell for the first time in three days after the U.S. Federal Reserve cut its growth forecasts and corn, wheat and copper futures dropped.

Bank of Montreal, Canada’s fourth-largest lender by assets, declined 1.5 percent after the Fed lowered its 2011 forecast for gross domestic product increase by 0.4 percentage points. Barrick Gold Corp., the world’s largest producer of the metal, gained 1.4 percent as gold futures rose for a seventh day. Bombardier Inc., a maker of trains and airplanes, fell 4.8 percent after rival Airbus SAS won an order for 80 single-aisle aircraft from Republic Airways Holding Inc.

The Standard & Poor’s/TSX Composite Index slipped 2.76 points, or less than 0.1 percent, to 13,060.56.

“The market’s still pretty edgy,” said Irwin Michael, a money manager at ABC Group of Funds in Toronto, which oversees about C$1 billion ($1.03 billion). “I don’t know whether people expected an extension of QE2,” the second round of asset purchases begun in November.

 The stock benchmark rallied 2.1 percent June 20 and yesterday for the biggest two-day gain in seven months as Greek Prime Minister George Papandreou won support for a Cabinet shuffle. The S&P/TSX tumbled 10 percent from April 5 to June 17 as world equities retreated on concern a Greek debt default will derail the global recovery.

US

By Rita Nazareth and Cecile Vannucci

June 22 (Bloomberg) — U.S. stocks declined, halting a four-day rally, after the Federal Reserve lowered its forecast for economic growth and said it plans to finish its $600 billion bond-purchase program this month as scheduled.

Adobe Systems Inc., the world’s largest maker of graphic- design software, retreated 6.3 percent after reporting lower- than-expected Europe sales. Sprint Nextel Corp. decreased 2.3 percent as Sanford C. Bernstein & Co. said the company faces risks from its strategy for fourth-generation phones. FedEx Corp., operator of the world’s biggest cargo airline and considered a proxy for the economy, advanced 2.6 percent after forecasting earnings that may top analysts’ projections.

The Standard & Poor’s 500 Index lost 0.7 percent to 1,287.14 at 4 p.m. in New York, after rallying 2.4 percent over the previous four days. The Dow Jones Industrial Average dropped 80.34 points, or 0.7 percent, to 12,109.67 today.

“The Fed is pretty conscious of the fact that the economy has softened,” said Liam Dalton, president of Axiom Capital Management Inc. in New York, which oversees $1.4 billion. “Even though the economy may stabilize, it’s a less exciting picture right now. Stock players are going to be a little more reluctant to take risks.”

The S&P 500 has retreated 5.6 percent from this year’s high at the end of April amid weaker-than-estimated economic data and concern about Europe’s debt crisis. The benchmark gauge for American equities was still up 2.4 percent in 2011 on government stimulus measures and better-than-expected earnings.               

Fed officials lowered their forecasts for growth and employment this year and next, projecting the economy will expand 2.7 percent to 2.9 percent this year, down from forecasts ranging from 3.1 percent to 3.3 percent in April. U.S. central bankers said inflation, excluding food and energy, will be somewhat higher than previously forecast. They said the pace of recovery is likely to “pick up over coming quarters.”

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” the Federal Open Market Committee said today in a statement.

“The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings.”

The S&P 500 surged 23 percent since Fed Chairman Ben S. Bernanke’s Aug. 27 speech in Jackson Hole, Wyoming, where he foreshadowed the second round of bond purchases, known as quantitative easing or QE, to boost the economy.                         

In a Twitter post this morning, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said the Fed at its Jackson Hole meeting this August “will likely hint” at a third round of quantitative easing and an effort to limit borrowing costs through interest-rate caps.

“The economy would have to decelerate materially from here for the Fed to do another round of quantitative easing,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion. “The economy will continue in a low trajectory of recovery. The underlying fundamentals remain in place.”

Adobe fell 6.3 percent to $30.01. The San Jose, California- based company dealt with uneven overseas sales in the second quarter while readying a new version of its flagship Creative Suite software. Europe was weaker than anticipated primarily because customers in Scandinavia and the U.K. held back purchases, Chief Financial Officer Mark Garrett said on a conference call yesterday.

Adobe also said profit for the third quarter may be as low as 50 cents a share, compared with the 54-cent average analyst projection, excluding certain items.

Sprint Nextel declined 2.3 percent to $5.12. Investors are optimistic about a turnaround, according to Craig Moffett, an analyst at Sanford C. Bernstein. “We remain concerned that the stock does not fully discount the financing risks associated with building a 4G network, and that subscriber forecasts remain overly optimistic given deterioration in overall post-paid market trends,” he wrote in a report today.

FedEx climbed 2.6 percent to $91.44. The company is benefiting from a pickup in worldwide shipping and higher pricing. The express unit’s overall revenue per package, or yield, added 10 percent to $22.69 in the quarter through May, FedEx said.

“The FedEx data today is as good as anything,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, which manages $1.5 billion. “Boxes are still moving and that’s a sign that business is getting done.”

CarMax Inc. gained 7 percent, the most in the S&P 500, to $32.66. The largest U.S. seller of used cars sold more vehicles at higher prices in its first fiscal quarter.

U.S. corporate profit margins are so high that a return to normal will cut about 3 percentage points a year from any future stock-market gains, according to Pierre Lapointe, a strategist at Brockhouse & Cooper Inc.

Margins in the first quarter were 11.3 percent overall and 13 percent in the non-financial category, based on Commerce Department data. These were the highest readings since 2007, before the latest recession started. Both were about two points higher than the average since the 1970s.

“We see no way around margin contraction,” Lapointe and economist Alex Bellefleur wrote yesterday in a report with a similar chart. U.S. companies are vulnerable even though they are increasingly generating profits overseas, they wrote.

Have a wonderful evening everyone.

Be magnificent!

“All things are linked together through cause and effect.  There is no such thing as an accident.

When we cannot find the link between cause and effect in an event, we call it an accident.” 

-Swami Prajnanpad, 1891-1974

As ever,

 Carolann 

“Work and struggle and never accept

an evil that you can change.”

           -André Gide, 1869-1959