Posted by Frances Horodelski on December 31, 2009

It's that time of year when analysts and strategists put pen to paper (and necks on the line) to provide investors with their forecasts for the coming year. While 2008 ended with a large measure of doom and gloom, the outlook for 2010 is mostly upbeat. Here is the consensus view (with some outliers thrown in for good measure).

1. Stocks will go higher. Pretty well everyone says so.  The average target for the S&P 500 is 1226 (versus its closing level of 1125 on December 29). For the S&P/TSX, most strategists are centred around 12,500 – modestly higher versus last night's close of 11,700. At the beginning of 2009, the consensus was generally correct in direction and magnitude with their targets for the end of 2009. Unfortunately, forecasters waffled when the world was falling apart in March. At that time, they lowered targets to avoid looking absurdly optimistic. As the year progressed, targets rose and most analysts got it right by year's end. We’ll see how well they do in 2010.

2. Gold will go higher. The consensus is for gold to average $1100 US per ounce in 2010 but John Licata at Blue Phoenix (who was bang on with his late 2008 call that gold would reach $1200 per ounce in 2009) is much more optimistic at $1375 per ounce for 2010. But there are a few forecasts for gold to fall. Doug Kass at Seabreeze Partners includes a topple in the price of gold in his forecasts for 2010. But this topple is for a relatively modest decline to the $900 per ounce level (versus today’s price of around $1100 per ounce). 

3. Interest rates will rise but when? Mark Carney, the governor of the Bank of Canada, has given us his conditional commitment to hold rates steady until the middle of 2010; so something sooner would be a surprise. And it's rare to find a strategist who doesn’t see the punch bowl being removed by the U.S. Federal Reserve in 2010. Goldman Sachs economists stand out here stating recently the Fed will remain on hold until 2012.

4. Bond prices will fall. The very steep yield curves in Canada and the U.S. already build in a tighter central bank environment in 2010. But many investors remain concerned about even more upward pressure on long term bond yields given the massive deficit position of the U.S. government, the need to fund that debt and the view that the big foreigner buyers (read China) could eventually not show up at one of the massive weekly auctions. Most portfolio managers say government bonds will not be an outperforming asset class in 2010, although corporate bonds are expected to continue to do well, say most portfolio managers as profits and the economy improve and default risk declines. The smart investors will watch global credit default rates to ensure the decline in risk continues downward as it has through 2009, and stay on the lookout for any reversals that might portend a change in risk sentiment.

5. Economies will grow in 2010. The recession is over.   Not much dissent here. Again, there are a few lone voices that call for a pull back in economic growth next year – but the consensus is for U.S. and Canadian economic activity to expand 2 to 2.5 percent (with some forecasts into the 3 percent area for one or more quarters). A negative quarterly number in 2010 would be a surprise for most investors as would any negative turn in U.S. jobless claims, which should track lower as the economy grows. Stronger than expected growth is not the consensus view, so quarterly growth in U.S. or Canadian GDP above 3.5 percent would be an eye-opener for most prognosticators. 

6. The dollars – both the Canadian and U.S. – will rise. The loonie has been averaging about 95 cents US for the last quarter of 2009 but most anticipate something closer to parity in 2010. The big call for 2010 will be on the U.S. dollar. Its modest 4-percent rebound in the last few weeks compares with a 17-percent decline from the 2009 highs. The fundamentals for the U.S. dollar are not compelling for bulls (deficits no matter where you look as well as a call for a new reserve currency gaining volume). But sometimes the least obvious trade is the right one and the higher U.S. dollar forecast is finding a few more voices (including influential newsletter publisher Dennis Gartman).

7. Commodities rule! While this view is becoming a little less dominant, the consensus remains mostly in favour of a cyclical bias to portfolios. With Chinese growth forecasted to accelerate in 2010, their demand for "stuff" is likely to remain firm -- or at least that's the common view.  And as commodities remain "bid," earnings growth expectations for energy and materials companies are strong (88 percent and 72 percent, respectively for the S&P sectors representing those two groups). Oil may be a wild card. Right now the consensus estimate is that oil will average $75 US per barrel in 2010 – just about where it is now. But with tensions rising in the Middle East (a recent attempted terrorist action over the holidays and Iran gaining front page headlines again), this may turn out to be an area where the consensus could change dramatically.

8. Bubbles, bubbles everywhere bubbles – but who has a pin? History is replete with investment bubbles and busts – but very rarely, if ever, has a bubble been seen by the consensus in advance. This time around there’s a bubble being detected around every investment corner. Detecting where the bubbles are (Canadian housing?) and how they get deflated will be one of the key stories for 2010.

9. Banks fail – many of them. In 2009, the FDIC has administered the failure of 140 U.S. banks, and in its latest report, advises that there are 552 institutions on the "problem" watch list. The prospect of more failures in the next few years is likely. But will there be a "big" failure? Not likely. But even a hint of this possibility could upset the easing risk trade in financials. Recent underperformance by some of the big names in finance (Goldman Sachs, for example) and the technical weakness in the Financial SPDR may be a harbinger of a less robust performance in 2010.

10. All of the above could be wrong! The old saying "Hope for the best but prepare for the worst" may be a useful investment recommendation for 2010. The consensus is relatively sanguine about the economic and market outlooks for next year. Yes, the punch bowl will be removed, but that will be because global economies are ready to grow on their own. Corporations will see rising profits and with valuations relatively modest, upside potential for stocks and corporate bonds are attractive. The risk trade is still on and risk indicators continue to decline (the VIX is below 20). China will grow. Political issues remain manageable. The prospect of sovereign default is modest. Ahhhh, the best of all possible worlds – unless it isn’t. Be careful out there.

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Posted by Paul Bagnell on December 24, 2009

2009 is a week away from being over. Here’s a highly subjective list of some of the year’s big winners and losers.

The Winners:

Canadian bank stocks: The banks began 2009 with their profits crushed under the weight of huge writedowns. When the writedowns ended, loan losses started to move upward. Now, many analysts see loan losses retreating in the second half of 2010. It’s all added up to a 52% gain so far in 2009.

Canadian mining stocks: The performance of some Canadian base-metal mining stocks was off the charts this year. When markets were pricing in apocalyptic economic scenarios a year ago, they clearly got it wrong on the metals producers. Supply and demand remain tight for many of the metals, and the credit squeeze has made it unlikely new mines will add to supply any time soon. Investors have taken notice, and spent 2009 buying shares of TSX traded companies like Rubicon Minerals (up 245% year to date); FNX Mining (up 282%); First Quantum Minerals (up 347%) and Consolidated Thompson Iron (up 625%).

Don Lindsay: You can add the name Teck Resources to that list of big mining gainers. It’s up 564% so far this year. When the year began, a crushing debt load stemming from a major coal acquisition threatened the company’s survival. Between July 2008 and this past March the stock plunged from $52.00 a share to just $3.42. Since then, though, Lindsay has adroitly stickhandled his way out of the debt mess. He’s sold non-core businesses, brought aboard a big Chinese investor, and amended the terms of a big loan. The result: Teck’s debt issues are almost completely behind it. Teck shareholders will be the winners when prices of metallurgical coal improve.

Robert Friedland:  In the 1990s, mining financier Robert Friedland hit it big as the man behind the gigantic Voisey’s Bay nickel deposit in Labrador. It was a once-in-a-lifetime success story. Or so we thought. This year, Friedland scored again, when his Ivanhoe Mines finally won approval from the government of Mongolia for development of the Oyu Tolgoi copper-gold mine. Rio Tinto is on board as a major investor, and Friedland has confounded his critics – probably not for the last time.

ETFs in Canada: Investors keep buying exchange traded funds, and that encourages fund companies to bring new products to market. During 2009, Bank of Montreal became the fourth company to issue ETFs in Canada. By my count, there are now about 94 ETFs trading on the TSX, and the once bare-bones range of choices facing investors has broadened considerably. Expect this trend to continue as investors move into the lower management fees ETFs offer. Markets are up, but nowhere near their record highs. Lower fees will be a big part of the climb back.

Shareholders of Dollarama: Its green and yellow signs are fixtures at small shopping plazas around the country. In October, it went public at $17.50 a share. At this writing, the stock is now trading at $22.36. That’s a 27% return in just two months. So far so good. The biggest Dollarama winner? Bain Capital, which took the company public and remains the company’s largest shareholder, with a nearly 61% stake.

The Losers:

The Canadian Auto Workers: It may be the country’s most powerful private-sector union, but the CAW spend almost all of 2009 agreeing to steep concessions from General Motors, Ford and Chrysler as the economic crisis pushed the automakers into steep loses, and long overdue restructurings.

Potash Corp. and Agrium Inc.: Like elsewhere in the commodity sector, share prices of the two big fertilizer makers rebounded from the astonishing lows reached in late 2008. But the gains were modest by comparison. The TSX Metals and Mining Index was up 307% through to Christmas Eve. Potash gained 30% and Agrium was up 61%. And both stocks are miles off their record highs of 2008. Agrium spent the year in an as-yet futile attempt to take over CF Industries of Deerfield, Illinois.

Magna International: Canada’s auto parts giant looked poised to at last become an auto manufacturer, until the board of General Motors had a change of thought and took its European unit, Opel, off the market. Investors loved the news, bidding the stock up by 14% the day the Opel deal died. But, like Potash and Agrium, a healthy gain in Magna’s share price (better than 40% at this writing) leaves the stock far short of its record high. And many of its customers remain challenged, to say the least.

Shareholders of Rogers Communications: This stock, a TSX powerhouse not so long ago, now appears on the list of top-losers among TSX Composite members. Down 12% as of Christmas Eve. And 2010 will see new competition in its key growth business of wireless communications.

Investors in the Claymore Natural Gas ETF:  “How low can it go?” was the question asked by investors over and over again as they watched units of this ETF fall throughout the year. “Lower” was usually the market’s answer. The ETF tracks an index of Canadian natural gas prices and, as gas prices fell, so did the fund’s units. Total 2009 return as of Christmas Eve: minus 60%.

Shareholders of Kinross Gold: The price of gold has jumped 22% this year. The ETF that tracks TSX-traded gold producers is up almost 10%. And Kinross Gold? Down 12%.

That’s it. Best wishes to all our viewers in 2010!

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Posted by Michael Kane on December 22, 2009

How did our Western consumerism get so out of balance?

Consumer spending accounts for 70 percent of the American economy, according to the National Retail Federation. And with the holiday shopping season from October to the end of December considered a make-or-break period for many retailers, research analysts at the New York-based Telsey Advisory Group believe the 10 days before Christmas account for as much as 40 percent of total holiday sales.

That is way too much concentration to be healthy.

Although in fairness to shoppers, manufacturers do target the end of the year for the release of new toys.

But doesn’t it create the image of a snake swallowing a bowling ball?

When I was a kid, it was fashionable to point out that too much gift-giving activity ignores the reasons why we acknowledge December as the appropriate time to show family and friends that we’re glad they’re in our life.

I favour regular bi-weekly or monthly purchases spread out across the entire year.

That, in fact, is how the tradition was born of some in the BNN newsroom enjoying pub-style chicken wings every second Friday morning.

I say "Enjoy!"  And be careful in traffic.

 

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Posted by Michael Hainsworth on December 15, 2009

Corrects to add: The U.S. Federal Communications Commission had asked both Apple and AT&T for more information regarding the reasons Google Voice had not been approved for the iPhone. Both firms responded to the FCC's request. Apple says it is still studying Google's application. AT&T says it "had no role in any decision by Apple to not accept the Google Voice application for inclusion in the Apple App Store."

 

Over the weekend, the website Boy Genius Report broke the news that Google is speculated to be on the verge of releasing its own cellphone.

Photos surfaced on the site showing the device being tested. It wasn't long before more photos of a prototype of the Google handset started showing up on the Flickr photo sharing site.

This photo is missing the startup logo. Once the product hits the street, it's expected to be emblazoned with Google's logo -- not that of Verizon or AT&T. T-Mobile is, however, predicted to be the primary carrier.

Google is expected to sell the device directly to customers, and what that means is an end-run around the cellphone carriers. It's the next step towards Google becoming its own telecom powerhouse. And that's because Google has created Google Voice.

Google Voice is a unified communication system. You tell Google what your home, cell and work phone numbers are, and then Google gives you another number: a Google phone number. When you give that to your contacts, every phone you register rings when someone calls... and the conversation is routed to whichever phone you pick up. You can configure it to schedule certain phones not to ring at certain times.

This is an end-run around the telecom sector because all conversations are routed over your data plan, not your voice plan. The telecom companies make big bucks from the latter. For example, in Verizon Communications’ third-quarter results, total wireless services revenue hit nearly $13.5 billion US, and, of that, data revenue generated $4.1 billion.

But releasing Google Voice on a Google branded cellphone that works anywhere in the world leapfrogs around AT&T and the rest of the telecom space.

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Posted by Paul Bagnell on December 8, 2009

Bank of Nova Scotia closed out the fourth-quarter earnings parade from Canada’s big banks this morning, and the best word to describe the quarter’s numbers is uneven.

Unlike most quarters, there were no clear winners and losers. And not one of the banks posted results that didn’t show some significant weakness somewhere in their operations.

A few quick observations:

-  Credit quality worsened at almost every one of the banks. That means more loans went bad. Gross impaired loans and the GIL ratio are two of the key numbers used in assessing credit trends, and both were up for most of the banks during the quarter. The exception was Bank of Nova Scotia, where gross impaired loans remained flat in the fourth quarter versus the third quarter, and the GIL ratio (which tells you what percentage of all loans are considered impaired) actually fell.

-  But the banks are sending an interesting signal about where they think credit quality is headed. Most of them put aside less money in provisions for credit losses (PCL) in the fourth quarter, than they did in the third quarter. That suggests they see loan losses retreating sometime soon. Investors had better hope the banks are correct. Those banks that are wrong will be forced to step up their PCLs in future quarters, triggering a damaging hit to profits.

-  The banking environment in the United States remains a mess. Royal Bank lost $125 million in the U.S. Toronto Dominion and Bank of Montreal reported U.S. profits too small to be meaningful. All three of these banks have waited a long time for their operations south of the border to contribute meaningfully to profit. The housing and credit crisis clearly means the waiting will continue.

-   Main Street Canada is still the place where Canada’s banks do best. Retail banking profit was up from a year earlier, almost across the board. CIBC was the only bank to post a loss in Canadian retail. The others reported at least mid single-digit gains.

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Posted by Michael Kane on December 8, 2009

While sipping on an ice-cold Stroh’s beer the other day, my mind began to drift to thoughts of how companies overcome adversity.

The Stroh family brewery had been established in Detroit around 1850, so it was well entrenched by the time Prohibition was imposed during the 1920s. Not allowed to brew beer, the Stroh family used the kettles to make - are you ready - ice cream.

Fabulous idea.

Stroh’s ice cream is still being made today in the United States. And although it is not available in Canada, we have, indeed, been able to buy Stroh’s beer for the past several years.

Stroh’s came to Canada through a licensing agreement with another brewery that had to overcome corporate adversity: Sleeman’s.

During Prohibition in the U.S., many Americans came to Canada to drink legally. One man, the story goes, was mobster Al Capone.

It has been alleged that Scarface Al kept a mistress at the Albion Hotel in Guelph, Ontario, the same city where the Sleeman Brewery was headquartered. John Sleeman tells the story that Al apparently enjoyed his family’s ale very much and approached Old Man Sleeman about a distribution deal. And the trucks began to roll.

After all, he notes, it would be hard to say "no" to Al Capone.

Alas, on one run to the U.S., authorities in Detroit seized the truck and cargo, arrested Sleeman’s relatives and ultimately forced the Guelph brewery out of business. It would be another 55 years before John Sleeman restarted the family dream and built the current brewing facility just a couple of kilometres away from the original site.

Good for you, John. Here’s to living the dream.

I think I’ll have some ice cream.

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Posted by Frances Horodelski on December 4, 2009

No, I'm not talking about Christmas shopping lists. Right now is the perfect time to do a year-end investment check list, and prepare your finances for 2010. And remember, be thankful you're reviewing your financial situation this year, not in 2008 when the financial world seemed to be falling apart.

** Watch this edition of Stock $ense

The first thing on your check list should be a risk assessment. Now that things are calmer, it's a good time to look at how much risk you should be taking in your investments. Questions to ask include those related to time horizons, liquidity, income needs, longer term return requirements for retirement, and knowledge levels.

Also, investors should do a (change to italics)"gut reaction" check. Try to think back to how you felt during the September to March period a year ago when equity markets were getting clobbered. Did you feel then that you had too much equity exposure for your risk tolerance? You may have reacted emotionally to feeling overexposed. Now is a better time to make the appropriate risk assessment with a clear head and adjust accordingly.

With your risk tolerance in mind, it's also time to reflect on asset allocation. Using some of the same questions as for risk tolerance, you can boil your risk and return requirements down to what you think is the right combination of bonds, stocks and cash for your needs. If you have already established such weightings, it's time to make sure your portfolio is as efficiently positioned as your risk and return needs require. This might mean selling down one asset class and beefing up another.

Year-end is also a good time to get rid of some of those money losers in your portfolio, and use the losses to offset gains that you may have taken. And this year when markets have rallied so substantially, if one of your investments is still underwater it may be the best time to say it was a mistake and get rid of it.

It’s also a perfect time to review your country and sector allocations for both bonds and stocks. In the equity markets, materials, financials and energy are up more than 30 percent this year, while telecom, consumer staples and utilities have dramatically lagged. While these latter sectors are small parts of the overall market, their underperformance this year has likely made them even smaller components of your portfolio. It may be prudent to add to them and reduce those sectors that have outperformed. 

Other check list components include assessing quality versus quantity (reduce the number of individual components in a portfolio and move up the quality scale). This will make your portfolio easier to manage and potentially less volatile. 

Also, prior to year-end, remember to make your charitable donations. These offer a tax advantage to you, and this year, maybe more than ever, organizations need your generosity.

Finally, while you have until the end of February to pay into registered plans, the earlier you make your contributions, the sooner you’ll be earning tax sheltered returns.

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Posted by Frances Horodelski on December 3, 2009

Last week, a viewer named Shaun wanted to know how much per share would a company be worth that has 15-million outstanding shares, with a potential of 2-million ounces of gold in reserves, at today’s gold price of around $1,200 US per ounce?

**Watch this edition of Stock $ense

While it would seem that it might be a simple case of math (ounces times price, divided by shares outstanding), it is more complicated than that, with lots of factors that need to be considered.

Here are just a few of them:

First, the reserves: Are these probable or proven -- a factor that can help assess the commercial viability of the mine. Details as to the productive life of the mine, the ability to expand the find, annual production estimates, etc. are also important questions.
 
Second, where are the reserves? Not just geographically in the world, but is it deep in the ground, open pit, what is the grade of the rock (i.e. grams per tonne), is it easily accessed or in an inhospitable territory? All of these questions can help in answering the next question.

Third, what is the cost to mine the gold? Are there significant by-product reserves with the gold such as copper? What kind of mining technique will be used? Is there a mill near, as transportation costs can be an important consideration, and/or will a mill have to be built or refurbished? Is the mine already in production or is it still in exploration or pre-start-up?

Fourth, does the firm have financing for the mine's exploration and production? If so, what is the cost of the debt, when is it due, and what are the covenants associated with this outstanding debt? On the other hand, if the company doesn’t have the necessary capital, how much more money does it need and when? What will be the costs of that capital in terms of interest rates, and/or dilution to existing shareholders? Access to financing, or the lack of it, has been a make or break aspect of many mining endeavours, regardless of the price of the commodity being produced.

Fifth, do they have a partner that can make decisions which may be contrary to shareholders’ fortunes? Is the mine in a country/region where significant royalty charges are required to be paid, or where there may be different tax regimes and government regulations that can affect profitability?  Are the local and national governments stable?

Sixth, what about the management team? Are they experienced and highly regarded? This factor can be important in terms of how much an investor wants to pay for any $1 of potential earnings, but also in how successful the operation might be. There are always things beyond management's control, but a team that is well experienced is better able to handle the inevitable hiccups, especially with mines that are in the early stages of production.

Two-million ounces is a relatively small reserve. Barrick, for example, has proven and probable reserves in the order of 138.5-million ounces (it's the largest gold company in the world). Some companies with comparable reserves could be Jaguar Mining (nearly 2-million ounces), Alamos Gold (1.7-million ounces), Kingsgate (1.4-million ounces), according to an RBC Captial Markets report. Reviewing the financials for these latter companies could provide some basis for comparison for the firm that Shaun is interested in.

Finally, these are only some of the many considerations that analysts review to make valuation assessments. The price of the product being sold (in this case gold) is important, but how much it costs to produce may be more useful in valuing a mining company.

Time to do your homework!

 

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