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October 2008 Archive Facebook: too many friends for its own good
Posted by Michael Hainsworth on October 31, 2008
Social networking site Facebook has become insanely popular. Just a year ago they logged 74 million unique visitors every single month. The number of visitors has grown 118 percent since then to 161 million. And it's showing. If you're like me -- and I know I am -- you're a member. And if you're like me, you've noticed the site routinely grinds to a halt. The news feed showing what all your friends have been up to is sporadically updated -- often with activities that are days and weeks old. The site is simply crumpling under its own weight. The privately held company needs cash -- and fast. Or more accurately, more cash. And even faster. Facebook got a $240-million US cash injection from Microsoft last year. At the time it was believed the cash was enough to save the company from going public or worrying about profitability until 2009. But this year it needed $235 million more as the server failures continued. The cash coming in the door isn't enough: $256 million in revenue this year, reportedly. Respected technology blog TechCrunch reports Facebook is buying 50,000 more servers this year and next. And it's not cheap to power those things, either: the site estimates Facebook spends more than a million dollars a month on electricity alone. TechCrunch says its sources indicate the company is pitching another cash injection from Dubai International Capital. Which might be its only bet. An IPO on Wall Street would likely lead investors to hit the "decline" button on that Friend Invite.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. GM calls a bottom
Posted by Michael Kane on October 30, 2008
I couldn’t help but be intrigued when General Motors announced this week that the U.S. has reached the bottom of its economic downturn. After all, it was the smart people at GM who shocked us last spring by announcing that high gasoline prices are here to stay… and began announcing cutbacks at a head-spinning rate. I was impressed that such a large, and -- I assumed -- slow-moving outfit could put such wheels in motion before most of us had grasped what was going on. In September, General Motors chief financial officer Ray Young sat in with me on BNN’s Lunch Money programme, giving us insight into how such a big organization evaluates economic forces. Mr. Young told us GM has financial models that use many variables and, importantly, he used the word “stress-test" … they stress-test their models to see how the economy may react to various pressures. It makes sense. When you have a product pipeline that is several years long, you have to be able to read trends very far in advance. That is how they make decisions to stop producing a certain model of car or truck. And that is why sharply rising gasoline prices in the spring of 2008 was enough to alert CEO Rick Wagoner that the Chevy Silverado, which was named Motor Trend Magazine’s 2007 “Truck of the Year”, should be taken out of production. Its twin, the GMC Sierra, was similarly marked for mothballing. Interestingly, Mr. Young divulged that their financial models were based on gasoline prices running between $130 and $160 per barrel. This interview was done just weeks after oil peaked at $147. And look at where it is now. In calling the bottom of the downturn, there is a chance that the automakers are looking for any port in the storm. The fact is, General Motors, although methodical and mechanical at the factory level, is nimble and informed at the executive level. That makes me wonder if perhaps we should be listening. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. U.S. survivor list: Cannaccord Adams
Posted by Andrew Bell on October 28, 2008
Well, it has finally come to this. We're in a market where, as the saying goes, it's not about return on capital but just return of capital. And brokerage analysts are reduced to pawing through the rubble, looking for companies and stocks that won't, er, die. So here comes Canaccord Adams with its "U.S. survivor list." Described as companies its analysts believe will "survive – even thrive -- in the weakening economic environment with lower risk but allowing the potential for upside in any turn." The brokerage went looking for companies with plenty of "net cash" (cash minus debt) and "access to enough capital to drive forward expectations (even with borrowed capital)." And, as soaring bond prices cut yields to rat droppings, the analysts also looked at dividend yields as an "additional measure of safety." Five candidates made the "focus" list: Australia-based Sims Group (SMS - N), the world's biggest recycler of scrap metal, has been in business for almost a century. Canaccord says the company is global, letting it "capitalize wherever opportunities may present themselves." Debt is low at just 11% of total capital. Martek Biosciences (MATK – Q) makes dietary supplements and nutritional oils, using algae for its main products. The products, mostly sold as additives to baby formula, include DHA and AHA, fatty acids found in the brain, retina, central nervous system and heart. Canaccord says the company has cash of $58 million US and a stable recurring revenue model that is posting 10% growth. "Essentially it's only risk is if a significant portion of mothers worldwide immediately switch to breast feeding." Specialty chip maker Linear Technology (LLTC - Q) has the "most defensible gross margins in our semiconductor coverage universe (great revenue and customer diversification with proprietary products)," Canaccord says. Intel (INTC – Q) is trading at only 11 times Cannacord's 2009 profit estimate, "versus an 18x average trough multiple over the past 10 years," the brokerage says. It also predicts the firm is set to cash in on growth in the market for Netbooks – small and low-cost notebook computers. Stryker (SYK - N), a maker of medical devices and instrumentation, has $2.2 billion in net cash and generates approximately $1 billion in free cash flow annually, Canaccord says. "Regardless of the financial markets, if a patient breaks a hip, the patient will need hip replacement surgery," the analysts say.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit.
Merrill's not-too-late-to-sell picks
Posted by Andrew Bell on October 28, 2008
Where does Merrill Lynch strategist David Wolf get off being so gloomy? Last month, he warned us that Canadian house prices are likely to fare worse "than the consensus believes and … the risk of an outright bust cannot be dismissed." He and colleague Carolyn Kwan say in a note today that they’re "getting more alarmed by the day." Canadian policy-makers and forecasters don’t seem too worried, they say. But "as in the U.S. two years ago, we are now seeing completed units pile up unsold in Canada, a clear sign of overbuilding and an ominous sign given the voluminous supply still in the pipeline." Now he's on the hunt for stocks that could be set for yet another drubbing. Paralyzed investors are "unwilling to sell shares that are already down so much," Wolf says in a research note. But he's got a list of names that "could be seen as not 'too late' to sell." Why are they vulnerable? "Given the dramatic deterioration in the financial and economic outlook in recent days, weeks and months," Wolf opines, "it’s hard to imagine that there are many companies whose underlying value on a forward-looking basis is not as low as it has been at any point over the past year." His list of potentially poised-to-fall stocks includes: Fairfax Financial (50% above its 52-week low) Metro Inc. (42%) Biovail Corp. (37%) OK, so Wolf isn't all gloom. The Merrill number-cruncher also says there could be money to made buying stocks that battered hedge funds have sold short and are now forced to buy back. So he identified stocks with at least 3% of their traded shares shorted as of Oct. 15. The list includes: Gildan Activewear (15% of outstanding shares sold short) Astral Media Inc. (9%) MDS Inc. (6%)
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More » Desperately thanking Madonna
Posted by Michael Kane on October 27, 2008
Pardon me for taking time out from the Mayhem in the Markets to do a little Musing about Madonna. Her impending divorce from filmmaker Guy Ritchie has set tongues wagging about how much money is at stake. After all, Forbes magazine says she is the world’s richest female singer. Guinness World Records estimates she has sold 200 million recordings. I will stay away from playing the numbers game and concentrate instead on the mere concept of her success. From early life in Avon Township in the state of Michigan to a mansion in central London, Madonna has done some pretty impressive work. Has she been a little controversial? A little. Has she made a lot of money? She has. A nice thing about Madonna is her resilience. It would be easy to self-destruct. And while there have been substantial challenges along the way, she has emerged with confidence and direction. Her career has had many phases and it's impressive to see her desire to survive in a difficult arena. So I prefer to look at this global financial crisis with similar optimism. Pessimism should be attacked using a model that works.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Branson's mane makes him a billionaire Samson
Posted by Mark Bunting on October 22, 2008
Lustrous, bouncy and manageable. A work of art. Those were the thoughts that crossed my mind as I waited to interview Sir Richard Branson, the flamboyant founder of Virgin Group. Just as Branson is the face of the Virgin brand, his flowing, multi-coloured locks are a signature of his personal brand. One could quibble and say that such long hair is more suited to a sullen teenager or the front man of an indie band than the 58-year-old head of a multinational company. And, one could quibble some more and question whether Branson is resorting to some dye to maintain his image. But, that would be missing the point. The Branson brand, inextricably linked with Virgin, has always been about being different and iconoclastic, about being a creative destroyer of stodgy industries, seeing niches in sectors like aviation and music and not just filling them but being so successful that it forces competitors to catch up. So, Branson with a conventional haircut wouldn’t fit the image. If the hair were to be shorn, like Samson’s strength, Branson might lose his entrepreneurial and philanthropic vigour. OK, enough with the hair and the biblical references. I had a chance to interview Branson. He was in Toronto for a small business summit held by The Globe and Mail and American Express. Branson also held a signing to publicize his new book, Business Stripped Bare. His previous books are called Losing My Virginity and Screw It, Let's Do It. Nothing short of a provocative title will do for Sir Richard, which is in keeping with his desire to stand out from the crowd. I only had so much time with the affable billionaire as Virgin handlers were hovering. But, he did tell me that Virgin Group, which encompasses an astounding 350 companies, has not been that affected by the credit crisis. He argues that people turn to brands they trust in tough times. And, with Virgin owning five airlines, fuel is a lot more affordable now that oil has dropped from almost $150 a barrel to under $70. Branson also confirmed that he doesn’t have a lot of money tied up in the stock market. He wasn’t shy to offer an opinion on equities, though: he thinks we're in the midst of a 2- to 3-year global recession and that stocks will hit lower lows. Branson is no ordinary billionaire. After our interview, he was off to New York City to embark on a transatlantic voyage starting at 4 a.m. He hopes to set a speed record in a 100-foot boat by crossing in 6½ days. It's all in the hair, I tell you. Click here to watch Mark Bunting's interview with Sir Richard Branson. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit.
More » Nightmare at the museum?
Posted by Mark Bunting on October 21, 2008
Wall Street is the engine of New York City. It provides just five percent of the jobs but accounts for a disproportionate 23 percent of the compensation. So, when things are rosy and million-dollar bonuses are flowing, the whole city benefits economically. From real estate agents to the proverbial shoeshine boy, the wealth gets spread around. But when the Wall Street engine sputters or, in this case, wheezes, hacks, coughs and generally seizes up, the effect is equally profound but not nearly as fun. Museums in New York and other parts of North America are among those feeling the pinch of the credit crisis. That’s because many financial firms have large arts sponsorship programs. But, given the economic environment, budgets are being reconsidered. An extreme example is the now defunct Lehman Brothers, which was a consistent and large supporter of the arts. But, with the investment bank chopped up and sold off in pieces, Lehman’s sponsorship tap has been turned off. UBS, which just arranged a $60-billion deal with the Swiss government to get toxic assets off its books, is well-known for sponsoring the Art Basel fairs in Switzerland and Miami Beach. But, Peter Dillon, who's in charge of the company's sponsorship in the U.S., says the bank has to be more diligent with every dollar it spends. That type of talk has museums wary to the point that the Museum of Modern Art in New York has instituted a temporary hiring freeze. And, the Brooklyn Museum is scrambling to find funding for an exhibit it's planning for next spring. Museum directors are also concerned that wealthy benefactors who often loan art works may curtail their generosity. Squeezing museums, as well, is the fact that New York Mayor Michael Bloomberg's budget calls for spending cuts of 2.5 percent this fiscal year and 5 percent next year. That will leave less city money for the arts. Plus, with the euro and Canadian dollar sinking against the U.S. dollar, museums are seeing fewer tourist visits. One trend emerging is that museums are relying more on their in-house collections for exhibits, which avoids the cost of launching major shows that rely on artifacts from outside the country. Not everyone is cutting back, however. Bank of America says it's important now more than ever to support the arts. It's arts and culture executive says clients appreciate the company's support, so it becomes a "marketing decision." And, retailer Target has no plans to stop financing 1,500 free days a year at 70 museums around the U.S. However, until the Wall Street engine gets revved back up again, which could be a few years, museums will have to be creative in raising money and attracting visitors.
Shifting sands
Posted by Michael Kane on October 20, 2008
It's not as though we weren't expecting it, but disturbing nonetheless is the fact that falling metals prices are making life difficult for junior mining companies. Case in point: First Nickel Inc. of Toronto (FNI-T) has announced that it is suspending operations at its Lockerby Mine in Northern Ontario’s Sudbury Basin. The reason: world nickel prices have fallen below the cash costs being incurred by First Nickel. They said they’ve been somewhat successful in cutting overhead costs, but have been overtaken by the steep decline in the prices at which they could sell nickel. There's the reality. Little companies that started projects as prices were climbing now must retreat, leaving work unfinished. Some properties may be purchased by larger, better-funded companies. Some junior miners may be bought outright. Indeed, one analyst warned me to expect a wave of takeovers. But he also told me I definitely should not invest in so-called "penny stocks" with the hope that a mining conglomerate will come along and pay a nice premium. Tempting though that may appear. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. It's time to get greedy
Posted by Frances Horodelski on October 17, 2008
The economic news is bleak. Retail and auto sales are falling; U.S. housing starts are at the lowest level since the early 1990s; measures of manufacturing activity such as industrial production and the Philly Fed index are back to levels not seen since the economic downturn of the early 1980s and in some cases, worse that those experienced during the even deeper recession of the early 1970s. These weak economic data are flowing into consumer confidence. The Conference Board of Canada reported today that confidence fell to its lowest level since the third quarter of 1982. And it is unlikely that these statistics will be changing direction anytime soon. Credit markets are tight; consumers are strapped and unemployment rates are rising. Not surprisingly, the economy is making it difficult for investors to gain any enthusiasm for stocks. Geez, sometimes, it's even hard to think about getting out of bed when we can only expect another round of bad economic news (Maybe that's why they call it the "dismal science.") But get up we must because when the outlook is the bleakest, astute investors find the best opportunities. If one goes back and looks at previous periods when the above mentioned economic statistics were scraping or nearing the bottom of the barrel as they are today and then overlay a graph of the major stock market indices such as the Dow or the S&P/TSX – there is a remarkable similarity. Low points in the economy tend to coincide with low points in stock prices. That is, while the economic statistics were bad and getting worse, stocks were starting to gain their footing for the next bull market. It doesn’t happen immediately. And many times, a lot of work needs to be done before stocks move decisively higher. The economy continues to weaken. Earnings continue to deteriorate. Markets remain volatile. But when the economy seems the weakest, it's time to look over the proverbial valley and think about the kinds of companies one wants to own over the next five years. Remember, the last time the Conference Board of Canada saw consumer confidence as weak as it is now (Q3 1982), the market was just beginning its rise into one of the greatest bull markets of the 20th century! History doesn’t always repeat, but it does often rhyme. And finally, you don’t need me to tell you about looking over the valley. None other than the legendary Warren Buffett is giving the same advice today. "Be fearful when others are greedy, and be greedy when others are fearful." If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. Winnebago forced to the side of the road
Posted by Mark Bunting on October 17, 2008
Spending anywhere from $60,000 to $300,000 on a motor home is becoming far less appealing to older consumers than it used to be. With house prices falling into a black hole, the global economy in or nearing recession, high gasoline prices, and the most daunting of all, the unavailability of credit, consumers are thinking twice before taking the discretionary leap. Each of those headwinds has conspired to form a gale force wind to send Winnebago Industries (WGO-N), the world’s largest maker of motor homes, to its first quarterly loss since 1997. The chief financial officer goes so far as to say that the company’s performance was "anemic." The CEO, Bob Olson, says Winnebago is going through its most difficult time ever. After hearing that motor home shipments fell 64% from last year and the order backlog dropped 68%, investors slammed the brakes on the stock and sent it tumbling by the most since 1980. The shares are now sitting at an eight-year low. Winnebago wants to hang on to whatever cash it has so, to that end, it’s suspending its dividend. Olson says the main issue for the company is ‘"the inability to get financing for retail customers." Dealers, as well, are having difficulty getting credit for stock so they’ve cut their inventories by 18% from last year. They’re trying to get inventories down to a level which they think will reflect the weakened demand. But, there’s hope, according to Ed Aaron, an RBC Capital Markets analyst based in Denver. He says Winnebago is in hunker-down mode as evidenced by their closing of a plant in its home state of Iowa. Aaron says the company should be a survivor and that Winnebago will be a great stock coming out the other side. For now, however, shares of Winnebago Industries are like, as Loudon Wainwright III sings, a dead skunk in the middle of the road. That’s something you want to swerve to avoid. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. Time to buy Canadian bank stocks: Desjardins
Posted by Andrew Bell on October 15, 2008
Forget energy and commodity stocks as the global economy slides…. and load up on dull, old Canadian banks. That's the call from Scotia Capital strategist Vincent Delisle in his fall outlook. TSX financials companies' earnings may drop 5% in 2009, but he sees profits plunging 15% to 20% at energy and materials producers. "U.S. financials have also outperformed in the latest quarter and we believe they have hit bottom," Delisle adds. In terms of investment returns, Scotia calculates Canadian financials have blown away global rivals, with 10% compound annual return versus 3% for global money-shufflers and 1.2% for American banks. Despite that, Delisle says, "Canadian financials are trading at 9.5x forward P/E, a 15% discount to U.S. peers. The average historical discount is 8%." And so much for the Canadian banks' previous warnings that they risk becoming global minnows. "Back in April 2007, Canadian financials' average market cap was about 3% smaller than their international peers," Delisle says, "But the ongoing credit crisis has completely reversed the situation. The average market capitalization of Canadian financials is currently 31% larger than the size of their global peers included in the MSCI World Financials index." He also recommends that investors load up on consumer dictionary and staples stock as money rotates out of the deep cyclicals. Delisle has raised the weighting of Shoppers Drug Mart and Thomson Reuters in his Strategic Edge portfolio and added Canadian Tire and George Weston. He has also increased the weighting of BCE because "the deal is expected to go through." The strategist also says utilities look good as interest rates fall (boosting the attractiveness of their dividends) and he says telecom earnings will hold up relatively well. Scotia says its model portfolio has produced a total return of 32% since inception in June of 2005 compared with 28% for the S&P/TSX index. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. (BCE holds a minority interest in CTVglobemedia, which owns BNN) More »Why Intel's earnings matter
Posted by Frances Horodelski on October 14, 2008
While the world has been focused on the credit crisis and the solutions proposed by global central bankers and their governments, Intel's third-quarter earnings will not go unnoticed. Why? Because as the largest semiconductor maker in the world, Intel will provide an inside look at what's really going on in the American economy. The semiconductor industry had sales in excess of $255 billion US in 2007 – Intel contributed almost 15% of those revenues selling semiconductors for use in everything from personal computers, telecommunications, industrial automation and even the military. More than 80 percent of its sales are outside of the U.S., so Intel's numbers also provide insight into the global economy. As well, the company tends to be one of the first big technology bellwethers to report, thereby providing a glimpse as to what’s happening on the technology front. For reference, at the time of the company’s last update in September, it was relatively upbeat on its revenue outlook providing an estimate of $10 to $10.6 billion versus $10 billion last year and almost $9.5 billion in the company’s second quarter. Analysts are estimating earnings per share at $0.34 versus $0.31 last year. Analysts will also be focusing on gross margins which were soft in the second quarter but are expected to have stabilized in the third. New products, including the next generation desktop processor, will also be a focus. And finally, the outlook for both the fourth quarter and 2009 will be important for sentiment. The stock, which I own, is down more than 40% from its highs and currently carries a multiple of 12.8 times 2008's consensus estimate of $1.25. That's back to levels last seen in the early 1990s. Tonight's results will show whether it is justified or not. (Intel's third-quarter profit topped Wall Street estimates, rising 12 percent to $2 billion or 35 cents a share on revenue of $10.22 billion. The company also warned that fourth-quarter sales could come in lighter than expected given the global economic slowdown. It expects fourth-quarter sales of up to $10.9 billion, slightly higher than Street forecasts.) If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »The Strip feels the pinch
Posted by Michael Hainsworth on October 10, 2008
What happens in Vegas, stays in Vegas – but lately, not much has been happening in sin city. Strip-wide revenue is down for the 8th straight month as cash-strapped Americans figure there's enough gambling going on in the stock market and at the gas pump. The Nevada Gaming Control Board says the 7.4-percent decline on The Strip pulled cash window receipts to $494 million US in August. And when you factor in the one-arm bandits between the airport and the hotel lobby, revenue is down further – 8.1 percent to $934.1 million. The hotels are feeling the pinch – big time. Hotel occupancy recently fell 5 percent, forcing resorts like MGM Mirage to cut room rates 15 percent. Nine percent fewer gamblers are arriving by plane. The Las Vegas Convention and Visitors Authority is trying to put a positive spin on the numbers. Twenty-two million visitors rolled dem bones in July – contributing $5.1 billion to the Nevada economy. The Las Vegas real estate sector, meantime, continues to melt like a Snickers in the Nevada sunshine. In September it fell 3.5 percent – the worst housing market in America. This news comes as the 66-acre $7-billion CityCenter condo, hotel and casino complex expects to open its doors in 2009. But don't expect the lights of the strip to dim anytime soon. They've only done that once – in 1995 – following the death of Dean Martin.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »My 2 cents (Cdn)
Posted by Michael Hainsworth on October 9, 2008
Hello Michael, I would like to know if you foresee our dollar coming back up before December. We have to pay the remainder of our cruise money by the first week of December and it is in American dollars. This could really add up, if our dollar continues to fall. Thank you for any light that you can shed on this matter. Nora H.
Hi Nora, Thanks for writing. It's not my job to express a personal opinion, so I'll share with you what the big shots on Bay Street are telling me about the future direction of our loonie. What you're seeing today, around the $0.87 to $0.92 range, is what's expected through the end of the year. The catalysts to pull it lower than that? News that there are more cockroaches under the financial fridge than first thought. We've had three big American financials fail, a $700-billion bailout package, and a massive cut to interest rates. If another big American financial fails, the commodities market will figure demand for oil will fall – taking our petro currency down with it. Economists predict interest rates will fall further. That would fuel strength in the U.S. dollar and put pressure on ours as traders race into the greenback on the belief the worst is behind us. The only way the loonie will rise from this range, we're told, is if Old Man Winter rears his ugly head. A huge drop in temperatures would spike heating oil and natural gas demand – and if the U.S. Northeast, Canadian East Coast and central Ontario crank the thermostats, the Canadian dollar would climb. I don't know how much stock you hold in The Farmer's Almanac, but it's calling for a bitter winter thanks to – of all things – the lack of sun spots! (Apparently it's colder in winters after a sun spot-free summer.) Hope that helps, thanks for watching, and enjoy the cruise! Michael
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Real estate fears hit alternative lenders: Desjardins
Posted by Andrew Bell on October 9, 2008
Perhaps Canadians are a little too smug about our supposedly solid real estate market, compared with the bloodbath south of the border. Desjardins analyst Michael Goldberg says in a report this morning that "Canadian lenders will not experience the same fate as U.S. mortgage lenders. In particular, the imprudent extremes of U.S. lending have been largely absent in Canada." But he adds in August there were "significant month-over-month declines in all but two cities in our sample—Montreal and Toronto, and more recent data issued by the Toronto Real Estate Board indicate that prices are also moderating in the Greater Toronto Area." The analyst says "the declines have been seen on a month-over-month basis since May—unfortunately with no sign of a bottom." Goldberg says if you study the magnitude of peak-to-trough declines – a 14% fall in Vancouver, an 8% drop in Calgary and Toronto – you can "see evidence of a housing bubble in some cities during 2007." For those looking to play the sector, he says investors have been too hard on a pair of alternative lenders, Home Capital Group Inc. (HCG – T) and Canadian Western Bank (CWB – T). Home Capital's stock has slumped 22% since the start of September, to trade at about $26.85 today. The Desjardins analyst calls the stock "Buy – Above-average Risk" with a $49.00 target. He says the company "maintains a strong risk profile even in tougher housing markets." For instance, it "eased out of the Windsor market 18 months ago, thus avoiding the significant drop in market prices there." But Goldberg says Home Capital's "2007 vintage loans are the ones to watch closely because they may have less equity value and may have dropped the most from their peak." Canadian Western Bank has fallen even harder, dropping 32% since the start of September to trade at $16.30. Goldberg rates the stock “Buy–Average Risk” with a $31.50 target. He says Optimum Mortgage, CWB's alternative mortgage business, has seen its loans grow 21% year-over-year to reach $432 million at the end of July. Almost 60% of that business is in Alberta. About 5% of the bank's total loan portfolio consists of alternative mortgages in Optimum. At the end of Q3, Optimum's loan book had a fairly conservative average loan-to-value ratio at initiation of approximately 70%. And Goldberg says management reassured him that "LTV values in Calgary are still quite low, with the average LTV at initiation remaining in the range of 68–71%." He notes that "Optimum has clearly scaled back its lending in B.C."
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More » Ya gotta laugh ...
Posted by Michael Kane on October 9, 2008
The 2008 plunge in the stock markets, which accelerated when banks started to collapse in September, prompted a colleague to lend me a book he'd had for years. It was written by 1920s comedian Eddie Cantor and is actually a collection of his standup routines. Just like today, comedians back then used current events to inspire humorous routines and this collection of funny bits was brought out in book form with the title Caught Short! A Saga of Wailing Wall Street. It was published by The Musson Book Company of Toronto in November 1929 … a month after the Crash. When I was a kid, one of the first things my Dad told me about the Crash was that some people who had lost their life savings were so depressed they committed suicide by jumping off tall buildings. As a young boy, that image immediately made me vow I would never get involved with the stock market. Another thing the grownups agreed upon, and which confused me, was that people who had money — dollar bills — were in relatively good shape. But there was little wealth being generated, and those people who had no money had a great deal of trouble getting their hands on any. In one of Cantor's jokes, he relates to the human condition by pointing out how the Crash meant there were a lot of promises made that could not be kept. He said he promised his wife a rope of pearls. He couldn't buy the pearls but he had the rope and was considering using it (rim shot!). In another, he said that on the night of the Crash, he was too frightened to go home so he went to one of the larger hotels and asked for a room on the 19th floor. The desk clerk asked: "What for? Sleeping or jumping?" (rim shot!) Sometimes ya gotta laugh to keep from crying. Eddie Cantor lost a lot of money in the Crash and during the Great Depression that followed. But the end of his book provides an inspiring benediction: "All you need is faith, good issues, patience and plenty of margin — in case."
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Acknowledgement: the first step to recovery
Posted by Linda Nazareth on October 8, 2008
Here's the thing about a co-ordinated cut by half a dozen central banks: it acknowledges once and for all that there is a problem in the world economy. That may seem obvious anyway, but a lot of people seemed to not want to acknowledge it for a very long time. In a way, the last few weeks have been kind of a relief for me. I mean, up to now it was a bit like being in an alternative universe. For years I have been talking (in true dismal scientist fashion) about the things that were so very wrong in the U.S. economy. Way too much debt. Really insane lending practices. A bubble in the housing market. High gas prices. Trade and budget deficits that defied the imagination – well, I could go on. And yet people kept saying that it wasn't that bad. That recession was not likely. Downturn. Slowdown. Lull. They kept using words that downplayed that there was even a problem – even as the investment banks started to tumble. I felt like the kid in The Sixth Sense who could see dead people when no one else could. Well, now there is no arguing against the problem. There isn't exactly a quick solution to the U.S. subprime crisis, but at least the process of fixing things has begun. Today's 50-basis-point cut by the U.S. Federal Reserve, the Bank of Canada, Sweden's Riksbank, the European Central Bank and the Bank of England may be too little too late, but it will get some liquidity into the system. I'm not naive enough to think that it will turn things around instantaneously, or even over the medium term, but getting credit flowing will eventually, at least, stop the carnage in the markets. My big worry? It's the U.S. consumer. I'm not worried that sales will slow through the holidays – I know they will. I know that the unemployment rate will rise, too, and that people will be cautious for a year or two. Fifty basis points one way or another isn't going to fix what's wrong with the consumer sector, even assuming that loans rates go lower, or that anyone is approved for them anyway. What I'm really worried about, though, is that, weighed down by way too much debt and burned by the stock markets, U.S. consumers may stay cautious for years. And Canadian ones are, too, even though their problems aren't quite as bad. Add in Europe and Britain and the rest of the global economy and you don't have a very upbeat picture. So sure, bring on the rate cuts. The markets seem to think that today's were just the first of what may be a series of them. Throw in some fiscal stimulus and the relief of lower commodity prices and you might even spark some kind of recovery in the economy. What kind of recovery, though, remains to be seen.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Signs of encouragement amid the carnage?
Posted by Mark Bunting on October 7, 2008
Yeah, yeah, the best time to buy is when pessimism is at its highest. We know, we know. But that old market chestnut is scant consolation right now for investors who are bleeding money. Aside from the rare few who saw this financial crisis coming and put all of their money into government bonds and/or gold - or shorted the market - it's hard for investors to see any rays of light amid the wreckage. But, Sam Stovall, chief investment strategist at Standard and Poor’s and a frequent guest on BNN, has found some evidence that makes him, shall we say, mildly hopeful. Although, not hopeful enough to recommend nibbling at certain stocks, let alone backing up the truck to load up on them. From a psychological perspective, Stovall says investors have gone through a range of emotions since equity indices peaked: anxiety, denial, fear, panic and capitulation (although some will argue that we haven’t seen that just yet). The only emotion investors have yet to experience is despondency. Stovall says that recently people had been asking him, "Is it time to get back in?" Now the question is, "Is it too late to get out?" Stovall thinks that might be a contrarian indicator. He’s also examining previous bear markets and this current one could be indicating that it's getting close to going back into hibernation. The S&P 500, as of the Oct. 6 close, has fallen 33.8% from its peak in October 2007. The average bear market decline is 32%. However, there are many who would argue that this bear market is far from average. Stovall also finds that the S&P 500 has retraced 63% of its bull market advance. That compares almost exactly with the average bear market retracement of 62%. In addition, Stovall points out that the current drops in S&P 500 industry subgroups are similar to previous times in the market when the S&P 500 was set to stage a recovery. For example, as of Oct. 3, 92% of the subgroups had fallen in the last year. That compares with a historic average of 35% and the 96% posted by the subgroups just prior to the ultimate bottom in the market in October 2002 triggered by the tech bubble collapse and 9/11 attacks. Stovall concludes that only a brave soul with a long-term investment outlook will have the courage right now to step into the market and buy. He's not ready yet for that. But, his point is that the moment be getting closer.
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Merrill downgrade spooks fertilizer investors
Posted by Scott Peterson on October 2, 2008
The laws of physics say that for every action there is a reaction. And if you’re analyst Don Carson with Merrill Lynch there must be some form of satisfaction in knowing you can move markets with a sector downgrade. Merrill Lynch downgraded the fertilizer stocks this morning before the opening bell – partly on poor earnings from Mosaic after the bell last night. Carson did a reversal from a "buy" to an "underperform" on most of the fertilizer plays we’ve come to know – Potash, Agrium and Mosaic to name just three. He also revised his target price to $100, $50, and $60 respectively. Basically, he said farmers are no longer making as much money as they once did growing corn, and that trend is expected to continue – only $300 an acre for 2009, down from $500 an acre in 2008– and as a result they would be moving over to growing soybeans, which require much less fertilizer. Reaction on the markets was swift. Potash, the largest producer of its namesake, dropped 20% – its worst showing since 1989. The TSX even temporarily halted its shares in the early afternoon citing unusual stock moves. Agrium, the third-biggest potash producer in North America, declined 15%. And Mosaic shares followed suit, diving 19%, this after it posted a disappointing 20-percent profit drop and warned it will cut up to one million tons from its production next year. The reaction from the companies was as it should be – an attempt to calm nervous investors who were dumping their shares. Potash called the sell-off an "overreaction." Agrium CFO Bruce Waterman summed it up succinctly: "No individual company can stand up to a tidal wave of panic selling," he said.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. Irish bank guarantee draws funds from U.K.
Posted by Andrew Bell on October 2, 2008
If one thing has become crystal clear in this financial horror show, it's that all of the bones are connected. In other words, fractures in one part of the system produce unpleasant side-effects that keep spreading. Take Ireland's shock decision to provide a blanket guarantee for bank deposits. Nervous British bank customers have begun yanking their money out of U.K. institutions and sending it across the Irish Sea to take advantage of Dublin's emergency move — just as British banks are trying to contain the damage from their willy-nilly real estate lending. The Guardian reports this morning that British Chancellor (finance minister) Alistair Darling has "intervened twice with the Irish government on behalf of U.K. banks" but the Irish finance minister, Brian Lenihan, sent him packing. The British were told "in no uncertain terms that the scheme was a problem for the U.K." The U.K. Post Office, whose accounts are provided by Bank of Ireland, was besieged by savers trying to find a safe spot for their cash. So far the guarantee applies to just six companies — The Allied Irish Bank (AIB – N), Bank of Ireland (IRE – N), Anglo Irish Bank, Irish Life & Permanent, Irish Nationwide Building Society, and Education Building Society — but Lenihan is considering applications from non-Irish-owned banks with a "significant high street retail presence" in the country. AIB stock has slid 61% on the NYSE this year but it has rallied 30% since Monday after the Irish made their move. Bank of Ireland has dropped 58% but it's up 25% since Monday. The scheme has annoyed the European Commission, which says it may be an unfair subsidy. Dublin says it had to protect the financial sector. Ireland's banking system would have "totally collapsed" if the government had not acted, Tánaiste (deputy prime minister) Mary Coughlan told lawmakers yesterday. It was "the strongest declaration by any Government member about the need for the emergency bill," the stuffy Irish Times reported. Dublin is abuzz with rumours that the government moved to save a major bank from failure. "Very senior Irish business figures said that the bank's insolvency, in the face of a 1.5-billion-euro debt to a German bank that it was unable to pay, would pull down several large companies and possibly a second bank," the Times of London says. Critics say the guarantee is "a blank cheque for the banks." The two-year guarantee covers deposits and well as bonds and subordinated debt up to 440 billion euros ($656 million Cdn) and gives Lenihan the power to intervene in mergers or acquisitions of the Irish banks. "The guarantee — the most ambitious step taken by a sovereign state since the financial crisis began more than a year ago — is far bigger than Ireland's gross domestic product of approximately 190 billion euros and national debt of 45 billion euros," Dow Jones notes. Banks will be charged a levy to support the costs.
If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit. More »Bailout bill hangs over BCE deal
Posted by Niall McGee on October 1, 2008
BCE shares are down. Again. Xstrata called off its engagement to Lonmin, saying raising cash in the credit markets isn’t in its best interests. The value of that deal was about $10 billion US, a fraction of what the BCE deal is worth. So will BCE's buyers walk away because they can't get the funding they need? Publicly, Ontario Teachers' Pension Plan says the financing is secure. Yet investors continue to have their doubts. If the bailout package is defeated, banks will likely be forced to hold on to that debt, says Crandall. And in this market, banks don't want that kind of heavy leverage on their balance sheets. Crandall says one likely scenario if the bill is defeated is that banks ask BCE to push out the closing date, currently Dec. 11, in the hope that confidence will have crept back into the credit markets sometime in early to mid-2009. BCE holds a minority interest in CTVglobemedia, which owns BNN. If you have a comment on this or any other blog, please write to us at blogcomments@BNN.ca We may print your comment and reserve the right to edit.
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