Posted by Mark Bunting on March 31, 2009

Goofy guys on television offering to buy and sell gold.

No, it's not one of the signs of the apocalypse. It's not even a sign that a gold mania has set in. But it is indicative of the demand during these difficult and uncertain times for the relative safety of gold.

You've probably heard stories of various mints around the world running out of certain gold coins or bars. There's no shortage of gold, just the retail products that people favour, such as one-ounce coins.

There are also many anecdotes about institutional investors raising their exposure to gold. John Paulson, who famously made a fortune betting against sub-prime mortgages, has recently been increasing his bets on the yellow metal.

In fact, he's used some of his substantial winnings to take an 11.3-percent, $1.3-billion US stake in AngloGold Ashanti.

The World Gold Council puts the interest in gold into perspective. Demand for gold coins and bars, along with exchange-traded fund buying, rose 64% in 2008.

One of the beneficiaries of this attraction for gold is ScotiaMocatta, the world's oldest and largest precious metals dealer. I recently shot a BNN feature story at their retail operations on the main floor of Scotia Plaza in Toronto and spoke to the managing director, Richard Maskobi.

He tells me business at the retail level has doubled in the last year. But, he also stresses that this is not a new phenomenon that started after Lehman Brothers collapsed.

Maskobi says demand for gold and other precious metals has been increasing incrementally for a few years now. Investors have seen their equity portfolio's decline and fixed-income investments aren't that attractive these days with interest rates so low.

So, Maskobi says, customers are coming to ScotiaMocatta for an alternative investment.

But, desire for gold is nowhere near the mania proportions seen in 1980. Then, Maskobi explains, Scotia had its precious metal operations downstairs at Scotia Plaza and the lines were out the door and up a couple escalators.

Plus, gold would have to go over $6,000 an ounce to match the run-up posted from 1971 to 1980.

Most of you have probably heard the predictions in some quarters that gold is eventually going to hit $1,500, $2,500 or $5,000. A few months ago Rod McEwen, the CEO of US Gold, told me that last figure was a possibility.

But, not everyone buys into the theory that the printing of dollars by the U.S. will lead to a debased currency, hyperinflation and a stratospheric price for gold. However, into its ninth year of gains, it's hard to bet against it moving higher.

So get used to those goofy guys on television.

 

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Posted by Scott Peterson on March 31, 2009

We may get a glimpse of Weizhen Tang on Wednesday. He's the man the Ontario Securities Commission alleges may be behind one of Canada's largest Ponzi schemes.

The OSC is seeking to extend the cease trading order on his accounts that was originally issued on March 17. The OSC accuses Tang, who styles himself "the Chinese Warren Buffett," of losing up to $60 million of investor's money and falsifying account statements. For example the OSC said he reported a profit in 2007 when in fact his trading accounts lost $15 million.

There is another wrinkle in the case. There are 116 investors of Oversea Chinese Fund Limited Partnership – who all put in $150,000 – who want the cease trade order to be lifted. Representatives of this fund told BNN that if Mr. Tang is allowed to trade they at least have a fighting chance of making up their losses.

The OSC is likely to obtain a cease trade extension of up to four months until it can sort the whole thing out. Someone who is familiar with OSC matters tells BNN the commission, a quasi-judicial-body, is not likely to be swayed by any petition from investors, no matter how many names are on it.

The petitioning investors say they're worried that any decision to further suspend Tang's trading activities will result in the total loss of their investments.

Watch Scott's report HERE

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Posted by Michael Kane on March 27, 2009

While doing my customary business report on CP24, a television/radio operation recently acquired by CTV, I was caught by surprise when hosts Melissa Grelo and Matte Babel asked my opinion of prenuptial agreements.

The question arose from the story of United Technologies chairman George David and the almost-$100-million alimony demand made by his wife, a Swedish countess.

I responded to the question by saying that I have never actually been married and, I pointed out, while that makes me a good "catch" it also makes me the least qualified to express an opinion on the topic.

As they needled me, good-naturedly (I thought I heard Melissa gasp when I said I was single) they hesitated to let me get out of this discussion unscathed. So I made a promise to blog my thoughts on prenuptials as soon as I could pull together an opinion.

OK… I’ve thought about it.

The benefits speak for themselves: everyone knows who-gets-what in the event of disaster.

The negative, of course, is that it introduces an odour of mistrust into the relationship.

And it ties love to money, which, in my books is a dangerous game.                          

Incidentally, BNN news writer Greg Hubert pointed out to me that in the business world, a failed merger typically results in one of the parties paying what is known as a "break-up fee" (Greg, himself recently married, does not have a pre-nup) but that usually occurs when one of the parties quits the negotiations to merge with a third party. Then again, the business world is a cold, heartless place.

Any lady lucky enough to marry me would have to be prepared to sign on the dotted line. Because any lady who married me would also necessarily be as cold and heartless as I am.

 

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Posted by Scott Peterson on March 19, 2009

It doesn’t matter how good you are – if you owe $6 billion US in debt it's hard to be profitable.

That's the problem AbitibiBowater is facing as it tries to renegotiate $1.8B US in loans by March 20. The main issue, according to The Globe and Mail, is that Bank of America, Citicorp and Wachovia may not be willing to play ball. They're unhappy about receiving less for their loans and having to wait longer – until 2012 – to get it.

It's all part of AbitibiBowater's larger plan to shed $2.4 billion US of debt and $162 million US in annual interest payments.

On the positive side they are making strides in securing loans – another $100 million Cdn this week. They also want to sell assets. They recently sold their interest in the Baie Comeau, Que., hydroelectric facility for $615 million Cdn. They have cash coming in, but will it be enough to save the company?

If you're a shareholder, and not a secured creditor, you might be out of luck already. To raise cash the company is planning a massive dilution of the shares. AbitibiBowater has about 58 million shares outstanding now. That's expected to multiply by 10 times. According to Dundee Capital Markets, there could be as many as 597 million shares after the capitalization and 453 million of those shares in warrants exercisable between $1.00 US and $1.50 US each.

So even if the company survives, the shareholders will be pushed to the side – only owning 10% of the remaining company. Debt holders will own the remaining 90%.

To watch Scott Peterson's report on AbitibiBowater click HERE.

 

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Posted by Frances Horodelski on March 18, 2009

Today we'll hear from the Fed.  It is unlikely that they will change the Fed Funds rate from the current 0-0.25-percent range.  However, the FOMC may make a statement or provide detail on whether they will be purchasing long term Treasuries to have a more direct impact on "market interest" rates.

Since the Fed moved to the current level, 10-year bond yields have moved from 2.04 percent to today's 3 percent.  Mortgage rates have declined from 5.8 percent for a 5-year adjustable rate mortgage to 4.8 percent -- the lowest since 2005.  But, investment grade corporate bonds still yield some 600-basis points above Treasuries, a continued high level of risk aversion exists in the market place.
 
So why do interest rates matter:
 
1) They are one of the key components in calculating price/earnings multiples -- simply put, the lower interest rates are (all things being equal), the higher price/earnings multiples are.  Why? Because analysts and investors use the general level of interest rates as a factor in discounting the future stream of profits that are generated by a company.  The higher the discount rate, the lower the present value is of the future stream of earnings and the lower the multiple anyone is willing to pay for those earnings.  This means stock prices are lower for any given dollar of expected earnings.
 
2) As well, interest rates are used in calculating the so-called risk premium.  Essentially, investors want a certain premium above the current level of return provided by a "riskless" investment such as a Treasury bill.   If the "risk-free" rate is 3 percent and an investor wishes a return of say 7 percent above the risk free rate, they want a return from their investment of 10 percent.  If the rate is 5 percent, they may want 12 percent.  If the rate is zero, the return is 5 percent.  The 10 percent, 12 percent or 5 percent will be used to calculate today's price of an investment in order to provide that return in the future.   Alternatively, analysts can back out today’s riskless rate (which is known) and calculate the current risk premium built into market valuation.   Analysts do this to determine whether stocks are rich or inexpensive relative to historical risk premiums. 
 
3) The general level of interest rates is used as a starting point for assessing comparable investments.  For example, if a bond is yielding 5 percent and the return expected from another investment, say a stock, is only 6 percent -- the risk free, 5 percent would likely be more attractive than a riskier 6 percent.  This is essentially a corollary of #2 above.
 
4) Finally, interest rates are important in calculating the rate of return for businesses.  If they can borrow only at, for example in today's market 9 percent (given where corporate bond yields are), they need to find an investment opportunity that will return something in excess of that. High yielding investment opportunities are hard to find, so capital investment gets deferred until either investment opportunities get cheaper (i.e. purchase prices fall) or the cost of capital gets cheaper (interest rates fall) or both.
 
So while today's interest rate decision is unlikely to be different than the current 0-percent to 0.25-percent target range - a statement about the Fed’s willingness to buy bonds and/or in some way bring pressure on the general market level of interest rates is very important to the valuation of stocks.  
 
Bottom line:  lower interest rates, all things being equal, are good for P/Es and risk premia in the equity market.

Click here for the latest installment of Stock $ense, in which Frances Horodelski offers even more insight on interest rates.

Watch Stock $ense, Mondays, Wednesdays, and Fridays, at 10 a.m ET, 7 a.m PT on Market Morning.

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Posted by Kim Parlee on March 18, 2009

Of note – Dundee's John Aiken told us yesterday on The Close that he believes Canadian bank dividends are safe …. this year. 

But watch out for 2010.  There could be dividend cuts coming then...

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Posted by Viewer Comment on March 17, 2009

Re: Michael Kane's Jim vs. Jon:

While I think that Jon Stewart was using 20/20 hindsight to pick a target, I do think his points echo the sentiments of many taxpayers in both Canada and the United States. 

Cramer uses an entertainment format to discuss serious decisions in the financial markets, and highlights his past as a hedge fund manager to build his credibility. Leveraging this credibility as a Wall Street insider, his daily commentary affects the portfolio of thousands of investors.

The sound bites that Stewart showcased were not only of Cramer making wrong calls, but also selected clips of Cramer's now infamous faux-pas, where he discussed how hedge fund managers manipulate the market on a regular basis.

Stewart is being opportunistic, I have no doubt of that. His motives are less around helping reshape market practices and more about gaining him profile. That being said, it is hard to dismiss Mr. Stewart when he showcases a fair level of understanding of market practices and looks to put his teeth into an issue that is at the core of economic crisis debate. It is high time investors understand that there is a 2-tier system in the financial market, insiders and everyone else.

C. Haugen

It almost seemed to me that Cramer got hung out to dry by his network.  He was their scapegoat.
 
Harry

The Daily Show with Jon Stewart is free - through comedy - to ask questions and speculate about the reasons why media outlets and pundits do and say the things they do and say. Anyone who takes a seat in front of the 24-hour news cycle becomes fair game for funny business.

You asked 'who do you trust?'  It seems rather humorous to me that we are all looking at a discussion about the market between a 'street' veteran and a wily comic on a fake news show and wondering who 'won' the 'battle.'

D. Trautman

I don't watch CNBC much any more but over the years when I was watching it, the morning Squawk Box cast was pretty good at citing analysts and others for their wild and irrational predictions. Haines, Kernen and Faber were not afraid to highlight for their audience analyst forecasts that were clearly nothing but false hype. 

So, CNBC can't be faulted entirely for what Stewart was castigating them for, but, like any recommendation regarding financial advice, we should all consult our own financial advisor before buying the analysts predictions.
 
Mike

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Posted by Michael Kane on March 13, 2009

As any secret agent will tell you, there is danger in ambiguity.

We like our comedy quirky and our facts straight. But that line was crossed when comedian Jon Stewart came up with The Daily Show. Unable to land a job as a late night talk show host, he looked around for just the right program format.

Current events have always been the mainstay of standup comedy. But Stewart added another layer of fun by presenting his view from the cliché of the "anchor desk."

On the other hand, we have Jim Cramer. A serious Wall Street presence as a hedge fund manager and an Internet innovator -- he co-founded TheStreet.com -- he attracted a lot of eyeballs. CNBC was happy to get him amped-up in front of a camera.

(The channel had dismal evening ratings with previous legitimate entertainers such as Charles Grodin, who starred with Cybill Shepherd in The Heartbreak Kid; Daisy Fuentes, who did one episode of Baywatch; and comedian Dennis Miller, who has had a string of unsuccessful talk shows but is actually quite a good straight actor.)

Now comes the ambiguity: Jim Cramer is a serious guy doing amusing stuff on TV, and Jon Stewart is an amusing guy doing serious stuff on TV.

They clashed. Stewart played clips of Cramer famously making wrong-way calls on financial institutions that then collapsed. Face-to-face on The Daily Show, next to Stewart’s confident delivery, Cramer slumped. And the blogosphere loved it.

The problem now, though, is: who do you trust?

 

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Posted by Andrew Bell on March 11, 2009

We always listen closely to Merrill Canada senior economist David Wolf, who's been largely proven right so far in his predictions of trouble for the Canadian real estate market.

In an unusually cheery report today, he sees "a handful of more hopeful signs in the Canadian housing market."

Wolf argues that demand rebounded last month with Toronto, Calgary and Vancouver reporting monthly sales increases of more than 50 percent. These are just month-on-month increases from an awful January but Wolf argues that they're "well in excess of the usual seasonal bounce."

But it also bears remembering that year-on-year, Toronto sales were down 32 percent in February, Calgary was down 34 percent and Vancouver was down 41 percent.

Here are links to the local real estate board statistics, in Toronto, Calgary and Vancouver.

"This looks to us far more like the 'end of the beginning' than the 'beginning of the end' of Canada's housing bust," Wolf says. "We're transitioning from acute weakness to chronic downward grind, not imminent stabilization and recovery."

He's encouraged by a rapid drop in supply of new housing. Housing starts fell 12 percent in February to 134,600 units annualized, the lowest in more than eight years, Canada Mortgage and Housing Corp. said on Monday. Economists anticipated starts would decline to 145,000 units. 

The decline "has finally begun to bring down the bloated supply pipeline," Wolf rejoices.  

But he warns against false optimism.

"Through Canada's bust of the early 1990s, existing home sales actually troughed fairly early on in May 1990, and posted their biggest monthly gain ever in February 1991 – but prices did not put in a definitive bottom for another five years."  [our emphasis]

 

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Posted by Andrew Bell on March 4, 2009

Everyone loves a bargain and Raymond James analyst Bart Jaworski thinks two TSX-listed uranium funds offer a cheap play on the nuclear fuel.

He started coverage this morning on Nufcor Uranium Ltd. (NU-T) with a Strong Buy and Uranium Participation Corp. (U-T) with an Outperform.

Both funds simply hold uranium but unlike mining stocks, avoid the risk of exploring, developing or mining.

"We suggest investors utilize either equity as a call option on potential future strength in uranium price," Jaworski says, adding that they may even attract takeover bids.

He thinks Nufcor is the better bet and reckons the thinly-traded fund is set to more than double in the next year, climbing to $4.90 from its current $2.40.  He says Nufcor is currently trading at just 60% of its net asset value, a big discount to Uranium Participation, which is trading at 90% of the value of its assets. The analyst sees Uranium Participation hitting $9.50 in the next year, up 66% from today's $5.72.

Nufcor has been under pressure because of "a management misstep" in which the fund agreed to buy uranium, couldn't raise financing during the market turmoil and had to sell inventory to honour the deal, Jaworski says. However, he adds, "despite the bad optics, this misstep cost NU minimal financial losses."

Another problem has been an 8% stake held by bankrupt Lehman Brothers. But "once the Lehman issue is resolved and the shareholder base is widened, we expect NU shares to begin trading inline with U," the analyst says.

The fund, based in the tax-friendly Channel Islands, is advised by a unit of U.S. power giant Constellation Energy (CEG-N), although CEG is divesting the operation. It reports its NAV (Net asset value per unit) one week after month end.

Uranium Participation is managed by Denison Mines Corp. (DML-T). It takes two or three weeks to come up with an NAV after the month finishes.

Uranium is currently trading on the spot market at $44 US a pound, still up six-fold from 2000 but down sharply from $136 in June of 2007.  Jaworski isn't a wild bull on the metal but he sees the spot price climbing to $80 next year and stabilizing at $50 long-term. And there's always the risk of supply disruption causing a price spike.

The analyst says the McArthur River mine run by Cameco Corp. in Saskatchewan (10% of global supply) is currently undergoing a major transition from one zone to another zone, which can cause hiccups.  And the McClean Lake operations, also in Saskatchewan, run by France's floundering Areva are experiencing arsenic problems and permitting delays.

"Supply is precarious over the near term whereas demand should continue to grow" as governments move toward nuclear power, Jaworski says. 
"This should continue as long as public acceptance remains stable (based on global warming concerns and nuclear's 23-year stretch of good safety record)."

 

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Posted by Andrew Bell on March 2, 2009

We're seeing a hefty selloff today in Air Canada (AC.B-T), Groupe Aeroplan Inc., (AER-T) and CIBC (CM-T), three companies whose fortunes are connected.

Air Canada has slid 13% to less than 80 cents amid fears over its solvency. The company "faces what we believe are significant challenges" Standard & Poor's said last week, cutting its rating on the carrier to B minus from B.

That isn't heartening news for investors in Aeroplan, whose shares are down 11% at just over $8.30.

"Air Canada is key to Aeroplan's future," Versant Partners analyst Neil Linsdell says in a report today, cutting the loyalty points giant to Sell and reducing his one-year target to $6.30 from $9.

He says the airline "is not only the third largest purchaser of Miles but also the key attraction for Aeroplan members given that 80% of Miles are redeemed for air travel rewards."

He warns that the slumping economy will squeeze results and also takes issue with the balance sheet. Linsdell cautions that Aeroplan faces a future drain on its cash in the form of "deferred revenue," which is money the company will have to pay out for the cost of rewards when its members cash in their points.

Under Aeroplan's somewhat baffling accounting, "gross billings" are the value of points that consumers earn – these are the dollars that partners paid to Aeroplan for the miles they dish out to their customers. Aeroplan gets those dollars in cash. 

But AER only posts this money as "revenue" when the miles are actually redeemed. At that point, the company must itself come up with cash to pay for the rewards it members earned on those points.

The Versant analyst says that "as long as the plan keeps growing, and more cash comes in than goes out … then cash from new Miles sales goes to pay for the rewards bought in the same period. We only highlight this to emphasize that when investors use metrics such as EV/EBITDA to value Aeroplan shares, we believe that this significant deferred revenue represents a debt owed to members."

CIBC dropped 8% today to trade just under $40, and hit a new multi-year low. Scotia Capital analyst Kevin Choquette cut the bank to Underperform this morning, reducing his target to $60 from $63. He warns of "weak performance from the retail bank, including loss of market share, weak earnings level and lower operating leverage from CIBC World Markets."

The bank is a huge Aeroplan customer through its credit cards that offer points. CIBC remains the biggest purchaser of Miles, Versant's Linsdell notes.

"Going forward, we expect consumer spending [on CIBC's credit cards] to slow in 2009, reducing growth to 4% in 2009 before rebounding to 9% in 2010."

Aeroplan shares may be under pressure but the stock still has its fans.

TD analyst Tim James upped his target on the shares to $17.50 from $15 this morning, noting that miles redeemed in Canada actually fell 2.1% in the fourth quarter, which means that Aeroplan had to pay out less cash to pay for the rewards. That and other factors produced free cash flow that was $30 million or 30% above his estimate.

The drop in redemptions surprised the Street. Credit Suisse analyst Colin Moore, who cut his target on Aeroplan to $14 from $17 today, reckons it was "likely due to members delaying travel or booking cheaper flights using cash."

RBC's Nick Morton sticks with his Buy recommendation and $14 target. He noted that the company's gross margin on points redeemed actually rose 10% as customers cash in points for non-flight rewards, which carry a higher profit for Aeroplan.

We're debating AER on The Close today. I've got the Bull case, based in part on those fatter margins and burgeoning cash flow.

To watch the Stars & Dogs Aeroplan debate click HERE.

 

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