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The close: Recession is baked


If investors were concerned about the U.S. jobs report, released on Friday morning to boos and hisses, they didn't show it: U.S. stocks held up remarkably well, despite further evidence that the economy is slipping toward recession. In other words, it might take more than a recession to spook investors these days, many of whom obviously believe the ugly U.S. economy is already baked into stock prices.

The Dow Jones industrial average closed at 12,609.42, down 16.61 points or 0.1 per cent – which is nothing given the recent volatility. Merck & Co. Inc. rose 4.3 per cent, continuing its rebound after a steep selloff. However, General Motors Corp. fell 4.7 per cent and Bank of America fell 2.4 per cent.

The broader S&P 500 closed at 1370.40, up about 1 point or 0.1 per cent. There, Google Inc. rose 3.5 per cent, bringing its rebound to about 14 per cent in the past month.

The S&P/TSX composite index, given its greater exposure to commodities, performed far better. It closed at 13,668.19, up 116.90 points or 0.9 per cent, helped out by rising gold and oil prices. Gold traded at $914 (U.S.) an ounce, up $11; crude oil traded at $106.16 a barrel, up $2.33.

Suncor Energy Inc. rose 3.1 per cent, Potash Corp. of Saskatchewan Inc. rose 2.3 per cent, Canadian Natural Resources Ltd. rose 2.7 per cent and Goldcorp Inc. rose 2.9 per cent. On the downside, Research In Motion Ltd., which surged on Thursday after it announced record results, fell 1.9 per cent. As well, Canadian banks fared poorly: Royal Bank of Canada fell 1.4 per cent.

 

ETFs: The daytrader's new friend


The variety of exchange-traded funds is exploding. Turns out, so are their trading volumes.

According to research compiled by Globe Investor, the average daily volume for ETFs trading on the Toronto Stock Exchange has risen to 12.3 million shares in the first quarter of 2008, up from 3.5 million shares in the same period last year. That's a 250 per cent increase that speaks volumes about the popularity of ETFs and what investors are using them for.

“You've seen a significant increase in demand for ETFs,” said Som Seif, chief executive of Claymore Investments, noting that his firm's assets grew 50 per cent in the first quarter alone.

For sure, part of the reason is that more investors have grown disenchanted with mutual funds, most of which fail to keep pace with the underlying index. This underperformance may rankle when the stock market is booming, but it is really bothersome when the market turns rocky and losses mount.

However, the spike in ETF trading volumes is also related to how ETFs are being used. Since they track a basket of equities, but are bought and sold like stocks, they give investors an ideal way to move in and out of the market with lightning speed without worrying about liquidity issues.

According to Howard Atkinson, president of BetaPro Management, 60 per cent of ETF assets are controlled by institutional investors, which include hedge funds. When it comes to Horizons BetaPro funds, many of which are highly specialized ETFs, the average holding period is as low as four days – and the lower the holding period, the greater the trading volume.

The iShares S&P/TSX 60 ETF remains at the top of the list in trading volume. In the first quarter of 2008, average daily volume surpassed 3.6 million shares, up more than 150 per cent over the first quarter of 2007.

But more impressive, trading volume for the Horizons BetaPro S&P/TSX 60 Bear Plus ETF surged to 2.4 million shares a day in the first quarter, from just 178,000 last year – a 13-fold increase. The rising interest here is obvious: The Bear Plus fund rises in value if the market falls, which means that more investors are betting on a downturn in 2008.

Their growing interest in trading the Horizons BetaPro Gold Bear Plus fund, which rises in value when the price of gold falls, suggests investors are also becoming increasingly interested in timing gold's downfall.

Will trading volumes for ETFs level off soon? “I don't think we've seen the high side of volume yet,” Mr. Atkinson said. “You're going to have additional products and new and creative ways of using them.”

 

At noon: Commodities trump jobs


Canadian stocks are outperforming their U.S. counterparts Friday at midday, just as Canadian jobs numbers for March were better than U.S. jobs numbers. But is this market all about jobs? Maybe not.

Gold rose to $908 (U.S.) an ounce in New York, up $5.12, and crude oil rose to $105 a barrel, up $1.17. Yes, commodity producers are red hot and Canada has more of them than the United States.

The S&P/TSX composite index rose to 13,667 at midday, up 116 points or 0.9 per cent. Potash Corp. of Saskatchewan Inc. was the biggest mover, rising 3.3 per cent to a new record high. Canadian Natural Resources Ltd. rose 2.7 per cent, Suncor Energy Inc. rose 3.3 per cent and Barrick Gold Corp. rose 2.7 per cent. Yamana Gold Inc. rose 4.1 per cent, helped out by an analyst at UBS who raised his recommendation on the stock to “buy” from “neutral”.

Meanwhile, the Dow Jones industrial average fell to 12,593, down 33 points, or 0.3 per cent. General Motors Corp. fell 5.2 per cent (that's the dismal jobs report talking) and Citigroup Inc. fell 2.5 per cent. Exxon Mobil Corp. rose 1.1 per cent.  

The broader S&P 500 actually managed a slight gain of nearly 2 points, bringing the index to 1371. Utilities and energy stocks rose 1.5 per cent.

 

Awaiting a bank bounce? Keep waiting

Looking for the ball to bounce back in financials?


Looking for a big bounce among U.S. bank stocks? The bottoming process is certainly under way, with aggressive interest rate cuts by the Federal Reserve and a steepening yield curve. But according to BCA Research, there are still a few hurdles standing in the way of a classic V-shaped recovery.

For one, employee headcounts remain far too high given the economic backdrop to banking operations. “Since the early 1990s, bank stock recoveries have been preceded by sizable staff cuts. It is remarkable how long it is taking the industry to downsize given the magnitude of the credit troubles, and is a warning that a sharp profit snapback is unlikely,” BCA Research said in its note.

As well, loan loss ratios are still too low relative to past business cycles, meaning that provisioning for additional losses will be a drag on earnings. And third, bank assets are still leveraged to the disastrous U.S. real estate market – yes, even after all the writedowns among investment banks. BCA Research expects bank profits won't be able to outperform the broad market yet, which is why they are maintaining a “neutral” recommendation on the sector.

 

At the open: Back to recession fears


Canadian and U.S. stock markets reflected their respective employment statistics when trading began on Friday morning: Up in Canada where the economy added jobs, down in the United States, where payrolls shrank by an alarming 80,000.

“The ultimate question that the markets wrestle with on today's data is this: they know unemployment (and jobless claims) is a lagging indicator and usually hits the highs right as the economy bottoms,” said Andrew Busch, global foreign exchange strategist at BMO Nesbitt Burns, in a note to clients.

The Dow Jones industrial average fell 22 points in early trading, to 12,604. Futures for the blue chip index had been up considerably prior to the release of the employment numbers. Chevron Corp., Alcoa Inc. and Exxon Mobil Corp. were up, partly because of rising oil prices and a reasonably steady price of gold. However, economically sensitive stocks, including General Motors Corp. (down 4.5 per cent), JPMorgan Chase & Co., Home Depot Inc. and Citigroup Inc. fell.

“If today's bad jobs number doesn't inspire a pullback, it will certainly go a long way to confirm the sentiment that I talked about last night that no matter what the news investors really want to believe that the bad news is already priced in, that there is little to no downside risk, and ultimately want and need to put money to work,” said Charles Kirk, who writes the Kirk Report blog.

In Canada, the S&P/TSX composite index rose 28 points, to 13580. Potash Corp. of Saskatchewan Inc. rose 3.7 per cent to a $174.62, a new record high, and Barrick Gold Corp. rose 1.1 per cent. The Big Banks were relatively unchanged.

 

No jobs boom, no jobs bust


Let's put those U.S. job losses into perspective. Some observers have pointed out that a loss of 80,000 jobs in March, while bad, is certainly nothing like the job losses seen in the runup to the 2001 recession. Then, 200,000 job losses were the norm – which either means that the U.S. is not headed into recession or that the recession is shaping up to be a mild one.

Hold on, says Barry Ritholtz, author of the Big Picture blog. He noted that the job creation cycle in the lead-up to the 2001 recession was far different than the job creation during the most recent business cycle. In the late 1990s, anyone who could fog a mirror could get a job, with monthly statistics regularly showing job gains of 300,000 to 400,000. After the bust, job creation was weak.

“The current backwards, cheap money, real estate-driven cycle has produced the least amount of jobs of any recession-recovery period post WWII,” Mr. Ritholtz said. “It's no surprise that very weak job creation would not generate the same sort of recessionary layoffs we saw after a much bigger jobs boom.”

He believes the U.S. employment trend is none too friendly. Investors are still uncertain which way to go, though. After the Labor Department issued the employment numbers for March, at 8:30 am (ET), futures for the Dow Jones industrial average dipped into the red, but are now up 23 points with markets opening in about 15 minutes.

 

Premarket: Jobs, jobs, jobs

Job numbers are calling the shots Friday


Investors will be focused on North American jobs on Friday, with both Canada and the United States reporting their respective employment figures for March. Neither country looks particularly promising, but so far markets have held up.

The U.S. employment situation continues to point to a recession. In March, payrolls shrank by another 80,000 jobs, higher than expected and the third month in a row where payrolls decreased. The jobless rate rose to 5.1 per cent from 4.8 per cent previously, according to the Labor Department.

Stock index futures were higher, though these numbers reflect trading prior to the employment statistics. Futures for the Dow Jones industrial average were up 50 points, to 12,687. Futures for the broader S&P 500 were up 7 points, to 1380. Both indexes were headed down right after the Labor Department's report.

In Canada, investors may take some hope in the employment figures released by Statistics Canada. Nationwide, employment numbers rose by 14,600 jobs in March, close to the consensus expectation – but anyone looking for a cloud here will note that most of the gains were in the West while manufacturing jobs – mostly in the East – fell by another 9,000.

“Canadian employment is still holding up well, with no obvious signs of stress outside of the beleaguered manufacturing sector,” said Doug Porter, deputy chief economist at BMO Nesbitt Burns. “From the Bank of Canada's perspective, there's no conclusive evidence here of either a big slowdown in activity or a continued upswing in wages, so this report will make little impression on the next rate decision.

In Europe, the U.K.'s FTSE 100 was up 0.7 per cent and Germany's DAX index was up 0.4 per cent. In Japan, the Nikkei 225 fell 0.7 per cent in overnight trading.

 

Canadian wages on the rise

Here's Allan Robinson's At The Bell which you'll find in tomorrow's newspaper:

The tone of financial markets in the United States and Canada today will be determined by the jobs data and it is expected to reaffirm the sluggishness south of the border, while domestically wage inflation barrels along.

WHAT TO KEEP AN EYE ON

The critical U.S. data are expected to show the unemployment rate rising to 5 per cent in March from 4.8 per cent in February, according to a survey of economists by Bloomberg. About 50,000 jobs are expected to have been lost in March, compared with 63,000 in February.

Job losses have been heavy in the construction and the financial sectors, while manufacturing is expected to be hurt by a strike at American Axle & Manufacturing Holdings Inc. that has affected 40,000 auto production workers, according to BMO Nesbitt Burns Inc.

The weak U.S. data stand in sharp contrast to the Canadian economy, which is forecast to have created 15,000 jobs in March, although that is down from 43,300 jobs in February. The unemployment rate is expected to remain steady at a 33-year low of 5.8 per cent.

While year-over-year wage gains in the United States are expected to slow a notch to 3.6 per cent, wage pressures are growing in Canada.

“Average hourly wages should increase 5.2 per cent year over year in March, after a three-month run at 4.9 per cent,” said Michael Gregory, a senior economist with BMO Nesbitt Burns. “This will be the first above-5-per-cent [level] in the 11-year history of this wage inflation series.”

The wage gains are not just limited to the commodity-rich provinces because migration has tightened up labour markets across the country, Mr. Gregory said. “Fortunately for the Bank of Canada, core inflation is trending down because of the dollar’s strength.”

Low inflation along with rising wages translate into real-wage gains and buoyant spending, Mr. Gregory said.

“Since we expect some spillover effect from a U.S. consumer-led recession on Asian economic growth, we think physical demand for commodities is poised to fade and remain cautious on energy and materials stocks,” National Bank Financial Inc. strategists said in a report to clients. It recommend investors overweight consumer staples (drugstores and food retailers) and consumer discretionary stocks (such as broadcasting and cable) in the S&P/TSX.

The close: 2009 is looking good


On Thursday, investors took a break from worrying about big picture stuff involving the health of the U.S. economy and instead focused on stock-specific stories, from stellar individual earnings to takeover rumours to plain old rebounds.

The Dow Jones industrial average closed at 12,626.03, up 20.2 points or 0.2 per cent. Alcoa Inc. rose 5.8 per cent after the aluminum producer was the subject of takeover speculation. Merck & Co. Inc., which had been hammered earlier in the week, rose 3.4 per cent after investors bet that it had been punished too severely. And General Motors Corp. rose 3 per cent after CSM Worldwide forecast that U.S. auto sales would recover slowly but steadily in 2009 – a welcome relief for anyone fearing the sector was doomed forever.

The broader S&P 500 closed at 1369.31, up 1.78 points or 0.1 per cent. Schering-Plough Corp. which had been battered along with Merck & Co. rebounded 11 per cent, and Ford Motor Co. rose 5.4 per cent. On the downside, Cisco Systems Inc. fell 2.9 per cent.

In Canada, the S&P/TSX composite index closed at 13,551.29, up 37.15 points or 0.3 per cent. But you can pin the gains on two big movers: Research In Motion Ltd. and Potash Corp. of Saskatchewan together contributed 41 points. Meanwhile, Bombardier Inc. rose 6.3 per cent after its strong earnings were released in the morning and BCE Inc. rose 1.5 per cent. 

 

Flying with the bomber


Most analysts who cover Bombardier Inc. kept to their previous price targets after the aerospace and transportation company reported strong fourth-quarter results on Thursday morning – except Cameron Doerksen, an analyst at Versant Partners. He maintained a “buy” recommendation on the stock but raised his price target to $7.80 from $6.50, a 20 per cent bump. The shares traded at $5.93 in Toronto on Thursday afternoon.

His new target is based on an expectation for far more robust earnings. Mr. Doerksen expects Bombardier will produce earnings of 45 cents a share in fiscal 2009, up from 33 previously. And for fiscal 2010, he forecasts earnings of 52 cents a share, up from 43 cents previously. The rise is due to a combination of better margins in its aerospace division and a lower expected tax rate.

“With a net debt to capital of only 20 per cent at year end, Bombardier should have no issues in fully funding its growth initiatives with internal cash,” he said. “Notably, Bombardier now has no material debt maturities until F2013. As a result, we expect the credit rating agencies to begin upgrading Bombardier in the coming months.”

 

 

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