Market Strategy Updates by Jim Armiento

LAST WEEK AT A GLANCE:
The TSX broke through the 14,000 level for the first time in 2.5 years this week, as investors continue to sell fixed income assets and rotate into equities. With much of the Q4 earnings already reported, the companies that make up the TSX index are on track for an increase in earnings of just over 25% on the year.

MARKETS:
WHAT HAPPENED                                          % Increase
TSX………… +356=> close 14,123                            2.5                              
DOW……….  +119=> close 12,391                            0.96
S&P 500……   +14=> close 1,343                             1.0
NASDAQ..…    +35=> close 2,834                            1.2

The good news in Canada doesn’t stop with profits.  Inflation appears to be benign with consumer prices rising 2.3% year over year, less than the expected 2.4%. This raises the likelihood of continued low interest rates well into 2011 and beyond.

WHAT IT MEANS:
In North America we are seeing expanding profits in a slow growth low inflation environment.  Low inflation translates into low interest rates and all this translates into bullish equity markets.  The problems occur when you start to look beyond the North American borders. The Chinese government once again raised the reserve requirements in an attempt to cool off its overheating economy.  Meanwhile, Producer Prices  in Germany jumped by almost double the expected rate.  The problems in the Middle East continue to escalate and could cause some short term volatility.  This market is overdue for a correction, so it may be prudent to start taking some profits and move funds into defensive assets.

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075

yourCFO Advisory Group Inc. is a member of the Canadian Investor Protection Fund (CIPF).

LAST WEEK AT A GLANCE:
Optimism about the North American economy is translating into strong markets here, however troubles seem to be brewing in the emerging markets.

MARKETS:
WHAT HAPPENED                                                % Increase
TSX………… -26=> close 13767                                           -0.2                            
DOW………. +181=> close 12272                                          1.4
S&P 500….  +18=> close 1329                                             1.4
NASDAQ… +40=> close  2809                                             1.4

Optimistic numbers in both the U.S manufacturing and service sectors this week helped boost investor sentiment south of the border. Canadian Indices stalled late in the week after what appears to be at least a partial resolution to the Egyptian political crisis. This led to a pullback in both gold and oil prices.

WHAT IT MEANS:    
I would like to take you back to early 2009 for a moment.  If you recall, back then fear and pessimism dominated the news headlines. Because of this, investors moved money out of equity markets and into bonds and money market instruments at unprecedented levels. Of course in hindsight this was the time where you should have been looking for opportunities in the equity markets. Now we’re seeing inflation and interest rates move consistently higher in the emerging markets. Brazil, India, China are all raising rates to fight inflation. However it seems that this disturbing trend is only being glossed over. Instead of becoming cautious, investors are jumping into the market because they do not want to be left out of this bullish run. This is the greed side of the equation. This optimism can go on for some time but as I have been saying….   it is time to be cautious, take some profits and raise a little cash.   

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075

yourCFO Advisory Group Inc. is a member of the Canadian Investor Protection Fund (CIPF).

LAST WEEK AT A GLANCE:    
Corporate earnings south of the border are once again coming in ahead of expectations. The key ingredients to a bullish equity market are earnings that are on the uptrend and consistently beating expectations.  Although Ford disappointed on Friday, the trend, particularly around the large industrials, has been very positive.  Caterpillar, DuPont, Intel, IBM and others, with significant exposure to the foreign markets, have exceeded expectations and are clearly well into an earnings recovery cycle. In fact, about seventy percent of the quarterly earnings reported to-date has managed to exceed analyst expectation.

MARKETS:  
WHAT HAPPENED
TSX………… +179 => close 13437
DOW……….     -48 => close 11823
S&P 500….        -7 => close 1283
NASDAQ…        -3 => close 2586

The second bullish sign is that this week the FED (FOMC) unanimously agreed to keep interest rates at current levels and it appears that they won’t be going up any time soon. (They will also continue to add liquidity to the system through the QEII program.)

WHAT IT MEANS:
The Dow Jones had been on an eight week winning streak.  To give you an idea of how rare that is, you would need to go back to March-May of 1995 to find the last time a string of consecutive weekly gains lasted longer. Unfortunately after eight straight weeks of gains, markets were looking for a reason to sell off.  On Friday we saw a major sell-off in the American markets that broke the winning streak. Ford’s miss on earnings can account for some of the problem, but the fact that oil and gold had big gains on Friday leads me to believe that the problems in Egypt are causing concerns. What seemed unusual on Friday was that the big positive moves in both oil and gold were not enough to keep the Canadian currency above par. The move into US$ is usually regarded as a flight to safety and we see it often when geopolitical forces capture the headlines.

WHAT TO EXPECT:
Although my long term view is still bullish, I will be using this rally in gold to reduce my exposure to the metal and then sit on the sidelines until the short term picture of this market becomes less murky.

Global equity and commodity markets have been taking off this morning, boosted by news out of the US that the Obama administration and US Congressional Republicans have worked out a deal to extend tax cuts and unemployment benefits to 2 million people that had been set to expire at the end of the month, indicating that the US remains prepared to use fiscal measures to support its recovery as well. The US Treasury’s decision to sell the rest of its Citigroup (C) shares was well received, along with the news that the government has profited from that bailout as well, indicates that the financial services sector continues to recover.  Meanwhile, in Europe, markets have been rallying on anticipation that the Irish budget vote may pass today, which could pave the way for implementation of the bailout package and related austerity measures.

On Thursday, news that the U.S. extended Bush-era tax cuts and a surprising drop in U.S. jobless claims helped Canadian shares close slightly higher. An optimistic trade report and more good news from the U.S. Friday helped the TSX close sharply higher. A wave of stellar economic updates helped Canadian shares close another week higher, overall.

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075 

yourCFO Advisory Group Inc. is a member of the Canadian Investor Protection Fund (CIPF).

It’s been a good year! The decision to be overweight in equities and more importantly to be focused in the energy and resources sectors has proven to be very profitable for all of us. So what do we do in 2011?
For the past two years the overriding investment themes that have been the basis of our investment decisions have been the following:

Emerging Markets
The growth of the emerging markets will be a game changer for decades to come. In 2010 China surpassed Japan as the second largest economy in the world. The growth of the Chinese middle class has created an enormous demand for goods and services as well as increased demand for resources and energy. China has been trying to cool off its economy for most of 2010 and will continue to do so in 2011. The current ten percent growth rate is not sustainable but even a move to the seven or eight percent rate over the next couple of years should keep demand for resources at elevated levels. I also expect India to get more attention in 2011. 

Weak American Consumer
Over the past year we have been saturated with the news of the woeful American consumer. Enormous debt levels, no savings, crushed by the collapse in housing, high unemployment levels. All of this of course is true, but what does it mean to us as investors? In 2001 Canada exported 85% of its goods to the U.S. In 2010 only 70% of our exports went south of the border.  The American consumer has less of an effect on all world markets. Make no mistake, they are still a powerful economic force, but with the emergence of the developing nations that continue to grow despite America’s troubles, emerging markets will continue to be the catalyst for global growth.

 Corporate Profits
In the U.S the S&P earnings growth, year over year, is 60% which is the highest on record. Many analysts have been saying that this is a misleading indicator because the profits are being derived by cutting costs and not increased demand for product. The only thing I can say about that is that analysts should have to run a business before they become analysts. Of course a prudent manager is going to cut costs when demand for their product goes down. The objective is to remain profitable or at least minimize losses while the economy is hurting. What we are looking for is what happens when demand finally does come back. With accommodative government policies, increasing exports and large cash balances, corporate America is looking strong. In 2011, I believe domestic demand will begin to return and add fuel to a rejuvenated American economy.

Supply of Resources
We have already mentioned how the demand for resources is growing due to the emerging markets, but what about supply? Oil is now approaching $100 per barrel. Although alternative energy sources are in some stage of development, it seems unlikely that they will have any significant effect in the foreseeable future. In the mean time, the new oil that is coming to market is very expensive to find and process (oil sands, offshore drilling).  Earlier this year I also made a comment on the supply of copper. There have been no new world class copper mines developed in several decades. Prior to this commodity bull market, which began around 2002; metals had been in a twenty five year bear market. During that period, it was not necessary to find and bring any new resources online. In 2011 and beyond, I expect to see continued strength in commodity prices.  However, because of the magnitude of the move over the past two years, it is time to take our profits and reduce the exposure to this sector.  I would suggest moving the Canadian equity portion of your portfolio to market weight in both the energy and materials sector. 

Bond Market
I like to save the best for last.  Several times over the past year I have commented on how the flow of investment capital has been heading straight into the bond market and in fact leaving the equity markets. This bond mania is sowing the seeds for the next leg up in this equity bull market. There is some evidence that this is already occurring. PIMCO, which is a bellwether bond fund in the U.S, recently had its first monthly outflow in two years.  In addition the yield of the 10 year American treasury bond has gone from 2.5%  to 3.48% in about a month (bond yields increase because of the decreasing price of the bond), indicating some selling pressures on the bonds.  I believe that this trend will continue and gain momentum throughout 2011. The increase in demand for equity caused by this redistribution of assets will be the engine that drives this equity market to new highs. 

 “The essence of portfolio management is the management of RISKS, not the management of returns. Well-managed portfolios start with this precept.”
Benjamin Graham 

Over the past two years we have had a wonderful run in the resource sector and I expect this to continue. The problem is that we started this run over weighted in the resource sector and the price appreciation of these assets has increased this over weighting.  The hard part of managing risk is having the discipline to sell your winners early in order not to overexpose yourself to any one sector. Over the next quarter, I believe that we should reduce our exposure to the resource sector (down to market weight) and move the funds primarily into high yielding blue chip American equities.  

Last month we saw both GE and BCE raise dividends. Over the last six months, we have seen numerous dividend hikes. The money that flows out of the bond markets in 2011 will be looking for a safe home with predictable yield. That is why I believe that the high dividend blue chip market will finally outperform the small caps. I also believe that it is time to increase our exposure to the American markets. The U.S market has underperformed for much of the past decade and is still currently out of favour. Some strategic purchases of American equities will expose us to industries that are hard to find in the Canadian markets and therefore will also allow us to de-risk your portfolio as we enter the third year of this current uptrend.     

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075 

yourCFO Advisory Group Inc. is a member of the Canadian Investor Protection Fund (CIPF).

LAST WEEK AT A GLANCE:
After an uneventful start last week, equity markets around the world soared on Wednesday as both U.S. and Chinese manufacturing numbers gave the markets a pleasant surprise. The TSX has now moved to post recession highs.

MARKETS:
WHAT HAPPENED  
TSX………… +286=> close 13179
DOW………. +290=> close 11382
S&P 500….    +36=> close 1225
NASDAQ…    +57=> close 2591

Even with soft earnings being reported by RBC and TD and weak unemployment numbers in both Canada and the U.S, the strong gains were able to hold up by the end of trading Friday.

What it Means: 
Stocks enjoyed a very good week! Higher oil prices early in the week boosted energy shares while increases in gold and copper prices boosted natural resource stocks. The improved tone of American economic growth, combined with the positive indicators from the emerging markets suggests that this market has a long way to go and that we should maintain our maximum equity position for the foreseeable future. Canadian financials jumped early in the week when National Bank raised its dividend, but later in the week Royal Bank, TD, and CIBC disappointed. Only Scotiabank beat the street estimates. I would recommend an underweight position in Canadian banks.

What to Expect:
The Bank of Canada will meet on Tuesday.  Do not expect an increase in interest rates. I do expect the year-end rally to continue in both commodity and equity markets. Bonds are a little bit more of a concern especially in the United States where we have seen long term yields increase even as QE2 stimulus continues to flow into the financial markets.

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075

LAST WEEK AT A GLANCE:
Thanksgiving week in the United States is a notoriously slow week for the North American markets.  Most stock market indices fell back this week because of concerns over growth in Europe and North Korea’s latest escapade.

MARKETS:
WHAT HAPPENED  
TSX………… -63=> close 12893
DOW………. -111=> close 11092
S&P 500….  -11 => close 1189
NASDAQ… +16=> close 2534

Ireland’s problems and bailout received special attention and next on the agenda appears to be Portugal and then Spain.

Problems in Europe:
Just a word on what is happening in Europe. It seems that the media has found another dog to whip.  Last week’s headlines about Ireland’s bailout and the looming problems in Portugal had the bears coming out in full force with what has become the predictable doom and gloom scenarios. The output of Portugal, Ireland and Greece represents about 4% of the total output from the European Union. If we follow the argument that is being used “contagion” (the new four letter word) will spread, the rest of the European continent will catch the disease and fall into a recession (again). So how is this going to affect your stock portfolio? Europe’s role as an economic power has been diminished due to the rise of the emerging markets. Since this bull market began in March of ’09, Europe’s weakness has been more than offset by the powerful growth from the emerging markets. Like Japan in the late eighties and nineties, the domestic issues of the E.U. will become more of a localized issue than one that can put a halt to the world’s prosperity. Stocks in Canada are cheap; balance sheets are strong, and problems in Europe should have little effect on Canadian (American) profitability.

What to Expect:
This week the big numbers include the manufacturing numbers from around the world, (China on Wednesday) but more importantly Friday’s key employment reports for the US and Canada.

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075

LAST WEEK AT A GLANCE:
Stock markets managed to rally from losses early in the week, but American indices closed essentially unchanged. Canadian banks and financials had a solid rebound however their American counterparts lost ground.

MARKETS:
WHAT HAPPENED  
TSX………… +207=> close 12956
DOW………. +11=> close 11203
S&P 500….  +1 => close 1200
NASDAQ… +0=> close 2518

Tensions on the Korean peninsula escalated early this week and sent the Asian stock markets for an early tumble. Geo-political risks generally create volatility and opportunity but should keep this market range bound until there is a resolution or at least some clarity.

GENERAL MOTORS-LARGEST IPO IN U.S HISTORY:
Thursday November 18, 2010 marked a historic day for the capital markets and U.S. economy, with the initial public offering (IPO) of General Motors (GM-N), the largest IPO in U.S. history. GM managed to raise about $20 billion dollars and substantially reduce government ownership. Going back to the dark days of 2008 we recall that the US treasury bailed out GM to the tune of $49.5 billion (this does not include additional bailout packages from both the Canadian and Ontario governments and the UAW). The strength of this rebound is reflected in the resurgence of GM. In the past 2 years the American economy has more than stabilized and the consumer is starting to become confident once again. Despite the good news, equity markets are still cheap relative to previous norms. Although the “easy money” has been made, pullbacks should still be viewed as buying opportunities. 

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075

LAST WEEK AT A GLANCE:
North American equity markets ended a five week winning streak amid concern that China may again raise interest rates in an effort to cool its economy.

MARKETS:
WHAT HAPPENED  
TSX………… -176 => close 12749
DOW………. -252 => close 1119
S&P 500….  -27 => close 1199
NASDAQ… -61 => close 2518

Commodity markets also tumbled given the moves by China.

WHAT THIS MEANS:
September was the best month in the equity market since 1939. The market continued to rise in October despite the negative press. A pull back at this stage is to be expected, however it will be short and sow the seeds for the next leg up in this bull market. Keep in mind all the positives that have occurred; both U.S and Canadian economies continue to expand, commodity prices are in a major uptrend, savings rates in the U.S are on the increase, dividends are on the rise, M&A (mergers and acquisitions) activity is robust, and growth in the emerging markets are still near 10%. Take advantage of this pullback, it won’t last long.

BONDS:
“The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the internet bubble”-Frank Mersh-
The single biggest reason I remain a bull in this market is that despite a staggering outflow of funds from the equity market and into the perceived safety of the bond market, the equity markets are still up. Make no mistake, many of the funds currently flooding the bond market will find their way back to the equity markets. This should put a quick stop to market pullbacks.

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075

 LAST WEEK AT A GLANCE:
Not such a good week for American democrats but a great week for the market. The second round of quantitative easing was announced mid week. The ultimate goal of QE2 is to move the U.S dollar lower and keep interest rates low. Both of these intended results are positive for equities. 

MARKETS:
WHAT HAPPENED  
TSX………… +249=> close 12925
DOW………. +325=> close 11444
S&P 500….  +43 => close 1226
NASDAQ… +72=> close 2579

In addition to the good news from QE2, Friday’s job report in the U.S was stronger than expected and earnings continue to beat expectation.

GOLD:
Gold crossed $1400/oz last week and seems to have the momentum to run much higher. Although I believe that gold will go higher, I am starting to get nervous. The consensus amongst the pundits seems to be that gold has a long way to go. Some of the bullish arguments being made are; central banks continue to print money, the Fed is underwriting inflation, gold is now trading as an alternative to paper currency and as a financial investment ….etc. Gold last peaked in 1980 at a price of $850 per oz. In today’s dollars that translates to about $2040 per oz. Although the feeling is not yet euphoric on gold prices, it is looking frothy. Expect a pullback short term.                                               

WHAT TO EXPECT:
Even the most vociferous bull should concede that a 13% rally over two months has the major U.S. equity markets overbought. I am very bullish on this market going forward but at this point I would wait for a pullback.

Have a great week, Jim.
www.yourcfo-ottawa.com
613-224-5075