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Canada and Europe to wind down stimulus spending, markets and gold on upswing, and November in review.

Big picture

Canada, Europe to wind down stimulus spending

The Canadian government warned provinces to “use it or lose it” as it set a two-month deadline for projects to be approved for stimulus funding. Canada plans to finalize commitments by the end of January 2010 on an estimated $62 billion in total stimulus spending. European Central Bank (ECB) president Jean-Claude Trichet also unveiled an exit strategy to unwind measures, even as the ECB remained highly cautious on the region’s economic prospects. U.S. Treasury Secretary Timothy Geithner said that the government’s US$700-billion bailout fund set up in October 2008 may be closed and the remaining US$210 billion redeployed.

U.S. data suggests the economic recovery is gaining traction – consumer spending rose more than expected in October while the unemployment rate dropped to 10.0% in November, from 10.2%, and new claims for jobless benefits has fallen for four consecutive weeks. Although private-sector firms shed 169,000 jobs in November, it is the lowest number since July 2008. U.S. mortgage applications nudged higher last week, spurred by the lowest mortgage rates in decades and an extension of the first-time buyer credit. In Canada, employment rose by 79,000 in November, bringing the unemployment rate down 0.1% to 8.5%.

Markets

Markets and gold on upswing

Markets rose this week on positive unemployment and consumer spending data, and waning concerns over Dubai after the city-state unveiled a restructuring plan. Markets dipped on Thursday after an unexpected contraction in U.S. service industries dampened optimism. UBS, one of the world’s largest wealth management firms, predicted in its 2010 outlook that the TSX should rise nearly 30% to 13,500 in the next 12 months, pointing to improving prospects for earnings and valuations that remain below historic norms. Gold hit another high as investors continued to seek an alternative to the U.S. dollar.

Comcast bought a majority stake in NBC Universal from General Electric, creating a media superpower that will not only produce television shows and movies, but also deliver them – Comcast is the largest U.S. cable distributor and leading Internet service provider to homes. Toyota is #1 in Canada for the first time, outselling other brands as the Canadian market slid 3% in November. Enbridge raised its dividend by 15% and expects to boost earnings by 12% next year as it completes new lines from the oil sands. Talisman Energy cut 220 staff as it shifts its focus to an alternative natural gas source – fuel trapped in shale rock formations. Nokia claims it will improve profitability in 2010 by producing more sophisticated devices with higher margins, and said the mobile phone industry should return to growth next year. Industry sales fell in 2009 for the first time since 2001.

Our recommendation

Capitalize on short-term volatility by buying on pullbacks

• Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says, “despite the many macro-economic hurdles that may constrain a sustained recovery, the trend for equity prices remains higher, with short-term volatility leading to a series of higher highs, and higher lows; any pullbacks will provide a buying opportunity for investors.” 
• Fixed income. Anthony Mentor, Associate, Portfolio Advisory Group, highlights the following recommendations: “Term Call – below benchmark duration; overweight cash. Sector Call – underweight Canadas, overweight Municipals and Provincials, and Corporates. Currency Call – recent strength in the Canadian dollar mean little upside to foreign currency trades. Alternative Strategies – overweight high yield, overweight Emerging Markets Debt, underweight inflation protected bonds.”
• Portfolio strategy. Vincent Delisle, Scotia Capital’s Portfolio Strategist, writes “The equity risk-reward outlook is not as compelling as it was at the start of 2009 however, and investors should expect more modest gains…compared with current levels (S&P 500 at 1,095; 10-year yields at 3.23%), equities thus appear 14% undervalued and long-term bonds 9% overvalued.”

The month in review

November: U.S. economic growth outpaces Canada

U.S. gross domestic product is growing at an annualized rate of 4.5% in the fourth quarter, based on surprising growth in the U.S. manufacturing sector, which expanded at its fastest pace since April 2006. In Canada, recent GDP data indicated that the economy contracted in the third quarter. Nonetheless, the Bank of Canada is still predicting growth in the second half of 2009, followed by 3.0% growth in 2010 and 3.3% in 2011.

Gold continues record climb

Gold rose to record highs in November, driven by a combination of U.S. dollar weakness, inflation worries and recovery doubts. Expectations for central bank buying were also a key driving factor, especially after India bought over half of the 400 tonnes put up for sale by the International Monetary Fund.

Dubai calms water after storm

Dubai raised concerns in global markets on November 26, as one of the richest city-states in the world announced it was seeking to defer debt repayments. On Monday, a restructuring plan was unveiled that reassured investors that Dubai’s problems will not affect the global financial system, as some had feared.

China on the rise

China’s economy continued to improve – industrial production jumped to a 19-month high, up 16.1% from a year ago, while retail sales also beat expectations, up 16.2%. Exports were down 13.8% over the year, but that was a smaller decline than the previous month (15.2%).

U.S. retail picture mixed

Three big U.S. retailers posted upbeat third-quarter results – discount retailer Target reported profits up 16% over a year ago, and Saks reported a profit instead of the expected loss. Jewellery retailer Tiffany & Co. sparkled in the beaten-down luxury market, posting a better-than-expected third-quarter profit. In contrast, Home Depot reported sales declined 8% in the third quarter and predicted a drop of 9% for the year. Sears Canada revenue and profit were down year-over-year – profit fell by $12 million, to $47 million.

A rocky road for GM and Opel
In an unexpected U-turn, General Motors scrapped plans to sell Opel to Canadian auto parts supplier Magna. Tens of thousands of Opel employees staged protests fearing GM Europe will now revert to a reorganization plan that chops fixed costs at Opel by 30%. Opel employs 45,000 people in Europe, including 25,000 in Germany.

Warren Buffett bets big

Warren Buffett made his biggest ever investment, buying Burlington Northern Santa Fe Railway for US$44 billion. It is one of four remaining transcontinental railroads, and one of the largest freight railroadnetworks, in North America. The billionaire described the move as “an all-in wager on the economic future of the United States.”

Hewlett-Packard buys 3Com

Hewlett-Packard struck a deal to buy 3Com for US$2.7 billion, as it battles Cisco for market dominance. Profits rose 14% on strong performance in China, and HP tripled the size of its share repurchase program to US$12 billion.