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Asia booming and China begins tightening, holiday sales lift U.S. and commodities fall, plus the month in review.

Big picture

Asia booming; China begins tightening

Central bankers in China moved to curb lending by raising the interest rate on three-month bills for the first time in nearly five months. Economic growth in Asia is powering steadily ahead, according to a slew of reports released this week. Consumer demand in China is drawing imports from Taiwan, South Korea and Malaysia, picking up slack from falling demand in North America and Japan. Six Asian members– Indonesia, the Philippines, Thailand, Singapore, Malaysia and Brunei– finalized the world’s third-largest regional trading agreement (after the European Union and NAFTA), rendering 90% of goods tariff free.

The action by China triggered concern among investors that governments around the world will begin to unwind stimulus measures; however, the Bank of England left rates unchanged and voted to continue its quantitative easing program amid signs of a shaky recovery. A Reuters poll released on Wednesday suggests a commodity rush could push the loonie to parity with the U.S. dollar. Higher commodity prices for major Canadian exports, such as gold and oil, and further signs of a global economic recovery, are expected to help boost the Canadian dollar in 2010. In a survey by the Economic Club, more than half of Canadians expect the economy to improve, compared to only 20% a year ago, when consumer confidence hit a 27-year low.

Markets

Holiday sales lift U.S.; commodities fall

The Standard & Poor’s 500 Index closed in on a 15-month high as better-than-expected holiday sales growth lifted retailers; however, emerging markets fell from their most expensive valuations since 2000 after China raised a key interest rate on Thursday. Commodities also fell, halting a five-day winning streak for the TSX, as investors feared the move could weaken China’s appetite for steel, copper and other resources.

High-tech news out of the International Consumer Electronics Show in Las Vegas this week: Microsoft unveiled a touch screen tablet computer with capabilities ranging from gaming to reading Kindle books. Sony showed off nine large-screen TVs capable of displaying 3-D video and will introduce 3-D cameras, camcorders and computers. Google began selling its new smartphone directly to consumers online, bypassing carriers’ storefronts. Dell will bring its first-ever smartphone to the U.S. this year. In car news, Magna bought a stake in a privately held lithium mining firm, betting that electric vehicles of the future will run on lithium-ion batteries. General Motors predicts a profit in 2010, after exiting bankruptcy just last summer. Corporate spending on IT has ramped up faster than expected, according to Cisco, which is suffering shortages due to suppliers’ cutbacks during the downturn. Suncor Energy sold its Colorado natural gas assets to U.S.-based Noble Energy for US$494 million.

Our recommendation

Capitalize on short-term volatility by buying on pullbacks

• Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says, “the trend for equities remains higher, but likely with limited upside potential until such time as investors are more willing to look beyond 2010 and start discounting further economic recovery and profit growth into 2011.  As a result, not only will stock selection become increasingly important, but dividend income will also play a larger component of total shareholder returns.
• 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 means 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 “we expect this cyclical outperformance to continue early in 2010, albeit to a lesser extent. Mid- to late-cycle areas such as Technology, Industrials, Energy (oil), and Materials (mining and fertilizers) should outperform Financials and Discretionary when the tightening cycle begins in the latter half of 2010. ”

The month in review

December: Canada ends the year on strength

Canada’s economy is strengthening, according to economic data released in December. Unemployment edged down in November and improving consumer confidence boosted retail and housing trends. Housing starts rose as inventories of unsold houses declined and low interest rates drove buyers. Exports rose 3% in October, resulting in a trade surplus after three months of deficit. The loonie gained 1.7 cents in December, ending the year at US$0.964. Former Bank of Canada (BoC) Governor David Dodge predicts the Canadian dollar to rise in 2010 on U.S. dollar weakness and commodity prices that should continue to firm in the face of strong Asian demand. Inflation rose 0.5%, remaining well below Canada’s 2% target rate.

Investors remain tentative, but TSX prospects bright

Markets were up slightly overall in December, but remained volatile as investors reacted to any hint of negative financial news. After surging nearly 60% since March, North American stock markets have been little changed since mid-October amid concerns the recovery won’t be sustained. However, 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.

Household debt threatens Canada’s fiscal strength

In its semi-annual Financial System Review, the BoC warned that historically high levels of household debt pose the biggest threat to the country’s financial system. The report said that Canada’s fiscal position remains relatively strong and overall risks had decreased modestly in the last six months. The average Canadian is carrying a record household debt-to-income ratio of 140%.

U.S. economy gains traction

U.S. data suggests the economic recovery is slowly gaining traction – consumer spending rose more than expected during the highly anticipated holiday season, rising 2.9% versus an expected 2%, while the unemployment rate dropped to 10.0% in November, from 10.2%. A weak dollar helped boost U.S. exports of goods and services to their highest in nearly a year; however, the economy still has a long way to go, as evidenced by a 30% drop in quarterly profit at FedEx, which ships 4% of America’s GDP.

Technologies of the future

Boeing’s long-awaited Dreamliner lifted off the runway, starting nine months of testing before it goes into service. The lightweight carbon and titanium plane promises to use 20% less fuel and provide 45% more cargo revenue capacity. General Electric won a 10-year, US$1.4-billion contract to supply giant turbines for Oregon’s Shepherds Flat wind farm, set to be the world’s largest once it is up and running.

A tale of two media mergers

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. Also this month, one of the most disastrous corporate mergers in history came to an end when AOL was spun out of Time Warner at a market capitalization of about US$3 billion. When AOL’s plan to merge with Time Warner was announced in January 2000, the Internet company was valued at US$163 billion.