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Federal budget balances cutbacks and stimulus; West moves higher and East retreats; month in review.

Big picture

Federal budget balances cutbacks and stimulus

Canadians won’t see any new tax breaks in Canada’s 2010 federal budget, but there are no tax increases, either. In a bid to rein in Canada’s record $56-billion deficit without stifling economic momentum, the budget proposes $17-billion of cutbacks in the public service over the next five years, as well as following through on phase two of the economic stimulus plan to dispense $19-billion in economic stimulus funding.

Under mounting pressure from the European Union and financial markets, Greece announced a massive austerity program, with civil service pay cuts and new taxes that will shave €4.8-billion ($6.7-billion) off the deficit. On Thursday, Greece saw strong demand for its €5-billion euro ($7-billion) government bond issue, which offered a high rate of interest. Europe and England left key lending rates unchanged in the face of an uncertain economic recovery. The Bank of Canada also kept interest rates low even as the Canadian economy grew at an annualized rate of 5% in the fourth quarter of 2009. Bankruptcies fell for the third month, down 8.7% for personal and 7.1% for businesses. Consumer confidence continues to rise, according to a recent poll. In the U.S., where consumer confidence is falling, retail sales still rose in February versus a year ago.

Markets

West moves higher; East retreats

Canadian stocks finished higher for a third-straight session on Wednesday boosted by the energy, metals and mining sectors, but floundered on Thursday in anticipation of the federal budget, even as the banks turned in stellar profits. In the U.S. and Europe, stocks rose for a fifth straight day on Thursday, while Asian stocks fell as China’s Industrial Bank predicted slower growth in new lending.

Copper prices jumped to five-week highs as an earthquake disrupted supplies from Chile, the world’s largest producer. Shares of Titanium Metals Corp. reached four-year highs on Monday, even as the company reported an 86% decline in fourth-quarter profit. Production of the Boeing 787 and heightened demand from the aerospace industry is expected to fuel a sharp recovery. Torstar announced a $57-million profit in 2009, an amazing turnaround from its $200-million loss in 2008. Steve Jobs declared war on the Google phone, launching a patent infringement suit that seeks to block High Tech Computer Corp. in Taiwan from importing mobile phones into the U.S., many of which run Google’s Android operating system.

Our recommendation

U.S. equities could present positive earnings surprises in coming quarters

·         Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says: “This year’s trading activity will be characterized by volatility while global economic data and corporate earnings reports attempt to catch up with and justify current market valuations. We remain confident that markets are fairly valued in the context of an ongoing economic recovery and view any intermittent pullbacks as an opportunity to add equity exposure.”

·        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: “Rebounding top-line growth and margin expansion in coming quarters should translate into outsized gains for earnings…rising U.S. capacity utilization should contribute to further profit margin expansion and, coupled with stronger industrial production, S&P 500 EPS could well surprise on the upside in coming quarters.”

The month in review

February: Recovery marches on against backdrop of sovereign debt worries

The month got off to a rough start as global stock markets posted significant losses linked mainly to debt problems in Greece, but markets resumed an upward trend after European leaders pledged to provide Greece with financial aid in an unprecedented move to restore confidence in the euro. On March 3, Greece announced a sweeping austerity plan, which restored some confidence, but triggered nationwide protests by public workers fearing pay cuts and pension freezes. While Greece’s potential credit downgrade continues to rattle the eurozone, analysts fear that Spain is an even bigger threat to the 16-nation currency. The eurozone’s No. 4 economy, Spain, has 19% unemployment, a deflating housing bubble, massive debt and a gaping budget deficit.

China shows strength

China grew 9% in 2009 and already has helped push commodity exports to roughly half of Canada’s foreign sales. A record 580,000 patents were issued in China in 2009, up 41% from a year earlier. China overtook Germany last year as the world’s leading exporter and is set to overtake Japan as the second-largest economy in the world.

Inflation inches up in Canada

Inflation in Canada rose 1.9% in January because of gas prices, which were up 23.9% compared with a year ago. Excluding energy, the Consumer Price Index rose 1.3%, compared with a 0.8% increase in December.

Venture capital dries up

The Canadian venture capital market fell to its lowest level in 13 years in 2009, with less capital available to small companies, which traditionally have been vital drivers of jobs in the economy.

Steel forecast to jump

Steel prices are forecast to jump in 2010 as the cost of raw materials is expected to surge 70% because of emerging markets demand.

Potash outlook improves

Credit Suisse increased its price targets for fertilizer as the global agriculture sector improves. Potash Corp. shares gained after Russian competitor BPC raised its prices by more than 6%, indicating prices have finally bottomed. Potash prices were in freefall during 2009 as farmers avoided placing orders and instead used up their stocks.

International sales buoy Wal-Mart and Coca-Cola

Coca-Cola sales were up 5%, boosted by China and India. In the U.S., where sales are declining, Coca-Colawill buy the North American operations of its biggest bottlerfor $15-billion in a bid for cost savings and more flexibility in distribution. Wal-Mart reported 22% profit growth last quarter, with strong international sales offsetting a 2% decline in U.S. sales. Wal-Mart announced it will add 6,500 jobs across Canada, opening 35 to 40 super centres that will sell groceries, a move that will intensify competition among food sellers. 

Research in Motion under fire

Research in Motion won a patent infringement lawsuit in the U.K. brought against it by Motorola. The U.S. Trade Commission will investigate a complaint by Kodak alleging patent infringement by Research in Motion and Apple in smartphones with digital cameras.