Midday Market Comments

Canada

At midday, Canadian equities are materially lowed led by losses in the Technology and Financial subsectors of the S&P/TSX as concerns lingered over the health of the U.S. financial system despite the Federal Reserve's rescue plan for U.S. insurer American International Group (AIG US). 

The technology subsector is under pressure as Nortel Networks (NT) plunged over 44% after cutting its revenue forecasts and commented about looking to sell one of its businesses. 

Canadian Financials are under pressure with all major Canadian banks selling off, led by the Canadian Imperial Bank of Commerce (CM) down 6.0%.  Manulife Financial (MFC) fell 4.8% after outlining its exposure to AIG and Lehman Brothers Holdings

Materials are the only sector posting a positive return, up 1.7% on bargain-hunting and materially higher prices of gold as investors seeked a safe heaven.  Barrick Gold (ABX) is up 10.6%

Canada's largest publicly traded durgmaker Biovail Corp (BVF) declined 5.7% after moving ahead with its plans to shift into central nervous system treatments by buying privately held drugmaker U.S. Prestwick Pharmaceuticals for $100 million.

US

At midday, U.S. equities are materially lower and trading near session lows with all ten subsectors of the S&P 500 posting negative returns led by Financials (down 7.6%) as an increase in bank borrowing costs increased fears that credit might be drying up in the global financial systems.  95% of stocks in the S&P 500 are posting a loss as the Fed's rescue of American International Group (AIG) failed to reassure investors after it said it will lend US$85 billion for a 79.9% stake in the company.

Morgan Stanley (MS US) reported its quarterly earnings and according to CNBC the bank is debating whether it should remain independendt or merge with another bank while taking into consideration the recent volatility in it's share price.  Morgan Stanley is trading over 36% lower.  Goldman Sachs (GS US) is also selling off today, down 25% after several brokerages cut their profit outlook for Goldman.  Barclays PLC (BCS US) accounced that it would buy Lehman Brothers banking and capital markets business for US$250 million, saving approximately 10,000 jobs.  Barclay's is trading 3.5% lower.   According to a New York Post article, the U.S. Federal Reserve is trying to orchestrate a joint purchase of Washington Mutual Inc (WM US).  WaMu is down 10.2%.

International

Equities in Asia had a mixed reaction to the Fed bailout of AIG.  Banks and insurers fell with Macquarie Group Ltd. Declining 7.8% in Sydney amid fears it may have difficulty refinancing debt.  In some M&A news, Hynix Semiconductor Inc surged 10% on speculation that prices would rise as a result of Samsung's bid to acquire SanDisk Corp. 

European equities are trading marginally lower with all major European indicies posting negative returns after U.S. housing starts came in below expectations and bank's borrowing costs jumped as fears of a recession increased.  Worthy of mention are Germany's largest builder Hochtief AG which declined 3.1% after the U.S. Commerce Department reported that housing starts sank to the lowest level in 17 years. 

Currencies & commodities

Oil prices have been trading in a volatile fashion following the government's inventory data.  For the week ending September 12, the U.S. Department of Energy reported a draw of 6.3 mmbbl in crude oil bringing inventory levels to 291.7 mmbbl - the draw was larger than Street expectations, which called for a draw of 3.2 mmbbl. Distillate fuel oil levels currently stand at 129.6 mmbbl after a draw of 0.9 mmbbl for the week, Street suggested a draw of 1.8 mmbbl. The U.S. DOE reported a draw of 3.3 mmbbl in motor gasoline, inventory levels currently stand at 184.6 mmbbl, Street expectations suggested a draw of 3.7 mmbbl.  Crude oil is trading higher by $2.45 at $93.60 per barrel.

Gold prices have just jumped significantly.  We're hearing rumours that there may be problems with a Central Bank in South America which may have sparked the jump.  Gold futures now almost up US$80 per ounce.  Gold stocks are doing very well right now.

Morning Market Comments

So what do we think about the AIG bailout. First, this is definitely good news as it avoids a systemic meltdown in the financial system. However there are a few things that we find terribly disconcerting. To begin with, the Federal Reserve announced it was lending AIG up to U$85 B as a disorderly failure of AIG would create too much turmoil in the financial system. The facility has a two-year term and will allow for the orderly sale of assets. The proceeds from the asset sales will be used to repay the loan. The interest rate on the loan is punitive at LIBOR plus 850 basis points. In exchange for providing the loan, the U.S. government will receive an 80% equity interest in the company. The fact the government ultimately stepped in is not surprising, however the amount of money they are pumping into AIG is staggering. Our understanding was last week the company needed U$20 B, then on Monday we were hearing they needed U$40 B, then U$75 B yesterday morning, only to find they may need U$85 B. To frame this number, over the last year major banks globally have collectively raised approximately U$330 B. What's interesting is that only when these firms go to confessional (The Fed) do we get a clear picture of just how dire things are. The size of the credit facility will require significant assets sales, beyond their aircraft leasing and other non-core businesses to its core insurance operations. The world's largest global insurance company is about to be unwound. There will be lots of buyers for their core insurance assets. Credit Suisse estimates a considerable amount of the total value of AIG may not go to current debt or equity holders, but rather to repay the loan to the Fed. So there is a risk debtholders may not be made whole. How will that effect the ratings on the company's debt. Credit Suisse believes the stock should trade in a range of U$1 to U$4 per share, based on pro-forma EPS of 30-40 cents.

Collateral damage from Lehman's demise is beginning to surface. First, the oldest U.S. money market fund "broke the buck" yesterday. The Reserve Primary Fund has halted redemptions as it was forced to write down U$785 million of debt issued by Lehman and shareholders withdrew 60% of its U$64.8 B in assets in the last two days. Shares of power marketing company Constellation Energy Group (CEG) lost almost half their value in two days on concerns Wall St. turmoil could create problems for its energy trading business. CEG is counterparties with Lehman Brothers through its commodity trading business.

Other news in the financial sector. The Federal Reserve is apparently actively shopping Washington Mutual (WM). Morgan Stanley (MS) pre-announced earnings last night and beat expectations. Numbers were better than those reported yesterday by Goldman Sachs (GS), but Morgan remains highly levered. CNBC is reporting Morgan is considering partnering with a bank. In the U.K., Lloyds TSB Group (LLOY-LN) is in advanced talks to buy Britain's largest mortgage lender HBOS (HBOS-LN).

Other news items today include:

1. Russia halted trading in its equity market for a second day after emergency funding by the government failed to stop massive selling pressure. Russia's RTS Index is down 37% this month. Russia's financial markets are facing their biggest test since the 1998 crisis that pushed the government to default on U$40 B of debt.

2. Barclays Plc, the U.K.'s third largest bank, will acquire the North American investment banking business of Lehman Brothers for $1.75 billion, two days after abandoning pans to buy the entire firm.

3. Nortel Networks (NT) has cut its forecasts for sales and profit margins, saying customers are curbing spending amid an economic slump.   Sales will fall 2% to 4% in 2008 compared with an earlier target of growth in the low single-digit range.  Third quarter revenue will be about $2.3 billion, short of the $2.66 billion Consensus estimate.

4. The Bank of Japan did as expected and left rates unchanged, accompanied by a fairly balanced assessment of growth and inflation risks.  The BoJ doesn't view downside risks to the economy as having intensified because softer global growth gets traded off against a terms of trade shift via lower commodity prices.  It continues to view inflation expectations as a risk.

5. Cameco Corp. has resolved the leak problem at its Port Hope nuclear conversion plant and hopes to restart it at a reduced rate within the next few days. The plant has been shut down since July 2007. Cameco expects total remediation costs at the facility to be between C$50 million and C$55 million. The company still has to resolve a fight with its sole supplier of hydrofluoric acid, a key input in the production of uranium hexafluoride, but Cameco says it has enough supply to keep operating at a reduced rate for about a month.

6. Teck Cominco (20% interest) and its partners (PCA-60% and UTS 20%) in the Fort Hills Energy Ltd. Partnership announced that the estimated costs for the Fort Hills Project have risen by approximately 50% from those announced in June 2007. The major increases are costs associated with construction materials, labour, project management, and engineering. The June 2007 cost estimate was $14.1 billion , implying an increase of approximately $7 billion of which Tecks share would be $1.4 billion. The interest in the project represents approximately 10% of $45 NAV on Teck and the higher capex would significantly reduce this value. The partners are considering options to reduce or defer capital costs, including the phasing of various aspects of the project. A final investment decision is planned by the Fort Hills partners for Q4 2008 and will depend on the results of the definitive cost estimate

AIG rallying

AIG, financials, and broader market are trading off their lows as investors place there bets that AIG will get  necessary bridge financing to give it time to sell assets and raise capital. No news on AIG yet. Will keep everyone posted.

AIG - NY Fed in meeting to discuss fate of AIG. CNBC is saying a government bailout of AIG is now a possibility. Stock rallying along with the broader m

Morning Market Comments

Today is more about American International Group (AIG) than the FOMC announcement - not to downplay the rate decision. AIG's survival is critical to the financial system. The company has insured U$441 B of fixed income assets including U$58 B of subprime mortgages through the CDS (credit default swap) market. This book of business has lead to huge losses for the company overshadowing what is a very attractive insurance business. AIG's failure would create additional problems for the CDS market which is still trying to figure out how to settle CDS in which Lehman Brother was involved in. AIG's demise would drag the other global insurance companies such as Alliance, AXA, ING into the fold. This would lead to a substantial increase in writedowns which would have implications for the broader economy. If we do not see any positive developments on AIG heading into the close of trading today, the equity market will sell off heavily. If AIG does in fact file for bankruptcy protection, hold on to your hats.

Goldman Sachs (GS) is off sharply along with other financials despite reporting better than expected Q3 earnings. Earnings per share was U$1.81, beating analyst expectations by U$0.10. However, revenues were down sharply and ROE was only 7.7%. It appears we are moving to the end of an era of standalone broker/dealers. We expect Morgan Stanley (MS) and Goldman Sachs (GS) are likely to partner with other banks similar to the Bank of America/Merrill Lynch transaction. If there is one survivor it will likely be Goldman. It all comes down to trust and people trust Goldman. They appear to be getting most of the new business what little there is.

Washington Mutual (WM) was downgraded to junk status by Standard & Poor's. The rating agency took the rating on the largest Savings & Loan in U.S. to BB- from BBB-, three levels below investment grade. S&P cited the deteriorating U.S. housing market for its decision. S&P acknowledged that the company's deposit base appears stable.

U.S. equity futures are lower this morning and Canadian markets will open lower as commodity prices come under further pressure.

Other news items today include:

1. Last night Teck Cominco announced "Teck continues to work with its syndicate of lenders to complete the definitive documentation for its fully underwritten $9.8 billion bridge and term loan facilities in connection with the acquisition, and expects to have definitive financing documents in place before the Fording unitholder vote scheduled for September 30, 2008."  I highlight this as Fording (FDG.un) was hit hard yesterday on fears that the financing could be in trouble.  The rumour in the market is that 80% of the debt financing has already been placed.

2. The Bank of Canada announced yesterday that it is monitoring global financial markets "closely" and will assist as needed to keep the country's financial system working.  "The Bank will provide liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets".

3. SNC Lavalin Group has won a contract valued at C$500 million to build an airport in Benghazi, Libya.  The contract for the airport includes construction of a new international terminal, runway and apron.  The airport, to be completed in 2010, will serve five million passengers annually as a gateway to Libya's second largest city.

4. Sun Life Financial (SLF) has announced that it will have a charge in the third quarter from investments tied to Lehman Brothers Holdings.  Sun Life has C$334 million in bonds and about C$15 million in derivatives contracts tied to Lehman.  The company didn't estimate the amount of the charge.

5. According to Bloomberg, potash inventories controlled by North America crop-nutrient producers fell 21% in August to their lowest in at least 19 years, as a strike at three Canadian mines reduced output.  Stockpiles fell to 556,000 tons last month from July and were down 33% from a year earlier.  Production fell 17% to 810,000 tons in August from July.

6. BHP Billiton Ltd. has said that it expects commodity markets to remain volatile in the short term, but it is confident there will be continuing growth in demand in the long term. BHP Chairman Don Argus said "While we expect commodity markets to remain volatile in the short-term, we are confident that long-term market fundamentals should support growth in commodity demand and, therefore, our revenue." Commenting on demand from Asia, Argus said "I have no doubt that economic growth in the Asian region will slow at some point but if I look at China specifically, the slow down is concentrated in regions oriented to the light export sector."

7. BHP Billiton Ltd. has increased the estimated ore reserves at its Olympic Dam copper uranium project in Australia by 19%, as it continues to study an expansion that may cost at least $6 billion, according to Bloomberg. Total estimated ore reserves, comprising both proven and probable reserves, increased to 473 million tonnes compared to last year's estimate of 399 million tonnes. The increased reserves increases the estimated mine life to 43 years, up from last year's forecast of 36 years, according to the company. Proven reserves, rose to 221 million tonnes from 61 million tonnes a year earlier. BHP plans to complete an initial study on the expansion that would raise copper production to 730,000 tonnes per year from the current rate of 170,000 tonnes per year, and increase uranium production from 4,000 tonnes per year to nearly 20,000 tonnes per year.

8. UxWeekly reports that the spot price of uranium fell $2.50 to US$62.00/lb U3O8. The group noted that the price could continue to weaken in the near term as some sellers had pressing sales needs.

AIG worries

Everything we are reading today, saying AIG's survival is critical to financial markets. AIG was downgraded by rating agencies. Must post additional collateral. Trying to arrange bridge financing. Markets will sell off heavily if there are no positive news into close.

Midday Market Comments

Canada

 

At midday, equities in Canada are materially lower with weakness in the Financial subsector of the S&P/TSX which accounts for about a quarter of the index's total weight, rattled by the bankruptcy of Lehman Brothers and persistent worries over the health of the U.S. financial system. 

 

We recommends patience, as today's losses may not be the only losses this week as the market takes time to digest and understand the magnitude and extent of the weekend's events.  Equities will likely continue to fall this week.  You do not need to be a buyer today if you are sitting on cash and waiting for a pullback.

 

All major Canadian banks are posting negative returns, led by Canadian Imperial Bank of Commerce (CM), down 4.3%.  The bank announced that its mark to market exposure to Lehman Brothers net of collateral is immaterial at $25 million.  Despite this, the bank continues to sell off.

 

The Energy subsector dropped 3.8% in-line with lower energy prices.  Canadian Natural Resources (CNQ) slid 5.5% while EnCana (ECA) fell 2.9%.

 

Teranet Income Fund (TF-UN) advised its unitholders not to take any action regarding the formal takeover bid from Borealis Infrastructure Management Inc.  The company commented that investors should wait while the fund seeks alternatives. Teranet is trading lower by 1.4%.

 

Teck Cominco Ltd. has secured European antitrust approval to buy Fording Canadian Coal Trust. The European Commission, the European Union's antitrust regulator in Brussels, announced the approval in a statement today. Teck has scheduled a shareholder vote on the acquisition for Sept. 30 and anticipates finalizing the deal by the end of October, according to Greg Waller, head of investor relations at Teck Cominco.

 

U.S.

 

At midday, U.S. equities are materially lower with all ten subsectors of the S&P 500 posting negative returns led by Financial and Energy subsectors. This is a historic moment for the U.S. financial services sector, after Lehman Brothers (LEH US) filled for bankruptcy protection and Merrill Lynch (MER US) agreed to be acquired by Bank of America (BAC US).   Lehman has been suspended from trading on NYSE and continues to trade on electronic trading systems at 20 cents a share.  Merrill Lynch is up 17.3%, and Bank of America fell 16.2%. 

 

American International Group (AIG US) is in further trouble as the company was expected to deliver a plan to sell assets to raise capital and avoid a downgrade by rating agencies. AIG rejected an offer from private equity firms. AIG plunged earlier by 70%.   Headlines at 12:30 -- saying that AIG has reached deals with the New York state insurance officials authorizing it to access $20 billion of capital in its subsidiaries to free up liquidity effectively making a bridge loan to itself for that amount.   AIG is rallying, now down 51%.

 

International

 

In Europe, equities fell led by banking shares after the bankruptcy of Lehman Brothers over the weekend.  Worthy of mention are Barclays Plc which pulled out of talks to buy Lehman Brothers and slid 13%, it's biggest loss in 20 years.    Britain's biggest mortgage lender HBOS Plc, dropped a record 27% while Royal Bank of Scotland fell 13%.  All major European indices are currently posting losses in excess of 3%.   

 

Equities in Asia are on a holiday today with markets in Hong Kong, Japan and Taiwan closed. 

 

Currencies & Commodities

 

Gold advanced $20 and is trading at $785.1 per ounce after Lehman Brother's bankruptcy sent investors scrambling for a safe heaven.  Crude oil fell to $97.33 per barrel, near it's lowest level in six months, as refiners in the Gulf of Mexico escaped damage from Hurricane Ike and investors eased fears over supply-disruptions.  The U.S. dollar dropped the most in a decade against the yen after investors sold assets financed by loans in Japan.  The Swiss franc also showed strength and rose against every other major currency. 

 

TradeTech reports that the spot price of uranium dropped $1.50 this week to US$63.00/lb U3O8. The group noted that demand is highly discretionary and spot supply is more than adequate to satisfy spot requirements. In addition, new spot supply continues to emerge.

 

Morning Market Comments

Quick Summary

1. Lehman Brothers filed for bankruptcy
2. Merrill Lynch (MER) has agreed to be bough out by Banc of America.
3. The Federal Reserve has widened the collateral it accepts for loans to securities firms.
4. The Fed also has boosted its program for lending Treasuries to bond dealers by $25 billion, brining it to $200 billion
5. A group of 10 banks including JP Morgan (JPM), Goldman Sachs (GS) and Citigroup (C.N) have formed a $70 billion fund to ensure market liquidity
6. The European Central Bank and Bank of England pumped emergency funds into their financial systems this morning as did the central banks of Switzerland and Australia.
7. The Federal Reserve meets tomorrow and is speculated to make either a 50 or 75 basis point cut.  It may even move today if warranted.
8. AIG Group (AIG) is seeking a $40 billion bridge loan from the Federal Reserve after weekend talks failed to raise capital for the company.


A history making weekend for the U.S. financial services sector as Lehman Brothers (LEH) said it would seek bankruptcy protection and Bank of America (BAC) said it would acquire Merrill Lynch (MER) for 0.8595 of a share of BAC for each share of MER. The transaction values Merrill at U$24.75 based on BAC's current share price in pre-market trading.

Lehman's filing threatens the Credit Default Swap (CDS) market as nobody is really sure how to settle or unwind these positions. Lehman ranked as the seventh-largest credit derivative counterparty by Fitch Ratings in a survey released last year. Scotia's fixed income strategist believes there are about U$1 trillion worth of counterparty transactions that flow through Lehman. Reuters noted the private nature of the market, however, makes the size of its books impossible to quantify.

The next shoe to fall could very well be American International Group (AIG). The shares are down 50% again this morning after they were pummeled last week on concerns about ratings downgrades that would require the company to post additional collateral. A significant portion of AIG Financial Products unit guaranteed investment agreements and financial derivatives transactions include provisions that would require the company to post additional collateral or repay its positions. According to a Financial Times article, it was estimated that a downgrade of AIG's long-term senior rating to A1 by Moody's and A+ by S&P would permit counterparties to make additional calls for up to U$13.3 B of collateral. AIG apparently turned down a capital infusion from a group of private equity firms led by JC Flowers because of an option tied to the offer that would give these investors control of the company. The press is saying AIG has asked the Federal Reserve for a U$40 B bridge loan. Some analysts think the Fed will extend them the necessary credit to stay afloat.

We do not believe this is the beginning of the end of troubles in the U.S. and global financial system. Banks are likely to hoard more cash and further reduce their willingness to lend money to consumers and businesses. This will delay a recovery in the housing market and prolong the downturn in the U.S. economy. Former Fed Governor, Alan Greenspan said this is a once in century event, the worst he has seen in his career. He believes the crisis still has a way to go and will be a corrosive force until the price of home in the U.S. stabilize.

A volatile day is ahead...

Obviously we expect all capital markets to be volatile in the near term after the weekend's announcments. 

WaMu

Washington Mutual (WM) - rumor of JPMorgan (JPM) looking at buying WaMu. No price. WaMu is beginning to move higher.

Midday Market Comments

U.S.

 

At midday, U.S. equities are flat for the day having recovered from earlier losses with strength found in Energy (up 2.2%) and Materials (up 2.0%) subsectors of the S&P 500 in-line with higher energy and metals prices.  The Financial subsector (down 0.7%) continues to weigh down on the S&P 500 for another day.

 

It's a relatively quiet day in the U.S. as investors speculate and await news (likely to come over the weekend) regarding the possibility of a buyout of Lehman Brothers (LEH US) by any of the possible suitors: Bank of America, JC Flowers & Co., or China Investment Co. (a SWF). There are indications that similar to the Bear Stearns situation, a large bank will be the buyer, with some assistance from the US central banking system.

 

Auto manufacturers rallied with General Motors (GM US) and Ford (F US) both advancing 7.2% and 5.1% respectively after reports indicated that GM is looking for low-cost loans from U.S. Congress.  General Electric (GE US) declined 4.9% on concerns about the company's commercial real estate portfolio, which is part of their commercial finance portfolio. Real estate represented about 8% of the company's operating income in 2007.

 

Canada

 

At midday, equities in Canada are higher with strength in Materials and Energy subsectors of the S&P/TSX in sympathy with higher energy prices and a weaker U.S. dollar that is making commodity prices higher. 

 

The Materials subsector advanced 5% on higher prices of gold and base metals.  Shares of top gold companies are up with Barrick Gold (ABX) and Goldcorp (G) advancing 4.2% and 6% respectively.

 

In the Energy sector, Husky Energy (HSE) rose 1.6%.  Husky recently won development rights to explore for gas off the coat of Labrador.   Suncor Energy (SU) also rallied, adding 3.5%.

 

The Financial subsector slipped 1.5% as worries persisted over Lehman Brothers and the health of the U.S. financial system after Lehman reported a big quarterly loss and failed to attract investors to shoe up its capital position.  All major Canadian banks declined, led by Toronto Dominion Bank (TD), lower by 2.1%.

 

The Technology subsector is the biggest drag on the S&P/TSX, down 1.3% with index-heavyweight Research in Motion (RIM) down 3.8% on no specific news as investors took profits and sold the stock on strength.

 

Automation Tooling Systems Inc (ATA), maker of automated manufacturing and assembly systems -- surged over 10% after signing a deal to sell its precision components group in Q3.  

 

Motorists across Canada were hit by sharply higher gasoline prices at the pump this morning, with the price of gas rising by an average of 13 cents a litre to more than $1.36 a litre. 

 

International

 

In Asia, equities rallied led by commodity producers and financials in sympathy with higher metals prices and the possibility of a buyout of Lehman Brothers. Worthy of note are BHP Billiton Ltd, which advanced 4.4% in-line with higher prices of copper and zinc.  Mitsubishi UFJ Financial Group. rallied 4.3% after Bank of America and other possible buyers expressed interest in Lehman Brothers.  The Nikkei closed higher by 0.9% while the Hang Seng declined 0.2%.

 

Currencies & Commodities

 

Gold advanced 1.7 % after a nine day decline, as the U.S. dollar fell against the euro increasing demand for gold as an alternative investment.   

 

Oil and gasoline prices rose 0.5% and 3.3% respectively after oil drilling and refining facilities were forced to shut down in the Texas Gulf Coasts as Hurricane Ike approached.  The hurricane is expected to make landfall late tonight or early Saturday morning.  The market seems to be completely focusing on the hurricane and anticipates supply disruptions. 

Possible joint bid for Lehman Brothers

Financial Times is reporting Bank of America, JC Flowers & Co., and China Investment Co. (a SWF) are considering a possible joint bid for Lehman Brothers. Details not available, but proposal could involve losses for equity and debtholders.

Morning Market Comments

1. CHC Helicopter Corporation (FLY.A) today announced that it expects the acquisition of CHC by 6922767 Canada Inc., an affiliate of a fund managed by First Reserve Corporation, to close on September 16, 2008. The parties have acknowledged that all conditions to close for the transaction (other than those that can only be satisfied at the time of closing) have now been satisfied.

2. China's industrial production grew at the slowest pace in six years. Industrial output rose 12.8% in August from a year earlier, below the Bloomberg consensus estimate of 14.5% and July's 14.7% increase. China's economic expansion slowed for a fourth quarter to 10.1% in the period April - June 2008. Its growth remained the fastest of the world's 20 biggest economies. Retail sales grew 23.2% in August, close to the fastest pace in nine years.

3. According to the Globe and Mail, former Bank of Canada Governor David Dodge said policy makers were aware of the dangers of a credit crisis five years ago, but that central bankers and regulators avoided taking more action because they didn't realize the scale of the damage that mortgage backed securities could cause.  Nice to know in hindsight eh?

4. Potash Corporation of Saskatchewan (POT) has approved buying back an additional 5% of the company's outstanding common shares.  The expansion of the buyback program allows the repurchase of a total of 10% of shares outstanding or 31.5 million shares.

5. U.S. advanced retail sales for the month of August unexpectedly declined as Americans reduced spending in the face of mounting job losses and falling home prices. Sales declined 0.3%, or 0.7% excluding automobiles. Consumers are also feeling the pinch from weaker wage growth which has failed to keep pace with inflation over the past year.

6. At 7:00 am this morning, Hurricane Ike is was located about 230 miles southeast of Galveston, Texas and is expected to make landfall early Saturday morning. While not a major hurricane at this time, it could strengthen to a category 3 storm before hitting landfall. Ike is a very large tropical storm with hurricane force winds extending outward up to 120 miles from the center and tropical storm force winds extending out 275 miles from the center. Coastal storm surge could reach 20 feet above normal tide levels. Floodwaters surged into Galveston Island neighbourhoods this morning with the center of the hurricane still 200+ miles offshore.

7. Prime Minister Stephen Harper has pledged to loosen restrictions on foreign investment if he's re-elected next month in a bid to bolster Canada's competitiveness.  The Conservatives would raise the threshold at which a foreign acquisition triggers a government review to $1 billion and allow non-Canadians to own bigger stakes in airlines and uranium miners.

It appears Lehman Brothers (LEH) 148 year history is nearing an end. A takeover of Lehman Brothers (LEH) appears to be increasingly likely after investors gave a thumbs down to the company's restructuring plans earlier this week. Among the list of potential suitors are Goldman Sachs (GS), Bank of America (BAC), Barclays (BCS) or Nomura. The press is also suggesting a consortium of financial institutions could be a potential buyer.

Washington Mutual (WM) said it remains "well capitalized" with U$50 B in liquidity, and forecast loan loss provision of U$4.5 B in Q3. Goldman Sachs upgraded WaMu this morning to "Neutral" from "Sell" saying Q3 results are likely to be worse than expected but not as bad as the decline in the share prices would suggest. The analyst went on to say the company may not have to raise additional capital. The shares are trading down in the pre-market.

Shares of Merrill Lynch (MER) fell 17% yesterday as worries about Lehman Brothers future also raised questions about Merrill's commercial mortgage exposure. The shares are trading at their lowest level in 10 years.

There are 3.9 million unsold existing single-family homes in the U.S. according to the National Association of Realtors. That translates into 11.1 months of supply at the current sale pace. Bloomberg reported that Alt-A loans or so called "liar loans" could be the next risk for the housing market as 16% of securitized Alt-A loans issued since January 2006 are at least 60 days late. Defaults of these loans are expected to accelerate next year as they hit their reset periods according to RealtyTrac Inc.

Midday Market Comments

Canada

 

At midday, equities in Canada are marginally higher after climbing back from steep losses earlier in the day with strength in the Materials and Energy subsectors of the S&P/TSX despite lower prices of crude oil and most metals.  

 

Encana Corp (ECA) and Canadian Natural Resources (CNQ) both rallied by 3.1% and 4.2%, respectively.  In the Materials subsector, Potash Corp of Saskatchewan (POT) and Agnico Eagle (AEM) rallied 4.2% and 2.3%, respectively as investors bought beaten up commodity stocks at what some perceive to be bargain prices.

 

The Financial subsector is lower by 0.7% as most major Canadian banks trade lower with the exception of Bank of Nova Scotia (BNS) which is up 0.3%.  Canadian Imperial Bank of Commerce (CM) is leading the rest of the banks lower by 2.8%.  The health of the U.S. financial sector is weighing heavily on Canadian banks after investment bank Lehman Brothers failed to announce deals to raise capital.

 

Statistics Canada released Canada's trade surplus numbers which narrowed more than expected in July as imports rose twice as fast as exports.  Energy exports fell for the first time in nine months.  There is some evidence of a cooling house market in Canada as price increases for new homes in Canada eased in July, advancing only 0.1%.  

 

Apparel retailer Lululemon Athletica Inc (LLL) rallied 6.2% after reporting a sharp rise in 2008 Q2 profit.  

 

U.S.

 

At midday, U.S. equities have recovered from earlier losses and are flat for the day with weakness in the Financial subsector of the S&P500 offset by strength in Materials and Energy.

 

Financials are under pressure as shares of Lehman Brothers Holdings Inc (LEH US) continued to plunge and are now down 31% after the U.S. investment bank suffered one of its worst quarterly losses in company history (almost US$ 4 billion).  Lehman said it would spin-off part of its commercial real estate assets, among other moves. Rumors out of NYC - Goldman looking at Lehman - no surprise here. Likely GS will want Fed guarantee like JPM got with Bear Stearns. Washington Mutual (WM US) followed Lehman and dropped 9% more after a ratings agency on Tuesday changed its outlook on the largest U.S. savings and loan to negative from stable, according to Reuters.  

 

International

 

Equities in Asia fell to their lowest low since November 2005 on concern credit-market losses will increase and slowing growth will damp demand for the region's exports.  Both the Nikkei and Hang Seng closed lower by 2.0% and 3.1% respectively.   Investors in Asia sold financials after Lehman Brothers plunged yesterday and posted a wider loss than analysts expected.  Both Mitsubishi UFJ Financial Group Inc and Australia & New Zealand Banking Group Ltd closed lower by more than 4%.  Mazda Motor Corp. declined more than 10% after the European Commission cut it's European growth outlook. 

 

In Europe, equities also declined led by retailers and financial firms on growing concerns over a deepening economic slowdown.   Home Retail Group Plc dropped 6.2% after reporting lower sales.  All major European indices are currently trading in negative territory with losses just under 1%.

 

Currencies & Commodities

 

Crude oil declined $0.84 to $101.78 per barrel and was trading earlier around the psychologically important $100 per barrel mark as the broad-based commodity sell-off trend continues amid persistent concerns over a slowing global demand.  Hurricane Ike is receiving daily news coverage and publicity, but does not seem to be causing any supply worries.

 

Gold dropped below $740 /oz and is at it's lowest level since October 2007 as the U.S. dollar gained and reduced demand for the precious metal as an alternative investment.  CMX prices of platinum and copper are also lower at midday, led by silver, down over 4%.  Aluminum is trading higher.

 

Morning Market Comments

1. According to Bloomberg, Australia, the world's sixth largest wheat exporter, may harvest less of the grain than previously forecast because of dry weather in some states.  Production may be 22.7 million metric tons, down from an August estimate of 24.5 million tons.  That compares to last year's drought-reduced crop of about 13 million tons.  Australian farmers need rain ahead of the harvest starting in about November to meet yield potential.

2. There is speculation in Australian newspapers that Incitec Pivot Ltd, Australia's largest fertilizer maker, may be a takeover target for Potash Corp of Saskatchewan (POT).  As Potash is debt free, the paper speculates that Potash could buy Incitec without issuing shares.  Then again the paper also speculates that other acquirers  could include Yara International, Agrium (AGU) and Mosaic….so I don't know how much faith you put in a story that basically says that every major fertilizer producer is a possible acquirer.

3. Agrium (AGU) Chief Executive Officer Mike Wilson says an increase in global demand for grains and agriculture products will continue, and he's increasing his stake in the company by 13% to take advantage of it.  Wilson said yesterday that Agrium's share price decline is unwarranted and he bought 20,000 shares this week to raise his personal holding to 175,000 shares. "Even if there is a slowdown in the U.S. or other parts of the world, we believe year over year grain demand will increase and that grain prices and grain fundamentals will stay strong…we do not see, globally, grain demand falling off".

4. Research in Motion (RIM) introduced a version of its Blackberry Pearl with a flip cover yesterday.  The phone will be available later this year and the specific release date and price haven't been disclosed.  RIM is trying to extend its success beyond business users with its first flip model.  Consumers accounted for about 60% of new subscribers in the first quarter and now make up more than 40% of customers. About 75% of mobile phones old in the U.S. are the flip kind according to Jim Balsillie.  "The most common preference is the flip and yet it's the most unaddressed because it requires some special innovation" Balsillie said.  The company created a special hinge for the Pearl that gives more room for the keyboard and trackball.  The phone has a 2-megapixel camera with a flash, and it connects to Wi-Fi networks.

5. The move to place both Fannie Mae (FNM) and Freddie Mac (FRE) into a conservatorship has triggered Credit Default Swaps (CDS) that could result in losses to financials institutions of up to U$25 billion, according to the Financial Times. Another unwelcomed surprise in this ongoing financial crisis.

6. Yesterday, ImClone (IMCL) formally rejected Bristol Myers' (BMY) U$60 per share offer to purchase the 83% of the company it does not already own. ImClone also said it received a U$70 per share offer from an yet unnamed suitor.

7. Credit Suisse lowered their earnings estimates, target and rating on Becton Dickinson (BDX) due to headwinds created by a strengthening U.S. dollar. The shares are now rated Neutral and the target price is U$89 from U$96. The Portfolio Advisory Group believes the investment thesis remains intact and will continue to hold the stock in its U.S. Core Portfolio. This does raise the question about earnings prospects for other multinationals. We continue to argue that earnings estimates for U.S. companies are too high.

Big banks are tripping over themselves to lower their ratings and targets on other financial institutions. This morning, Credit Suisse lowered their earnings estimates and target price on Lehman Brothers (LEH). Their new target is U$10, it was $35 per share. Their new target could prove to be a stretch. The market continues to punish the shares of Lehman Brothers. After falling into yesterday's close, the shares are down a further U$3.25 or 45% in pre-market trading. The company must find a buyer for its asset management business sooner rather than later. The sale would help shore up the balance sheet and give the company time to spin-off its commercial real estate assets. If they can sell Neuberger and spin off its unwanted real estate assets, shareholders are left with a quality fixed income trading operation, back to where it began. The company's apparent reluctance to sell the entire asset management operation could prove to be a stumbling block to culminating a transaction. Lehman is in no position to negotiate and it appears time is of the essence.

Shares of Washington Mutual (WM) plunged 30% yesterday on the back of a 20% decline on Tuesday. The stock is off another 25% in the pre-market this morning. Short sellers have piled on the stock and now represent 26% of shares outstanding according to Data Explorers. The company received a memorandum of understanding from regulators this week asking for a detailed financial plan in the face of mounting losses. News that potential suitors have backed away because of new accounting rules coming this December has also added fuel to the fire.

Lehman Brothers

Lehman Brothers (LEH) is trading 40% lower in pre-market trading and will likely drag most U.S. financials lower today.

Midday Market Comments

U.S.

 

At midday, U.S. equities are marginally higher but trading in a very volatile fashion.  Strength is to be found in Energy (up 2.0%) despite lower post-inventory crude oil prices.  However, weakness in the Financial subsector (down 0.6%) is dragging the S&P 500 lower.

 

The Financial subsector seems to be following Lehman Brothers (LEH US) and Washington Mutual (WM US), as both companies continue to fall.  Washington Mutual is down over 20% this morning on news that potential suitors have apparently walked away because of pending accounting rule changes that will force an acquirer to mark acquired assets to market.   Lehman is extending its massive losses from yesterday by another 3.3%.

 

We are anticipating an eventual bounce in resource stocks and recommend resource ETFs.  ETFs are a great way to play themes and sectors as they reduce company specific risk

Canada

 

At midday, equities in Canada are higher with all 10 subsectors of the S&P/TSX currently posting positive returns.  The Energy subsector is up 1.2% despite lower crude oil prices following a surprise decision by OPEC to cut production.  Worthy of mention is Canadian Natural Resources (CNQ) which rallied 2.6%.  

 

The Materials sector is also posting a positive return despite lower prices of gold and base metals as investors bought beaten up commodity stocks at bargain prices.   Barrick Gold (ABX) rallied 4.2%.

 

Teck Cominco (TCKb) stated that all conditions for the Fording deal are expected to be satisfied by September 30 and the deal is targeted to close October 30.  Taxable unit holders should sell FDG into the market prior to close to avoid the big tax bill.

 

Boralex Power Income Fund (BPT.UN) announced today that it will temporarily cease operations of its Senneterre wood-residue thermal plant, starting September 21 up to November 15. Boralex Power cites on-going difficulties in securing wood residue because of recent sawmill closures in Quebec, including the Tembec mill, which represented approximately 25% of its supply. Boralex Power Income Fund is rated 3-SU by Scotia Capital with a price target of $6.00.  BPT is currently trading 4.7% lower.

 

International

 

In Asia, equities declined led by commodity and shipping companies after metals prices continued to decline on concern slowing global growth will curb demand for resources.  Among the biggest decliners were BHP Billiton Ltd., the world's largest mining company, down 3.5% after the Lehman Brothers' European unit cut its holding in BHP Billiton to below 3% according to the SEC.  Both the Nikkei and Hang Seng closed lower.

 

Equities in Europe trade lower after the European Commission cut its forecast for growth and investors grew more concerned over further bank losses.   Credit Agricole SA fell 3% and UBS AG declined 2.2% as Lehman Brothers Holdings Inc reported a US$3.9 billion loss in 2008 Q3.  All major European indices are currently posting a negative return.

 

Currencies & Commodities

 

For the week ending September 5, the U.S. Department of Energy reported a draw of 5.9 mmbbl in crude oil bringing inventory levels to 298.0 mmbbl - the draw was larger than Street expectations, which called for a draw of 4.2 mmbbl. Distillate fuel oil levels currently stand at 130.5 mmbbl after a draw of 1.2 mmbbl for the week, Street suggested a draw of 2.2 mmbbl. The U.S. DOE reported a draw of 6.5 mmbbl in motor gasoline, inventory levels currently stand at 187.9 mmbbl, Street expectations suggested a draw of 4.6 mmbbl.  Crude oil for October delivery is currently trading about a dollar lower at $102.38 per barrel.

Bonds Outlook: A long way to go

Another day of triple digit losses yesterday from both the Dow and the TSX, paired with rumors and worries regarding the future of Lehman Brothers Holdings Inc. caused an overall flight to quality of Government backed bonds in both the U.S. and Canada. Yields were lower by 0.11-0.09% in the U.S., with the bellwether 10-year U.S. Treasury declining to 3.59%, touching lows not seen since April of this year. Canadian government bond yields declined 0.04-0.01% basis points across the curve, causing a slight steepening in the shape of the curve.

While no major economic news is out this morning, there is enough market activity to keep everyone busy. We are seeing some reversal from yesterdays Treasury moves after Lehman Brothers announced plans to shed assets including a majority stake in its asset management unit and also its commercial real estate holdings. 3rd quarter losses were reported to be 3.9 Billion or almost 6$ per share. Yields in the U.S. Treasury are higher by 0.11% to 0.06%.

Morning Market Update

Lehman Brothers (LEH) preannounced Q3 financial results and provided details on a strategic restructuring. The company reported a net loss of U$3.9 B (U$5.92) per share, well below what the street was expecting. The investment bank made significant mark-to-market adjustments in its residential mortgage and commercial real estate positions. Lehman also disclosed details of a strategic restructuring to strengthen the company's capital position. As part of that plan, Lehman intends to spin-off to its shareholders, the vast majority of the firm's real estate assets into a new, separate public company; it also intends to sell a majority stake (approximately 55%) in a subset of its Investment Management Division; and reduce its dividend from U$0.68 per share on an annual basis to U$0.05 per share. The stock has been volatile since the news was released trading in a range of $7 to $9. Significant risks remain and we caution investors considering speculating on a recovery.

1. Goldcorp (G) CEO Kevin McArthur said gold is halfway through a long term bull market, and prices should surge to $1500 an ounce in the next 18 months. "It's a fire sale, and commodities are bearing the brunt of this…we are in a long term bull market. These bull markets in commodities last about 16 years, and we're only seven or eight years onto this one."

2. A new Financial Accounting Standard Board rule to be adopted this December could create a new obstacle for M&A activity in the financial services industry. The new rule will force acquirers to mark the target firms assets to market at the time of acquisition. The accounting change has been noted as a sticking point in recent discussions involving the potential acquisitions of Washington Mutual (WM) and National City (NCC).

3. The European Commission lowered its growth estimate for European GDP to 1.3% from 1.7% previously. They are now also predicting a recession for the German economy, which accounts for about 30% of aggregate demand in Europe. Economic growth has stalled in the recent quarter as manufacturing and services activity contract. The Commission also signaled it could lower its 2009 forecast, due out this November.

4. Credit Suisse initiated coverage on Yum! Brands (YUM U$38.01, Neutral, Target U$42) and Burger King (BKC U$24.11, Outperform, Target U$32). Yum! Brands is the largest fast food operator in the world with more than 35,000 outlets in more than 100 countries. It's flagship chains include KFC, Pizza Hut and Taco Bell. Credit Suisse is maintaining their Neutral rating on McDonald's (MCD U$63.19, Target U$64).

5. RK Capital Management LLP, the metals hedge-fund firm co-founded by Michael Farmer, lost as much as 30% last month according to an investor with the firm. Red Kite Metals, the company's biggest fund, dropped by approximately 40%, bringing this year's loss to as much as 7%, according to the investor. Some commodity hedge funds have managed to fare better this year, with Touradji Capital Management LP, a New York-based firm that manages $3.5 billion, returning 6% in August, leaving it unchanged this year, according to an investor.

6. BHP Billiton Ltd. has said the outlook for metallurgical coal is strong. "The outlook for the metallurgical coal market is strong with robust demand from key growth markets." Dave Murray, president of the company's coal division said. The company also said that its venture with Mitsubishi Corp. had completed the $2.4 billion acquisition of the New Saraji coal project in Australia.

7. Benchmark European thermal coal derivatives fell to more than a three-month low this morning. Fuel for delivery to Amsterdam, Rotterdam or Antwerp with settlement next year declined $6, or 3.5%, to $165 per tonne.

8. FedEx Corp, is up in premarket trade after announcing last night that first-quarter profit would exceed its forecast. The company announced that earnings for the quarter ended August 30 were $1.23, beating expectations of $0.80 to $1.00. The company reaffirmed its full year profit forecast of $.475 to $5.25 per share.

Midday Market Update

U.S.

At midday, U.S. equities are lower led by weakness in Energy and Financial subsectors of the S&P 500 in-line with lower energy prices and negative news regarding Lehman Brothers (LEH US). At midday, shares of Lehman Brothers are getting hammered after talks with Korea Development Bank have apparently ended. The stock is now down over 27% and touched as low as 8$ per share. Lehman Brothers is dragging down the Financial subsector of the S&P 500, currently down 3.4%.

Washington Mutual (WM US) continues to plummet after the largest U.S. savings and loan company replaced CEO Kerry Killinger and has been put under special regulatory supervision, following dramatic losses from mortgages. Washington Mutual is trading lower by over 19%.

Commodity related stocks are posting steep declines in-line with much lower commodity prices, dragging down the Energy and Materials subsectors down by 3.5% and 2.8%, respectively.

Canada

At midday, equities in Canada are materially lower, led by weakness in the Materials and Energy subsectors of the S&P/TSX. Commodity-related stocks are being “whacked” lower by broad-based, heavy declines in commodity prices and worries over slowing economic growth.

The Energy subsector is posting a loss of 4.4% with crude oil trading lower by over 2% as threats from Hurricane Ike eased and expectations increased that OPEC will not cut any output. Worthy of mention are Canadian Natural Resources (CNQ) which plunged 4.7% and Suncor Energy (SU), down 4.5%.

The Materials subsector is also lower, down 5.0% in-line with lower gold and base metals prices, as the U.S. dollar traded higher. Gold-miner Agnico-Eagle (AEM) declined by 5.3%. Fertilizer producers are down with Potash Corp of Saskatchewan (POT) falling almost 7%.

All major Canadian banks are trading lower led by the Canadian Imperial Bank of Commerce (CM), down 1.4% as the Finance subsector of the S&P/TSX is down 0.5%.

A Globe and Mail article reported that CI Financial Income Fund (CIX-UN) is in preliminary talks to sell investment banking unit Blackmont Capital Inc to Canaccord Capital Inc (CCI), in exchange for a minority stake in Canaccord. CI Financial is trading 1.1% higher.
Companies reporting today include Major Drilling Group International (MDI) and Harry Winston Diamond Corp (HW). Both companies will report after the close.

International

In Asia, equities fell on concerns that global economic growth is slowing. Materials, shipping and financial companies closed lower with Nikkei and Hang Seng posting negative returns of -1.77% and -1.46% at the close. Worthy of mention are Newcrest Mining Ltd. and Cnooc Ltd. which led commodity stocks lower, as gold and oil declined. Other big losers included Mitsui O.S.K. Lines Ltd, and Macquarie Group Ltd which closed 6.9% and 7.3% lower as investors lost confidence in Lehman Brothers Holdings and feared further writedowns.

Currencies & Commodities

Commodities are under pressure with Natural Gas down 3.7% and Crude oil for October delivery trading 2.0% lower as it appears that Hurricane Ike will miss most oil & gas facilities in the Gulf of Mexico.

The Saudi Arabia’s oil minister commented that supplies are sufficient to meet current demand, suggesting that OPEC will maintain current output. The price of crude oil is currently at its five-month low.

The CRB index is now up only 1.0% on a year to date basis, and down 24% from its all-time high in July. CMX metals prices are declining with Gold, Silver, Platinum, Nickel and Copper all lower.

Morning Market Update

1. Bloomberg reports that Vale has asked Nippon Steel Corp. and its Japanese rivals to pay 12% more for iron ore after agreeing in February to an increase of at least 65%. Vale has asked Chinese mills for a similar increase after Asian steelmakers in June and July agreed to gains of as much as 97% for Australian iron ore from Rio Tinto Group and BHP Billiton Ltd

2. Alpha Trading Systems postponed the September 26 introduction of its alternative trading platform to challenge the dominance of TMX Group Inc's Toronto Stock Exchange, after testing showed the system isn't ready.

3. German exports declined more than forecast in July as slowing global growth has cooled demand . The Federal Statistics Office said exports declined 1.7% from June. Economists were looking for a decline of 1.1% and don't see a significant recovery anytime soon. The German economy contracted 0.5% in the second quarter.

4. McDonald's Corp. (MCD) reported same-store sales increase of 8.5% for the month of August, drive by an 11.6% gain in Europe. The shares are up about 6% this year, significantly outpacing the S&P 500, which is down nearly 14%.

5. Wells Fargo (WFC) has surpassed Citigroup to become the 3rd largest bank by market capitalization. Bank of America (BAC) remains the largest, followed by JPMorgan Chase (JPM).

6. Hiring intentions in the U.S. have fallen to a 5-year low according to a Manpower Inc. The reading for stores and wholesalers is the weakest reading for any fourth quarter since they began tracking the data. Retailers are bracing for what is likely to be a very weak holiday season. The U.S. has lost over 600,00 jobs this year and the unemployment has risen sharply in recent months to 6.1%.

7. Shares of Dell Inc. (DELL) are up in the pre-market on news founder Michael Dell bought U$100 million of stock in the world's 2nd largest computer maker.

8. UxWeekly reports that the spot price of uranium was unchanged at US$64.50/lb U3O8. The group noted that several suppliers have noted a willingness to sell at the currently published price, while others are not willing and are still looking at holding off for higher prices. On the other hand, there are also some participants that are reporting offers being made at lower than currently published prices, however, there has been no verification of any current offers below last week’s reported indicator.

9. Harry Winston (HW) is expected to report results today where Consensus is looking for EPS of US$0.48.