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.