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.