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