Thomson Financial: Monthly Canadian Economic Summaries

 

CANADA – JULY 2006 MONTHLY COMMENTARY 



Canadian shares edged up last month after a two month decline, as ten out of thirteen sectors rose, led by mining, materials, and telecom. As oil continued its steep climb, its price began to affect other sectors, such as transportation, and gold had a mid-month rally. Earnings season also began mid-month and had mixed but largely positive results, although economic indicators, initially very good, showed a slowdown in the economy at month’s end. Mega-mergers dominated the news, especially in mining and telecom. Finally, the markets and earnings reports were unpredictable as they were buffeted by worldwide political turbulence, as July began with North Korean missile tests and ended with Hezbollah and Israel exchanging fire, punctuated by the Iranian nuclear power dispute, a terrorist train bombing in Mumbai, pipeline breakdowns in the Gulf of Mexico, and attacks on oil infrastructure in Nigeria.


The S&P/TSX composite index rose 218.09 points, or 1.88%, to 11830.96 in July.


The Bank of Canada, as expected, held the lending rate steady at 4.25%. Housing was strong as building permits, housing starts, and new home sales all advanced. Although inflationary worries were growing by the end of the month, consumer prices slipped in June. While the labour market is strong and wholesale sales shot up, May retail prices dropped. Further indications of a general slowdown came in the last two trading days of the month, with a surprising 2.5% drop in June for raw materials and a flat GDP reading. This last data is leading investors to speculate that the Bank is pleased with its efforts to curb inflation and may continue to keep interest rates at the same level.


South of the border, the minutes from the latest FOMC meeting revealed there was 'significant uncertainty' among members about the appropriate level of interest rates going forward. This uncertainty remains with investors ahead of the next rate decision on August 8. On the jobs front, the economy created fewer-than-expected jobs in June, while the unemployment rate remained at 4.6%. Despite the moderation in job growth, average hourly earnings increased at a faster-than-expected pace. Meanwhile, the economy grew below predictions in the second quarter, compared to the first quarter, and the index of leading economic indicators increased 0.1% after two consecutive declines. The Institute for Supply Management's manufacturing and services readings both came in lower than expected in June. Also, the Philly Fed index fell sharply in July. Higher energy and food prices bolstered the producer price index last month; although, core inflation was in line. In consumer-related news, consumer prices increased at a moderate pace in June, but core inflation rose 0.3% for the fourth-straight month. The consumer-confidence index and the University of Michigan’s consumer sentiment reading were stronger than expected, while retail sales in June were weaker than expected. On the home front in June, new home sales fell. The decline in sales of existing homes was smaller than expected.


Resource-related stocks surged as prices went up for precious and base metals alike, and crude oil and yellow metal rose unsteadily as unrest around the world was reflected on an almost daily basis in their movements. The mining and mineral sectors helped boost the entire market as they soared 8.22%. Oil finished the month at US$74.40 a barrel after hitting a peak of US$78. In other resources, Alcoa and Alcan kicked off the earnings season with drops in profits, but Cameco ended the month with profits of C$149 million. Teck Cominco and Inco also shot up on the strength of the nickel market. Glamis Gold finished the month reporting that it tripled its profits from last year. In the forestry sector, various lumbering groups protested the termination clauses of the Softwood Lumber Agreement as PM Stephen Harper visited the White House for the first time and pledged support for it. Also, foresters Abitibi and Tembec posted losses, and the former unveiled a recovery strategy the next day. The volatile energy sector ultimately rose, lifted by promising earnings reports but tempered by project costs and political uncertainty. Exxon Mobil and Conoco Phillips witnessed a surge in their quarterly profits. Earnings reports from Canadian energy moguls also soared on oil prices, including second-quarter earning jumps from Encana, Petro Canada, and Talisman.


The financial sector also advanced last month, as firms such as Sun Life released good news. While U.S. moguls such as Citigroup missed forecasts and others such as JP Morgan Chase and Bank of America exceeded them, the Canadian financial world was quiet, reaping the fruits of the rising economy. Sun Life did announce a new deal with the Chinese state-run pension system that could be worth billions, and soon afterwards posted profits of C$512 million. Healthcare edged up as QLT dropped on its earnings announcement. However, Biomira was pleased to announce a good Phase II trial result for its new Stimuvax.


Nortel helped lift the tech sector as it announced a partnership with Microsoft for telecom projects, although Microsoft itself, as well as Dell, Yahoo, IBM, CGI Group, and Intel, faltered, either losing earnings or failing to meet forecasts. Google and Apple did very well, and Motorola brought in US$1.38 billion. Finally, Celestica’s earnings also dropped but still met predictions.


Turning to industrials, one of the few bright spots was the tripling in profits of Canadian Pacific Railway. Consumer discretionary issues also faltered, as earnings from McDonald’s and Tim Hortons (the latter making such a profit in the second quarter that it issued its first-ever dividend) were not enough to offset disappointing results from GM and Ford.


M&A news was dominated by a deal that, if it had gone through, would have been the biggest in Canadian history: the US$40 billion acquisition by American copper mogul Phelps Dodge with the combined nickel miners Inco and Falconbridge. As the price of nickel soared and both miners posted record quarterly earnings, Falconbridge shareholders had to choose between Inco’s final cash-and-stock bid, worth about US$63.40, and European hostile suitor Xstrata’s all-cash bid. On Thursday, July 27th, the shareholders decided not to accept Inco’s bid, and the merger was no more. Phelps Dodge and Inco, both the targets of takeovers themselves, are now weighing their options. Other major deals were sealed, of course, with the most prominent being the acquisition of ATI by U.S. telecom giant AMD for US$5.4 billion in cash and stock, and Bell Globemedia taking fellow broadcaster CHUM. The mining sector also consolidated itself with Barrick Gold buying NovaGold, Quadra buying Australia’s Equatorial Mining, and Stornoway Diamonds snapping up Ashton Mining and Contact Diamonds; however, Northgate Minerals, after being blocked by the BC Supreme Court, formally withdrew its offer for Aurizon. In the energy industry, Canadian Oil Sands set a C$13.10 per share bid for a friendly takeover of Canada Southern Petroleum, and Find Energy soared after its acquisition by the Shiningbank Income Fund.





CANADA – AUGUST 2006 MONTHLY COMMENTARY 



Canadian shares in August continued to edge up on favourable earnings reports, higher prices for the yellow metal and crude, and increasing housing starts, as well as the ticking up of leading economic indicators. Good news from Biovail and Neurochem in the healthcare sector also helped stocks to surge, and financials rose on favourable earnings reports from major banks. In M&A activity, the saga of Inco lurched forward towards another milestone and Goldcorp bought Glamis, while the softwood lumber deal was approved by British Columbia Premier Gordon Campbell. In loonie news, the Canadian dollar is believed to be undervalued by the Bank of Canada which said that if only high commodity prices were properly taken into account, it would increase the dollar’s value.


The S&P/TSX composite index rose 242.75 points, or 2.05%, to 12073.75 in August.


Heading Canadian economic news in August was the scandal surrounding Statistics Canada as it revealed it has miscalculated the official inflation rate for the last five years, due to a computer glitch in the formula for calculating hotel and motel rates. Among economic indicators, Statistics Canada’s GDP forecast revealed that while it expects the overall economy to grow about 3.1%, the resource-rich Western provinces and Newfoundland will see exceptional growth. Statistics Canada ended the month by reporting that the economy slowed slightly in the second quarter to a 0.5% rate. Also, the leading indicator of economic performance went up in July, as well as the net income. July employment figures, meanwhile, slightly dipped 5,500 in the number of people employed, while it ticked upward in the rate to 6.4%. On the housing front, data was mixed, as housing starts and the new housing price index rose, while building permits dipped in June. On interest rates, the markets assumed that the Bank of Canada will not now raise rates and is even expected to lower them in early 2007.


On the U.S. economic front, data was mostly positive, with the Federal Reserve Bank holding interest rates steady at 5.25%, which had the markets assuming that the central bank would also hold rates steady in September. Meanwhile, inflation in the U.S. suggested that data was contained, as the producer price index, core inflation rate and the core consumer price index edged up in July. Meanwhile, consumer data was positive during August as the core personal consumption expenditure price index, personal income, and consumer spending all rose, as well as retail sales, though consumer sentiment sank to the lowest point since November. Turning to the housing sector, data showed that the home front is slowing, as housing starts, building permits, and home sales all dropped, while home prices stalled, and new home inventory rose. Finally, unemployment also dropped slightly to 4.7% from 4.8% in July, with the 125,000 jobs added beating the estimate of 120,000 jobs for the month, indicating that the recovery was continuing but not pushing the market into fears of another rate increase.


In sector action, technology stocks rose the highest in August as Nortel Networks, Cisco, Hewlett-Packard and Mosaid Technologies reported increasing earnings results, while Dell Inc.’s second-quarter profit fell as the company has been forced to recall 4.1 million Sony-made notebook computer batteries. Meanwhile, Apple Computer admitted it may need to revise four years worth of earnings reports, and later was also forced to recall 1.8 million Sony-made batteries. Telecom stocks were also quite high, as Telus Group and Bell Canada posted earnings that beat expectations. Financial shares also ticked up on increased profits of the Bank of Montreal, kicking off the bank earnings season, and strong profits were reported from Toronto Dominion, the National Bank, and Canadian Imperial Bank of Commerce. In company news, Sun Life Financial President Jim Prieur resigned from the insurance company.


Staples shares also increased in August on rising profits from La Senza Corp., Molson Coors, Procter & Gamble, and Gildan Activewear, while Ford Motors losses more than doubled in the second quarter. Industrial shares also gained on a profit jump from CAE Inc., though Aecon posted a loss in the second quarter.


Though oil prices began the month battered by the Alaskan pipeline shutdown, it, along with rising gold and yellow metal prices helped resources stocks to continue to surge. Crude closed down at the end of August as the weak Hurricane Ernesto veered away from the Gulf and the UN was still mulling actions to take against Iran, which defied a deadline to stop uranium enrichment. On mining earnings front, Algoma Steel, Alcan, Breakwater Resources, and First Quantum Minerals all boosted their results. Among gold-producing companies, earnings from Barrick Gold, Kinross Gold Corporation, Iamgold Corporation, and Bema Gold topped expectations. Copper markets were affected by a strike in Chile’s largest mine that lasted 25 days. Finally, among oil and gas firms, Canadian Natural Resources, Enbridge, Suncor Energy, Compton Petroleum, and Penn West Energy all had earnings results that rose.


On the down side, healthcare stocks declined as Biovail received an unfavorable U.S. court decision on its rights in a patent infringement case. Despite the decision made, Biovail still reported stronger second-quarter profit. Labopharm received good news about its reformulation of tramadol from Health Canada, and AnorMed rallied after shaking off a takeover attempt from Genzyme. Cyclical shares, meanwhile, ticked despite dismal earnings from Jean Coutu Group, Wal-Mart Stores, Home Depot and Staples Inc. Despite such disappointing results, Rogers Communications, IMAX and Sears Holdings lifted sentiments. In the paper and forest sector, Domtar reported earnings losses, while airline companies UAL and ACE Aviation Holdings posted growing profits.


In merger and acquisition news, Atlas Cold Storage Income Trust became the target of a hostile takeover bid by Avion Group, while Rogers Communications made an agreement with Aliant Inc. Also in cyclicals, the Yellow Pages Group is buying MTS Media Allstream, while Jean Coutu Group is selling its Eckerd and Brooks drugstores to Rite Aid. In the basic materials sector, Domtar will merge with an arm of U.S. Weyerhauser. In resources M&A news, Yamana Gold plans to buy Viceroy Exploration Ltd. In the last week of the month, the second-largest gold company in Canada was created when Goldcorp bought Glamis. Meanwhile, Canadian Oil Sands Trust extended its bid for Canada Southern and hopes to hold off hostile bids from Petro-Canada and Canadian Superior Energy. In mining, Quadra Mining has been outbid by Antofagasta Plc to buy Australia’s Equatorial Mining, while Premier Gold will be buying Sedimentary Holdings of Australia, and EuroZinc will buy Lundin Mining. Lastly, in mining, Teck Cominco is in the lead to buy six of nine old mining projects Falconbridge is shedding as it prepares to be absorbed by Xstrata, while Inco has acquired another suitor, Brazilian Comphania Vale do Rio Doce, from South America, but still favours the friendly bid from Phelps Dodge. And in staples, Sleeman Breweries has accepted the bid of Sapporo Breweries to buy it for

C$17.50 per share.