Big Picture

U.S economy revives; recession fears fade

U.S. economic growth increased at its fastest pace in a year, expanding 2.5% on an annualized basis in the third quarter versus just 1.3% in the second quarter. Consumer spending grew at 2.4% after slowing to a 0.7% pace in the second quarter, while business investment spending was the fastest in more than a year. Chinese investment in Europe is expected to double this year to US$8-billion, and surge over the next decade. The EU and Beijing are considering opening negotiations on an investment treaty that would make it easier for Chinese companies to invest in Europe. Flooding in Thailand could disrupt global electronics supply chains for several quarters, with the closure of major factories for semiconductors and hard drives.

The Bank of Canada left its key interest rate on hold and warned the eurozone is headed for a “brief recession.” Canadian payrolls rose by 238,400 positions, up 1.6% in August from a year earlier. Canadian workers can expect a 3.1% pay rise on average in 2012, following a 3% increase in 2011 and 2.7% in 2010. Retail sales in Canada rose a better-than-expected 0.5% in August after declining in July. Canadians are delaying retirement and staying on the job longer. A 50-year-old worker stayed in the labour force another 16 years in 2008 – 3.5 years longer than workers the same age in the mid-1990s.

Markets

Global stocks rally on euro deal

World stocks surged after European leaders convinced banks to accept 50% write-downs on Greek debt and boosted the rescue fund’s capacity to 1-trillion euros. U.S. stocks extended their best month since 1974, jumping 3.4% Thursday, after GDP data eased recession fears. About three-quarters of S&P 500 companies releasing quarterly results so far have beaten analysts’ expectations. Caterpillar reported a 44% jump in earnings year-over-year and forecast sales to increase between 10% and 20% in 2012. UPS posted a 5.1% increase in third-quarter earnings, although package volume was stagnant. 3M reported a 1% decline in earnings, falling well short of expectations, because of weakness in the electronics market.

Oil companies benefited from high oil prices – Exxon Mobil earnings surged 41% and Shell third-quarter profit doubled to US$7-billion from a year earlier. Potash Corp. profit doubled in a year reflecting the “unrelenting pressure on global food production,” according to the CEO. The long-awaited Boeing 787 Dreamliner made its first commercial flight Wednesday, from Japan to Hong Kong. Amazon quarterly sales were up 44%, but profit plunged 73% from a year ago as the company invested heavily in the Kindle Fire tablet.

Our Recommendation

Fundamentals still take back-seat to macro concerns

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG), wrote: “In the very short term, for more tactical trading-oriented investors, stocks are approaching the upper end of a narrow trading band established since the beginning of August and we are more inclined to be sellers into further strength.”

• Fixed income. Anthony Mentor, Associate, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “a recovery in risk-appetite could lift valuations as the U.S. economy averts recession and Europe adopts a credible debt relief plan.”

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