Greed Resurrected Technically, the week ended with the Dow, Nasdaq, and TSX all breaking out of trading ranges that have bound them for the past 10 days. Trading since the crash has been characterised by false starts dressed up as breakouts, so it will be interesting to see if that trend gets reversed here and the markets continue their move up.
Debt: Optimist's tool in good times, bear feast in bad. A sensible rule since October has been to avoid companies with significant debt no matter how strong their assets. Debt is one of a few core forces that really drives market dynamics, with the size of global debt markets significantly exceeding that of world equity markets. Most players with a vision, no matter how big or small, require debt to make their ideas a reality. Home ownership, that most basic form of equity in western societies, is only possible thanks to mortgages. When the cycle unravels, however, debt is the prime delicacy of bears. Heavily leveraged companies' share prices are ripped apart, spat out, stomped on, and left on the ground for the next round of no less hungry bears to repeat the process, until whatever's left is unrecognisable to remaining shareholders. Banks, risky lenders, housing companies, and commodity companies have obviously been huge victims of this bear market. When the price of the product a company sells plunges during recession, and the company has borrowed heavily to fund expansions that are no longer profitable during the downturn, the resulting collapse breeds pure market nausea. Interesting, then, to note the comeback of companies such as Teck Cominco of late. At its worst level of $3.35 / share, Teck's market cap was about 1/6 the value of all the debt it is carrying, but now it's up to $11, and rumours abound that the company is a takeover target. As confidence returns, investors, but more importantly the 'strong hands' such as governments, industry leaders, or large institutions are once again giving value to assets that markets have been pricing at massive discounts. It may be time to take a more subtle approach to companies carrying significant debt who possess assets that were prized in less distressed economic circumstances. Spring Trading Markets have enjoyed a great run and the question is how long will the party last? For those not involved it grows harder to participate without feeling that one is chasing the rally, especially knowing that when momentum dies we may plunge back to all-too-familiar depths. Wells and Goldman have certainly opened earnings season on a positive note. It is often said that a recovery must be led by the banks, and if other sectors over deliver on analysts' expectations (never mind, for the moment, what this says about analysts' forecasting abilities!), the momentum will likely continue, leaving the current bullish trading environment intact. And copper takes the gold! A discussion of last week 's highlights can't omit copper, which has become a runaway train. The discussion for weeks has been that Chinese buying has fuelled copper's rise, which shot above $2 on Thursday and continued to defy gravity yesterday. A few months back copper and base metal stocks weren't so hot, but it's amazing how explosive the turnaround can be. So: anyone have some favourite natural gas stocks to recommend?
Best regards,
This newsletter is solely the work of the author for the private information of clients. Although the author is a registered Investment Advisor at Canaccord Capital Corporation (“Canaccord Capital”), this is not an official publication of Canaccord Capital and the author is not a Canaccord Capital analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Canaccord Capital. |
OFFICES IN MAJOR CENTRES ACROSS CANADA. MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA. MEMBER CANADIAN INVESTOR PROTECTION FUND (CIPF).
