European Soveriegn Debt

One of the top headlines around the world today is the resignation of Portugal's Prime Minister after his government's austerity plans were voted down by opposition parties. Rather than prescribe their own medicine after suffering the effects of too much borrowing and spending, they'd rather stick their hand out to the EU. What ever happened to accountability? This is fuelling speculation that the government could collapse; add on a rumor that Ireland would miss a coupon payment, and interest rate speads are widening. In related news, a report from Standard & Poor's estimates that European banks might need as much as 250 billion Euros in fresh capital if there is a severe economic downturn and a sharp jump in yields.

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QE2

Awhile back I highlighted the selling of US Treasuries by Bill Gross in PIMCO's total return fund. The latest edition of The Economist magazine picks up on the story and its implications. Why should we care? When the manager of the world's largest bond fund is avoiding US Treasuries, we should ask why?

"Mr. Gross is particularly worried about the effect of quantitative easing by the Federal Reserve, the second round of which is due to expire in June. PIMCO reckons the Fed has been responsible for 70% of recent Treasury purchases. Who will by Treasuries when the Fed doesn't? The danger is of a spike in bond yields as private investors demand a higher return to compensate them for the risks of inflation or dollar depreciation.

Now the end of QE2 has been well signaled. Markets have had time to adjust. Nevertheless, it is legitimate to worry whether getting out of a QE program will be as easy as getting into it (and this is a problem the Bank of England and the European Central Bank face as well). In what circumstances would investors be most keen to buy more government bonds?"

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Positive EPS revissions Continue

Although equity markets have been hit by rising volatility and uncertainty this year, the trend in global earnings has remained positive. In fact the global earnings picture has continued to improve as all regions benefited from positive earnings recently. Scotia Capital put out a chart to illustrate revissions over the last three months. Positive revisions were strongest in North America with the TSX and S&P 500 2011 EPS forecasts revised up 2.9% & 1.9% respectively.

Withdrawl Sequence Risks - Friday May 6

When markets are volatile not only like the last few weeks but the last few years Withdrawl Sequence Risk can have a significant impact on your portfolio. This refers to the actual order of your withdrawls and returns. It doesn't really matter when you are accumulating money on a regular basis because of dollar cost averaging but it does matter when you are withdrawing income especially if you have a negative return sequence in the early years of your retirement. The main point here is to be sure to avoid negative returns in early retirement. this can be acheived by proper portfolio construction and using alternative strategies. Make sure you diversify your portfolio so you are comfortable with the risk level of your overall portfolio.

Is Copper a Canary in the Mine?

The following is by David Andrews, and was featured on AnvisorAnalyst.com:

"Gold is often viewed as a store of value and a hedge against economic Armageddon, but "Dr. Copper" is said to be the metal with a Ph.D. in economics for its ability to presage the future of the global economy.

Prices have moved from a steep premium to a discount recently. February copper shipments into China fell 35% from one month earlier; the lowest level in 2 years. Stockpiled inventory is 16% higher so far in 2011.Prices will likely continue to slide until the Chinese buyers return. After such a steep fall, many began to wonder if the metallic professor is warning of trouble; or is this an opportunity for those on the sidelines to get in on the action?

The Trading Week Ahead
Trading volumes may indeed be a little lighter than usual with the peak of the March Break vacation season upon us. Many institutional trade desks will be have lighter staffing than normal as many traders will be off enjoying the renewed purchasing power of the strong Canadian dollar. Notwithstanding, investors will have the latest inflation data to consider as the week unfolds. Rising commodity prices and energy costs are expected to show signs of building which could potentially pressure corporate profit margins. Investors will gauge to see how fast these costs are rising and to see if businesses have begun to pass these rising costs on to their customers.

The Federal Open Market Committee congregates but no major news is expected to emerge in the statement on Tuesday. The FOMC is expected to maintain the Fed Fund Rate between 0 and 0.25% and will announce the continuance of the asset purchase program, or QE2 as originally planned. The Fed may indicate in the statement the improvement in economic activity in early 2011, especially as regards the labour market, and the increase in inflationary pressures. However the latest data are not likely to force the Fed to remove the expansionary monetary policy anytime soon.

The Middle East and North Africa are expected to push volatility higher once again next week. Energy and precious metals will continue to be a main focus and will give directional cues to equity and bond markets.
Earnings announcements are few and far between this week with only Federal Express likely to be market moving. Fedex is a proxy and measure of general business activity for both North America and Europe."

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Implications of oil price spikes

Portfolio strategist, Vincent Delisle, asks the question: "When should investors start to be concerned about the current oil price spike?"

Modest increases in oil prices occurring in sync with an improving US consumer/employment outlook typically have minor impacts; in addition, oil price increases during the initial stages of recoveries appear less threatening. In contrast, swift moves in oil prices occurring later in the cylce tend to prove more challenging. Up to a 20% YOY increase in WTI, the forward impact on output, earnings and equity returns appears negligible; however, YOY price increases exceeding 20% take 1% off US GDP, dramatically slow the pace of earnings growth, and lower the equity risk/reward outlook. The negative impacts appear compounded in the latter stages of cycles. WTI is up 29% YOY and the US recovery started in Q2/09. Vincent believes sustained increases above current levels will jeopardize the 12-18 month outlook for earnings. Robust macro data remains supportive and equities may successfully shake off the current uncertainty. However, the ongoing oil spike, if sustained, has the potential to negatively impact the outlook for earnings growth. As the S&P500 celebrates the tw0-year anniversary of the rebound, investors should not forget what's been driving this epic recovery - profits. S&P500 earnings are up 115% since Q3/09 and any threat to earnings will take its toll.

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Dividend Yields

Credit Suisse tested some dividend strategies and the resulting for various sectors. They concluded that screening for the highest yielding stocks increased your relative return within that sector. When you looked for stocks with a high divedend yield and low payout ratio it enhanced your return even more. We expect the best performing dividend strategies to continue to perform well in 2011.

Seasonal Trades in March

Looking for a negative day to establish a long position or even short the market? Witching Day is the third Friday of the month, and it has a track record of volatility and negative performance. This is the day that stock options and futures expire; however, it is the business day after, dubbed 'Witching Hangover' by Brooke Thackray and Bruce Lindsay, which has produced even bigger negative performance. Together they make a wicked pare.

From 1974 to 2007, Witching Hangover has been negative more than half of the time. Other than 2001, in the years when Witching Hangover has been positive, the year has performed above average.

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