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Investors on TSX reaping rewards of profit recovery

Stories Report on Business is following today:

Pressures on Europe mount

Markets remained soured on Europe this morning, driving Greece's borrowing costs to new heights and spreading the pain to Portugal, where the cost of insuring sovereign debt also hit record levels. Despite Greece's decision Friday to formally ask the EU and the International Monetary Fund for a bailout that could run to €45-billion, investors want details and timing.

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"The Greek crisis has started to spread to the rest of the periphery and Portugal seems to be next in line," Alliance Bernstein senior economist Darren Williams told the Reuters news agency. "The situation there is less urgent than in Greece but the medium-term outlook is challenging. Unless Europe's leaders can draw a line under the situation, Portugal could face an uncomfortable period."

Added Scotia Capital currency strategist Camilla Sutton: "The Greek crisis is being played out in many ways, but there are two notably important market reactions for [foreign exchange]players. The first is that contagion fears are pushing up credit risk for the weaker members and therefore driving yields higher ... The second important reaction is that there is fear that current issues will dampen growth and inflation and will therefore result with looser monetary policy for longer, combined with a surge of risk aversion-driven cash seeking 'safer' bond markets than the weaker EU members. Accordingly, there is downward pressure on bond yields in Germany, France, Norway, Switzerland, Sweden, Finland and Denmark."

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Related: Tough talk fuels doubts over Greek rescue plan

Audio: Eric Reguly on what the party's over for Greece

Luxury home sales rebound

Sales of luxury homes in Canada have rebounded to record heights, driven by the economic recovery, immigration and foreign investment, a new study says. Prices have also surged as sales rose, the first-quarter study by ReMax Canada said. "With the exception of Toronto, buyers could be relatively particular and take their time in making decisions as balanced conditions characterized markets across the board," the company said. "Given adequate supply, prices are likely to hold steady or experience modest increases in the majority of markets in 2010." Read the story

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Should analysts be more upbeat?

Investors in Canadian stocks are beginning to reap the rewards of the earnings recovery.

As shareholders prepare for the first truly hectic week of the quarterly reporting season in Canada, CIBC World Markets notes that estimates point to a 45-per-cent gain among TSX companies, given stronger economic growth, firmer resource prices and the fact that earnings are coming off weak levels of a year ago. That would mark the fastest year-over-year rise since the first quarter of 2003.

"Although two sectors - materials and financials - will account for three quarters of the year-to-year increase in dollar earnings, nine of 10 sectors should show improvement," CIBC's Peter Buchanan and Meny Grauman said in a research note. "Nearly a fifth of all dividend announcements since the start of the year have provided enriched payouts compared to 11 per cent in the fourth quarter, and share buybacks are also rising - both signs that shareholders are starting to benefit from the earnings recovery."

Mr. Buchanan and Mr. Grauman also pointed out that the better-than-expected results among S&P 500 companies hasn't bolstered the confidence of some analysts watching Canadian earnings. "Although TSX [first-quarter]earnings are expected to be the strongest in seven years, recently as many analysts have cut their estimates as have raised them," they said. "All this suggests that current [earnings-per-share]projections for the TSX composite are on the conservative side, leaving some potential for upside surprises as we head into a heavy week for earnings announcements."

Related: Dollar's rise a good thing for TSX earnings

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Several major companies report this week, beginning with Canadian National Railway Co. today after markets close, and followed later in the week by Husky Energy Inc., TransAlta Corp., Barrick Gold Corp., Canadian Pacific Railway Ltd., CGI Group Inc., Jean Coutu Group Inc., Rogers Communications Inc., Shoppers Drug Mart Corp., Cenovus Energy Inc., Imperial Oil Ltd., Potash Corp. of Saskatchewan and TransCanada Corp.

UBS Securities Canada projects a sharp jump in first-quarter profit from CN today and expects "management optimism regarding the improving outlook and rebound in volumes will be somewhat tempered by the unfavourable impact of the strengthening [Canadian dollar]and continued long-term economic uncertainty."

It will be interesting to see whether Shoppers Drug Mart, which reports Wednesday, will give any update on the impact of Ontario's proposed drug reforms. It has already said it is scaling back the number of its 24-hour and open-til-midnight stores, closing some pharmacy sections early and cutting back on some free services. Drug stores across the province estimate the reforms will cost $1-billion in revenue next year.

One of the more interesting reports may come Thursday from Potash Corp., which last month raised its first-quarter profit projection to between $1.30 (U.S.) and $1.50 a share, a sharp jump from its previous estimate of 70 cents to $1.

Related: Potash Corp.'s Bill Doyle dims hopes for new mines


U.S. releases details of Citigroup sale

The U.S. government's first sale of its Citigroup Inc. stock will amount to 1.5 billion shares, or 20 per cent of the stake it holds. "Treasury will begin selling its common shares in the market in an orderly fashion under a pre-arranged written trading plan with Morgan Stanley," the U.S. Treasury Department said in a statement this morning.

The U.S. government is set to earn a bundle on the stock it acquired during the bailout period at the height of the crisis. It acquired the shares, which closed Friday at $4.86 (U.S.), at $3.25 each.

Financial reform bill in spotlight

President Barack Obama's bid to reform the financial sector heads for a crucial Senate vote this evening. A vote is scheduled for 5:15 p.m. ET on whether the bill, a sweeping bid to govern Wall Street, goes to a full debate. Republican Senator Richard Shelby and Democratic Senator Christopher Dodd said yesterday in a television interview that they were close to an agreement, though this morning Mr. Shelby said "I don't believe we'll have a deal today."

Last week, the Senate Republican leader blocked his opponents' bid to raise the bill for debate, and today's session will need 60 votes to move forward. The Republicans said yesterday that if there's no agreement before this evening, the 41 Republican senators would vote to block the beginning of a debate. The bill is said to be more than 1,300 pages.

Markets eye key economic readings

Markets get a fresh look this week at how North America's economy is rebounding from the recession. The U.S. government provides the first look at first-quarter economic growth Friday morning, at the same time Statistics Canada reports on growth for the month of February.

Economists don't believe gross domestic product in the U.S. expanded at the rapid 5.6-per-cent pace of the fourth quarter, but still project a solid reading in the range of 3.5 per cent, annualized. "The data will reinforce what has been a V-shaped bounce in activity across broad swaths of the economy, including employment," said Eric Green, Toronto-Dominion Bank's chief U.S. strategist. "The bigger question is what will sustain growth over subsequent quarters."

In Canada, Friday's reading should show how the Vancouver Olympics added some bounce, and flavour, to the economy in February. "The Olympic Games likely added substantially to some specific services, notably the arts, entertainment and recreation category," said BMO Nesbitt Burns deputy chief economist Douglas Porter. "The Calgary Olympics in 1988 saw a 13-per-cent spike in this sector (which accounts for nearly 1 per cent of output, and a similar move would alone add roughly 0.1 percentage points to GDP. Moreover, the accommodation and restaurant sector also likely saw a big boost - putting it in a nutshell, the bars were packed, especially on hockey days."

The report should mark the sixth month of economic expansion in a row.

Fed, Bank of Canada take centre stage

The two reports come after this week's policy meeting of the Federal Reserve. The U.S. central bank, which announces its decision Wednesday afternoon, is not expected to budge from a record low benchmark interest rate near zero. The Wall Street Journal reported last week, however, that the Fed will discuss how to dispose of more than $1-trillion (U.S.) in mortgage-backed securities it acquired during the crisis, without disrupting financial markets.

Bank of Canada Governor Mark Carney is also front and centre this week, testifying before the Commons finance committee tomorrow and the Senate banking committee Thursday.

Related: All eyes on Fed's rate decision


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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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