Chris Kuflik - ScotiaMcLeod Montreal

We are in earnings season again. The profit recovery that started in early 2009 is still intact. Nineteen of the 21 companies in the S&P500 index reporting so far, as of Wednesday, have beaten earnings estimates. However, they have done so on declining sales. Despite this ‘good news’ the markets in the last week have shown extreme volatility both on the upside as well as the downside.

Federal Reserve Chairman Ben Bernanke’s testimony to the US Senate Banking Committee triggered the sell-off on Wednesday this week. Media reports headlined his statement that it would take “a significant amount of time before the eight million jobs lost during this recession will be regained.” He also described the macro economic outlook as “unusually uncertain”.

Increasing pessimism is clear from how the market has shrugged off “good news” lately. Intel’s record revenues were a one-day wonder. BP’s capping the Gulf of Mexico blow-out did nothing for the market. Even Goldman Sachs’ successful settlement of the fraud lawsuit lodged against it by the Securities and Exchange Commission had no effect.

Consumer confidence in the US is down. This decline reflects the recovery’s fragility and feeds back into that fragility. Unless monthly payrolls increase, consumer confidence will stay depressed.

Industrial production and manufacturing have continued to be strong despite weakening housing and retail sales over the last three months. Moreover, the divergence between the consumer and production sectors may be over. The most recent manufacturing survey for the New York region shows a declining index. A similar index calculated by the Philadelphia Federal Reserve Bank has fallen to its lowest level since August 2009.

Overall, macroeconomic data in North America will be visibly weaker in the third and fourth quarters this year. Some people continue to look for China to backstop the world economy. However, the forward-looking numbers are also weaker there, as its growth is expected to slow for the rest of the year.

The 10 year US Treasury bond’s yield continued to decline as it broke through a yield of 2.90% this week. Despite the lower borrowing costs, home sales in the US remain sluggish, consumer credit continues to contract and foreclosures are on track to reach a record 1 million homes this year. The bond market is currently telling investors to be cautious. You should note that this asset class often leads.

North American companies currently have record amounts of cash on their balance sheets. This cushion against future economic shocks is currently doing little to increase profitability.  Another round of mergers and acquisitions could help profitability if revenues continue to struggle. Mergers could help to increase valuations, but it would do so only for the short term.

Our focus will be on reasonably priced income-oriented investments as the income generated will provide us with a return during these confusing times. It is important to identify companies that can maintain their profitability.

We will continue to monitor the situation closely and adhere to our disciplined approach. Please call us at 514-287-2931 to discuss possible investments whilst mitigating potential future risks.

Chris Kuflik

Associate Director, Wealth Management

Wealth Advisor

514-287-2931

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Visit our website at www.chriskwealth.com

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