Chris Kuflik - ScotiaMcLeod Montreal

Recently, several companies have announced both friendly and hostile takeovers. The largest thus far, BHP Billiton’s proposed hostile offer for Potash, has dominated both the Canadian and international news media. Despite these merger announcements, the S&P 500 has entered a negative trend. What does this mean to investors?

As of Tuesday of this week, the S&P 500 entered a “negative trend.”  This major index broke a long-term trend line that had been in place since March 2009. What this means is that more stocks on the S&P 500 are giving new technical SELL signals than are giving new BUY signals. Right now in the stock markets, there are “more sellers than buyers.” The last time this happened was in August of 2008. Additionally, the Toronto Stock Exchange, New York Stock Exchange and the NASDAQ also registered technical sell signals.

In my commentary of August 5^th, I asked the question “It’s The Economy…Or Is It?” At that time, investors cheered good corporate earnings and ignored the negative economic news. In the article, I discussed Alan Greenspan’s view that the US economy could pause but avoid a double dip recession providing that housing remained stable. We are now witnessing the beginnings of a double dip in housing. Add to this slowing manufacturing numbers, lower retail sales and a greater number of bank failures in the US versus this time last year, increasing jobless claims, and the prognosis for growth in the US economy is not looking good. Similarly, economic numbers for many of the world’s major markets are also waning.

With the decline in the markets, the financial media allotted more airtime or space to those bearish economists such as David Rosenberg from Gluskin Sheff.  Mr. Rosenberg has been bearish for a few years. He feels that the US is currently in a depression. It should be noted that he does have the data and uses historical comparisons to the 1930’s to back his view. 

While time will tell if Mr. Rosenberg’s analysis is correct, I believe that the large cash positions that corporations hold will allow them to navigate the slowing global economies. All told, U.S. businesses are sitting on about $3 trillion in cash, according to Dr. Mark Dotzour at Texas A&M University. He feels that “With so much of it earning little to no interest, we'll likely see an avalanche of money thrown at companies that have something to offer.” I do not share his conclusion that this Merger activity will propel markets higher. It would take large volumes of transactions to change the current negative investor sentiment. One only has to look to the effects of the BHP offer. While it helped provide an initial pop in some stocks in the fertilizer sector, it failed to pull the broader markets higher. As such, we currently reside in a negative trend as discussed above.

Will this negative trend have the same result that we saw in the fall of 2008 and early 2009? At this time, I don’t believe that it will. In the fall of 2008, the global financial system froze. Even the most creditworthy companies were forced to borrow at onerous rates (recall GE, which was rated AAA at the time being forced to borrow at 10%). The same can not be said today. Corporate credit markets are open and receptive, as evidenced by the record amounts of high yield debt that has been successfully sold in the past months. To successfully navigate this negative trend we will continue to focus on high income securities that have strong relative strength scores and are not on negative trends. We will continue to maintain larger amounts of cash than normal to take advantage of future opportunities when market forces dictate that we should.

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Chris Kuflik

Associate Director, Wealth Management

Wealth Advisor

514-287-2931

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