Market Buzz: Jobs & Commodities

Market Buzz – April Job Report Positive but Commodities Decline Significantly for the Week

The TSX Composite index closed on Friday, May 6th at 13,556 points, down 383 points, or 2.7%, for the week. Over the past five trading days, investors have seen the market in Canada slide primarily as a result of declining commodity prices, some of which posted intra-day declines not seen in years. The most notable of the declines was silver, which only a few weeks ago was trading at its all-time high of $48.70 and has since suffered a precipitous decline of 27% to close the first week of May at $35.31. Crude oil also felt the crunch with WTI spot prices declining nearly 13% through the week to $97.75 per barrel.

The weekly news was not all negative with the April job report indicating positive gains in both Canada and the United States. For the month of April, Canada added 58,300 new jobs, exceeding consensus expectations. Surprisingly, the majority of the jobs creation was in Ontario, which has stubbornly maintained one of the highest unemployment rates in the country. The downside of the news was that most of the job creation was part time. This is in contraction to the March job report which indicated lower than expected employment growth but surprised markets with higher than expected creation of full time jobs. In the U.S., the month of April brought an additional 244,000 jobs to the national economy and the unemployment rate actually moved up to 9%. This might seem counter-intuitive; however, the unemployment rate is based on the number of people actively looking for work and not on the total number of people without jobs. Better job prospects trend to bring more discouraged workers back into the pool of job seekers, which has the effect of increase rate of unemployment.

Short-term interest rates remain a topic of focus moving into the summer with many analysts previously having forecasted that the Bank of Canada would begin raising rates as early as June. Although job growth and the return of mild inflation are in support of the likelihood that the Bank of Canada (BOC) will start to increase short-term rates, the recent decline in commodity prices may have central bankers questioning whether or not rate increases should wait until at least after summer. Considering the dependency of Canada’s economy on commodities, rate increases coinciding with further commodity price declines could have a substantially damaging impact to further economic recovery.

The question on everybody’s mind right now is whether or not the recent commodity price declines are simple corrections or the reversal of a cyclical trend. One factor to consider is the U.S. dollar which appreciated in value over the course of the week. All internationally traded commodities are priced in U.S. and tend to decline as the U.S. dollar appreciates. This relationship is what keeps commodity values in equilibrium with global currencies. Some analysts are assigning at least some of the cause to the recent death of Osama Bin Laden and believe that the event has removed risk premium added to oil prices in relation to global terrorism. China as well has its place in the mix with some investors questioning the sustainability of its economic boom and the consequences if its rapidly growing economy is no longer capable of supporting global energy and metal demand.

All of these perspectives play their part in the ever more complicated world of global finance and it will be interesting to see how the market absorbs new information over the next few weeks and months. Thankfully, the April job report at the very least helped to end the week on a positive note, with the TSX Composite posting a daily gain of 111 points on Friday.

Looniversity – Tips on Evaluating Tech Companies

With many pundits (rightly or wrongly) suggesting tech may lead the markets out of the current bear, we thought we would take a brief look at some key points to look at when considering investing in a technology based company.

Look For:

Earnings/Cash flow: Although tech companies are often emerging companies, we suggest you stick with those posting strong cash flow and earnings, not just an interesting concept.

Strength of Management: More so than in most other industries, much of the value of a high-tech company can be found in the knowledge, creativity, or intellectual property belonging to the driving forces behind the company. Look for strong, highly skilled management.

Research and Development: In technology, remaining on the cutting edge of your market is critical to future success. As such, ensure the companies you are evaluating continue to spend a healthy amount of current revenues on research and development.

Market Leadership/Scope of Market: For established companies, a strong market position is usually a positive sign. If you insist on looking at concept companies, evaluate whether or not there is a sustainable market for the company’s products or services. Of course, a company may have developed a “best-in-class” software program that revolutionizes the method of teaching “Hip-Hop dancing” to the African Pygmy tribe, yet the practical market place is so minute that profitability is clearly impossible. Identify tech companies that service or sell products to relatively substantial growing markets.

Put it to Us?

Q. ave an investment that, according to the listing in the paper, is up 3.5% this year. I initially got into the fund at the start of the year and I am losing money. How can that be?

– Harvey Daniels; Calgary, Alberta

A. Well Harvey, timing is everything, especially in investing. It’s no good investing in a hot stock or mutual fund if you buy in at the top.

Without looking at your statements, I will take a guess that you have some sort of staged contribution to your investment in the fund and that you may have added to your position at or around the time the share price was peaking. Let’s take an example. Say you own 1,000 shares of a mutual fund that began the year at $10, which puts the value of your holdings at $10,000. And let’s say the fund ran up to $15 a share on March 20th, then fell to $10.35.

The mutual fund company would accurately report that the fund itself is up 3.5% this year. Here’s how the weirdness occurs. Let’s say you bought an additional $2,000 worth of the mutual fund when the share price peaked on March 20.

Your portfolio’s cost basis has changed. Yes, your initial investment was $10,000. But you added $2,000, or 133.33 shares, at $15. That means you have 1,133.33 shares with a basis of $12,000. But those 1,133.33 shares, at $10.35, are only worth $11,729.97 at the latest price ($10.35). You can measure this by multiplying 1133.33 by $10.35. This means you suffered a loss.

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