Canadian Economy Coming off of a Sugar High

Market Buzz – Correcting Worldwide Mismatches Key to Sustained Recovery

Now three weeks into what promises to be an interesting fall investing season, we take a quick look at the Canadian economy and Toronto’s main market.

We tend to agree with Deputy Chief Economist at TD Financial Group Derek Burleton’s recent assertion that the Canadian economy is coming off a “sugar high” from stimulus measures as well as the unleashing of pent-up consumer demand showing signs of a maturing recovery.

Typically, in the early stages of a recovery, you get a bounce as inventories are restocked after the deep cuts during the recession. As the consumer pauses during the recessionary period, you get a good deal of pent-up demand. We saw this demand hit the economy in full swing in the fourth and first quarters of 2009 and 2010, respectively. Compounding this pent-up demand was significant government stimulus that brought future spending forward for home renovations and other programs.

All these factors lead to a couple of 5 per cent plus quarters (Q4 2009 and Q1 2010). However since then, we have seen clear evidence that some of those early returns are beginning to diminish. While this is perfectly natural as they cannot sustain that growth forever, there are some tailwinds that are turning into headwinds. Not only are we seeing a slowdown, but over the next couple quarters, we could see growth fall below the trend rate.

Heading into 2010, we had stated that on a valuation basis, Toronto was really neither cheap nor expensive and that there was no real compelling reason to “buy the market,” but, there remained compelling reasons to buy some individual growth and value stocks. We saw it as a limited growth environment and a stock pickers market. Our stance is unwavering in this respect with nine months solidly behind us.

Late this past week, we were pleased to report that Boyuan Construction Group Inc (BOY:TSX) announced a rise in profit for the fourth quarter on higher revenues as the company expanded into new core markets. Results for the current quarter were also helped by absence of stock based compensation expenses.

Boyuan’s net income rose 27.4 per cent to US$4.59 million from US$2.31 million last year. On a per share basis, earnings were US$0.17 compared with US$0.09. One year ago, the company had incurred a stock-based compensation expense of US$1.8 million.

The China-based commercial builder attributed the growth mainly to its decision to expand into the Shandong Province, one among the company’s new core market. We will be issuing a full update next week.

Looniversity – Technical vs. Fundamental – at the Mall

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

Fundamental analysis is about using hard data (price-earnings, price-to-sales) to evaluate a security’s intrinsic value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold and then decide whether to buy it or not. On the other hand, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.

Put it to Us?

Q. I often watch CNBC and BNN to find out about the market action during the day. Can you give me a quick overview of the ticker tape and what all the numbers mean?
– Mary McDonald; Edmonton, Alberta.

A. Good question, Sandra. Here’s an example of a quote shown on a typical ticker tape, which reports data on the latest significant trades of a stock:

Ticker Symbol: This refers to the unique characters used to identify the company.

Shares Traded: This is the volume for the trade being quoted. Abbreviations are K = 1,000, M = 1,000,000 and B = 1,000,000,000.

Price Traded: The price per share for the particular trade (the last bid price).

Change Direction: Shows whether the stock is trading higher or lower than the previous day’s closing price.

Change Amount: The difference in price from the previous day’s close.

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