Rally Heats Up

Posted by Ryan Irvine - Keystone Financial

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Market BuzzSummer Rally Heats Up, MOSAID Beats Street

While Toronto’s main index ended the session off its highs for the day, Friday’s session still found itself in positive territory at the close. Friday’s session marked an impressive week which saw S&P/TSX Composite Index close up 2.23% to 12,144.92. In fact, the recent leg of the current market up-tick which begun late in August continued to accelerated this past week.

We can trace the current upswing back to the July 5th year lows when the TSX dipped to the 11,092 level. From here we have witnessed the index gain over 8% in just under 2 months, a very impressive run – albeit on seasonally lower volumes.

Early in Friday’s session the TSX had been up almost 100 points but gains were trimmed in the wake of a report from the U.S. Institute for Supply Management that its service sector index for August came in at 51.5, down from 54.3 July and lower than the 53.2 reading economists had expected. While we are still seeing an expansion, it is at the slowest pace since October. Of note, the employment component (of the index) fell below 50 again, which signals contraction and is concerning.

The data took some of the luster off of the U.S. Labour Department report that the U.S. private sector created 67,000 jobs last month, much higher than the 40,000 or so that analysts expected. Having said this, we believe in the mid-term, the U.S. jobs market remains challenging.

The U.S. jobless rate edged up 0.1 of a percentage point to 9.6%. The Canadian jobs report for August comes out next Friday.

From our Canadian Small-Cap Universe (www.keystocks.com), we are happy to report that MOSAID Technologies Incorporated (MSD:TSX), Canada’s leading IP company, reported better-than-expected Q1 fiscal 2011 earnings.

The Ottawa, Ontario-based company posted Q1 fiscal 2011 revenues of $18.5 million, up 14% from $16.2 million in Q1 fiscal 2010. Q1 fiscal 2011 pro forma net income rose 29% 5o $8.6 million from $6.6 million in Q1 fiscal 2010. Pro forma diluted EPS were $0.73, based on 11.84 million diluted shares, compared to $0.65 per diluted share in Q1 fiscal 2010, based on 10.25 million diluted shares.

LooniversityThe Short Squeeze

Ah, the “short squeeze” – while the term may conger up images of your bearish broker’s vertically challenged girlfriend, in the financial world, the term has quite a different meaning.  All financial humour aside (thankfully), this week we take a look at the phenomenon known as the short squeeze.

Short Sale

An investor who sells stock short borrows shares from a brokerage house and sells them to another buyer.  Proceeds from the sale go into the shorter’s account.  He must buy those shares back (cover) at some point in time and return them to the lender.

Short Squeeze

While shorters sell short a stock on the hope that its price will plunge, there is always a chance that its price may begin to rise.  If it does so, more and more of these “shorters” will “cover” their investments.  That is, they’ll buy back the shares that they had shorted, and take a loss, since they’re now having to buy the shares at a higher price.  As more and more shorters do this, the price rises (since more people are buying than selling).  In investment parlance, this is a short squeeze.

Put it to Us?

Q. What are the major influences on interest rates in Canada?

– Walter Williams, Vancouver, BC

A. While there are a multitude of influences on interest rates in general, we will narrow the major influences down to a party of three.

Supply and Demand: Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.

Inflation: Inflation will also affect interest rate levels. The higher the rate of inflation, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in the purchasing power of the money they will be repaid in the future.

Bank of Canada: The major method for influencing interest rates is the Bank’s management of cash deposits in the banking system. Every day, the banks try to balance all cash flowing in or out of their accounts as closely as possible to avoid a positive balance in their clearing account at the Bank of Canada that earns no interest or a negative balance that incurs interest charges. The Bank of Canada can affect these balances by moving cash between federal government accounts at the Bank and demand accounts at the commercial banks. An increased positive balance tends to lower interest rates while an increased negative balance tends to raise rates.

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