Market Summaries

S&P/TSX Composite down 0.09% to 12071 (up 2.80% year-to-date)
S&P/TSX Venture Composite down 0.08% to 1666 (up 14.28% ytd)
Dow Jones Industrial Avg up 0.20% to 11019 (up 5.70% ytd)
Nasdaq Composite up 1.10% to 2481 (up 9.30% ytd)
Oil (West Texas Intermediate) down $1.68 to $83.24 (up $3.88 ytd)
Gold (Spot USD/oz) down $24.60 to $1137.40 (up $40.45 ytd)

Commentary

Goldman Sachs Big Bet Against The U.S. Subprime-Mortgage Market – In a bluntly worded civil lawsuit, the US Securities and Exchange Commission alleges that Goldman Sachs and one of its vice-presidents, Fabrice Tourre, defrauded investors by misstating and omitting key facts about an investment instrument it developed that was tied to subprime mortgages. The allegations against Goldman Sachs Group Inc centre on the creation of a single security called Abacus 2007-AC1. Goldman has often been criticized for selling billions of dollars of debt securities, called credit default obligations (CDOs), filled with mortgages that the bank itself allegedly thought were overvalued. But like many controversies in the financial services industry, it’s not about what you know, or what you do, it’s about whether you tell anyone. That’s what makes Abacus 2007-AC1 special in the SEC’s eyes. It alleges that for this security, Goldman hired Paulson & Co to come up with a number of the mortgage-based contents. Two things about Paulson & Co: Firstly, Paulson had perhaps the biggest bet on a US housing market collapse and part of that bet was through shorting Abacus 2007-AC1. Secondly, Goldman allegedly didn’t tell anyone that Paulson helped build the same security the hedge fund was betting would fail. According to the New York Times, Goldman took most of its short positions on the Abacus securities before 2007. Goldman’s bets against the performances of the Abacus CDO’s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. This glaring conflict of interest is at the centre of the SEC’s charges. The involvement of Mr Paulson and his company was “undisclosed in the marketing materials and unbeknownst to investors” the SEC said. Instead the SEC alleges Mr Tourre led investors to believe that an impartial firm, ACA Management LLC, selected all of the mortgage-backed securities in Abacus 2007-AC1. Essentially, Tourre designed the security to fail, while telling investors it was designed to succeed. Paulson’s timing couldn’t have been better, getting in just before the US housing market started its collapse. Beyond the headline, the thing that makes this situation even more stressful is the fact that Goldman Sachs is Wall Street’s most dominant investment bank, employing some of the industry’s smartest. Ordinarily, firms caught in the crosshairs of the SEC jump through hoops to avoid publication of charges that can cause significant damage to their reputation, which is why more often than not they opt for a settlement. However, it appears that SEC, with its newly invigorated Obama appointees is on a mission to distance itself from the previous regime and isn’t willing to play by the old rules. Any question about the impact of the charges were answered when Goldman’s stock price tanked more than 10% within an hour of the stunning charges becoming public, despite the firm’s insistence of its innocence and pledges to vigorously defend itself.

– excerpts from the Financial Post

Soundbites

• Here are a few “warm and fuzzy” stats surrounding Greece and parallels to the US: Greece has been in default 50% of the time since 1800. Aren’t they overdue for some carnage? The London Financial Times says Greece’s debt is 120% of GDP. The US government debt is 63% of GDP, according to Monday’s Wall Street Journal, and rising. It will reach 90% by 2020, says the non-partisan Congressional Budget Office, assuming the end of the Bush tax cuts don’t impede growth rates. Higher taxes – whether needed or not – do slow growth. Federal spending is almost 25% of GDP versus the longer-term average of 21%. The budget deficit as a percent of GDP is almost 10%. The US finds itself in a very tangled web and the problems are escalating.
• BC’s real estate market started and finished the first quarter strongly, cooling off through the Olympic stretch. According to MLS, the 7110 sales in March were 43% higher than a year earlier when the market was only beginning to pull out of the downturn. Through the entire three-month stretch, the province saw 18,284 sales, representing a 64% jump from 2009 stats. “Since the beginning of the year, we’ve seen home sales moderate,” said Cameron Muir, the BC Real Estate Association’s chief economist. “That is largely the result of pent-up demand that has already been expended in the marketplace as well as eroded affordability as higher home prices and more recently, higher mortgage interest rates are certainly squeezing some low-equity buyers out of the marketplace.”
• Russia and Argentina have ended years of ignoring one another and are now exploring numerous avenues to combine their resources. When Russian President Dmitry Medvedev stepped off his plane in Buenos Aires, it marked the first visit by a Russian head of state in 125 years to the Latin American country. Following successful talks with Argentine President Cristina Kirchner, the two signed numerous deals which will expand their economic ties. Trade between the two stood at just $2 billion in 2008 and was mostly comprised of meat, fruit and mineral fertilizers. The new deals will focus on oil & gas, ship building and possibly even arms trading.
• The Canadian Pension Plan Investment Board has announced plans to make significant investments in India. In what will be the first India-focused fund for the CPPIB, the board announced intentions to initially invest $100 million and ultimately grow the fund to approximately $450 million. The fund, to be named the Multiple Alternate Asset Management Fund, will invest in mid-sized Indian companies, management-led buyouts, and spin-offs of divisions from larger groups. The Toronto-based CPPIB currently manages $123.9 billion in assets, making it one of the country’s largest pension fund administrators. The profile of CPPIB is growing with the entity participating in three of the top five global private equity deals in 2009.

Marketwatch – A Look at the Week’s Newsmakers

Canadian Oilsands Trust (COS.UN) – shares shot up in Monday’s session after Houston-based ConcocoPhillips confirmed the sale of its stake in Syncrude Canada to Chinese refining giant Sinopec for $4.65 billion USD. Many believed that Canadian Oilsands would step up and buy this stake and this announcement now paves the way for a much-desired distribution increase. Syncrude Canada is now made up of the following consortium: Canadian Oilsands Trust (36.74%), Imperial Oil (25%), Suncor (12%), Sinopec (9.03%), Nexen (7.23%), Murphy Oil (5%), and Mocal (5%).

Apple Inc (APPL) – facing very high demand in the US market, Apple is about to disappoint Canadian fans with a reported one-month delay of the tablet device’s overseas launch. In a news release from the company’s Cupertino, California headquarters Apple claims to have sold more than 500,000 iPads, and taken “a large number of pre-orders for iPad 3G models for delivery by the end of April.” It expects sales will “likely continue to exceed our supply over the next several weeks.” Calling it a “difficult” decision, Apple will only begin taking online international pre-orders on May 10 (announcing at the same time the international price), with delivery delayed until the end of May. This is the second delay for customers living outside the US. In January, Apple said the iPad would be sold worldwide in late March. It started selling them in the US on April 3, but delayed the international launch until later this month. “We know that many international customers waiting to buy an iPad will be disappointed by this news, but we hope they will be pleased to learn the reason—the iPad is a runaway success in the US thus far.”

Khan Resources Inc (KRI) – after beginning the trading week at 83 cents, shares plummeted Tuesday on word that Khan’s takeover by China National Nuclear Corp (CNNC) may have hit some resistance. Shares in Tuesday’s session fell as low as 51 cents, far below the proposed buyout price of $0.96. Last year, Khan ran into trouble with Mongolian authorities and had a license suspended, which was followed shortly after by a lowball offer from a state-owned Russian company that Khan rejected. The company worked hard to get the suspension lifted and worked out the aforementioned deal with CNNC this past February. But according to Khan’s CEO Martin Quick, Russia has been working behind the scenes to squeeze Khan out of the Mongolian operations, despite the bid from the Chinese. This mess is far from over.

Canadian Pacific Railway Ltd (CP) – there is no clearer sign of an improving economy than measuring rail volumes and if the latest data is a signal, we are in the midst of a significant rebound. Canadian railroads reported 74,686 carloads last week (up 31% from the previous year) and 44,046 trailers or containers (up 17.4% form 2009). While these results are indicative of how bad 2009 was, it is still extremely encouraging to see so much product being shipped. Year to date, overall rail volume is up 16.9% from the first 14 weeks of 2009 and the percentages continue to expand.

“Quote of the Day”

“Sometimes I lie awake at night, and I ask, “Where have I gone wrong?” Then a voice says to me, “This is going to take more than one night.” – Charles M. Schulz (1922 – 2000), Charlie Brown in “Peanuts”

This newsletter expresses the opinions of the writers, Marc Latta and Jamie Switzer, and not necessarily those of Raymond James Ltd. (RJL)  Statistics and factual data and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities.  It is not meant to provide legal, taxation, or account advice; as each situation is different, please seek advice based on your specific circumstance. RJL and its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Within the last 12 months, Raymond James Ltd. has undertaken an underwriting liability or has provided advice for a fee with respect to the securities of the Royal Bank of Canada. Raymond James Ltd is a member of the Canadian Investor Protection Fund.

JAMIE SWITZER | Raymond James Ltd.
Senior Vice President, Financial Advisor
North Vancouver IAS
PH: 604.981.3355 | FAX: 604.981.3376
jamie.switzer@raymondjames.ca