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Month in Review:: December 2011
Month in Review:: December 2011
Month in Review:: December 2011
miners weighed heavily on the benchmark. The S&P/TSX Gold Sub-Industry Index fell 15.7% in December, outpacing bullions decline. Shares in the nations banks were generally higher. Reporting season ended with five of the Big Six announcing better-than-expected earnings. Research in Motion (RIM) fell 19.5% as the companys dismal year mercifully came to a close. Early in the month, RIM announced a $360 million after-tax charge related to its PlayBook and warned about its Q3 earnings. Despite beating the reduced expectations two weeks later, lower guidance for Q4 and the delayed release of BlackBerry 10 sent the companys shares back into a tailspin. The shares gained some life on takeover speculation, but that soon faded as any suitor would face intense regulatory scrutiny due to economic, competitive, and security concerns. In M&A, Rogers Communications (RCI.B) and BCE (BCE) announced they would jointly acquire 75% of Maple Leaf Sports and Entertainment in a $1.3 billion deal that is all about programming content. The transaction consolidates Rogers position in the Toronto sports scene while BCE will now own minority stakes in both sides of the storied Leafs-Canadiens rivalry. Elsewhere, Eldorado Gold (ELD) agreed to buy European
Goldfields (EGU) for $2.5 billion in a move to augment its development pipeline. The December Federal Open Market Committee (FOMC) meeting passed with no substantive change in policy stance. Economists continue to believe a third round of quantitative easing could be in the offing if conditions warrant. This view is bolstered by the annual shuffling of the deck of FOMC members, which would lead to a perceived dovish shift as noted hawks give up their voting power. The S&P 500 again found itself in a mid-month slump as investors digested the agreements made at the latest Eurozone leaders summit. A late-month rally buoyed by strong demand for the ECBs 36-month Long-Term Refinancing Operation (LTRO) helped push the index into positive territory for the month. Indeed, the S&P 500 managed to finish the year unchanged despite the heightened volatility that accompanied the multitude of macro events occurring in 2011. Telecommunications, Utilities and Health Care were the best-performing sectors in December, while Materials underperformed. Information Technology was weak as Intel (INTC) reduced guidance and Oracle (ORCL) delivered disappointing results. Sears Holding (SHLD) was battered after it released a disappointing business update and announced plans to close up to 120 stores. The companys share price was nearly halved during the course of the month. In M&A, AT&T (T) dropped its bid for T-Mobile USA in the face of regulatory scrutiny and will take a $4 billion charge as a result. AT&Ts $1.9 billion bid to purchase airwaves from Qualcomm (QCOM) was approved by regulators just days later.
2 MONTH IN REVIEW DECEMBER 2011
Number Crunching
Equity Indices* S&P/TSX Composite Index TR Dow Jones Industrial Average TR S&P 500 Index TR NASDAQ Composite Index TR MSCI EAFE TR (USD) MSCI World TR (USD) S&P/TSX Sector Performance* S&P/TSX Financials TR S&P/TSX Energy TR S&P/TSX Materials TR S&P/TSX Industrials TR S&P/TSX Consumer Discretionary TR S&P/TSX Telecom Services TR S&P/TSX Information Technology TR S&P/TSX Consumer Staples TR S&P/TSX Utilities TR S&P/TSX Healthcare TR Month -1.7% 1.6% 1.0% -0.5% -0.9% 0.0% Month 2.7% -0.3% -11.5% 3.4% -1.7% 6.1% -10.2% 1.9% 0.5% -0.7% YTD* -8.7% 8.4% 2.1% -0.8% -11.7% -5.0% YTD* -2.9% -9.9% -21.2% 4.2% -15.5% 24.9% -52.5% 6.8% 6.5% 50.4% Currencies (in Canadian Dollars) US Dollar Euro British Pound Japanese Yen (100) Commodities (US$) Natural Gas (per million btu) Gold (per ounce) Silver (per ounce) Copper (per pound) Nickel (per pound) Aluminum (per pound) Zinc (per pound) Exchange 1.0213 1.3237 1.5872 1.3284 Spot Price $2.99 $1,563.70 $27.84 $3.44 $8.49 $0.90 $0.84 Month 0.4% -3.2% -0.6% 1.3% Month -1.5% YTD* 2.3% -0.9% 1.9% 8.0% YTD* 8.2%
-15.8% -32.1% -10.5% 10.1% -15.1% -9.9% -3.4% 7.0% -5.1% -21.3% -24.2% -18.9%
-10.9% -24.8%
* All returns are on a Total Return basis All indices are in local currency unless otherwise noted. Source: Bloomberg
S&P introduced an overhang to the market after it placed most long-term Eurozone sovereign ratings on credit watch negative status. The review was ongoing through month-end, with final decisions to come in the New Year. Downgrades to Eurozone lynchpins Germany or France could have significant implications for the credit capacity of the EFSF. Euro leaders
completed their last summit of 2011 with several new agreements that were cited as a very good outcome by ECB President Mario Draghi. The group agreed to limit structural deficits, deploy the leveraged EFSF, accelerate the deployment of the permanent bailout facility, and loan 200 billion to the IMF for additional bailout purposes. The ECB cut its benchmark interest rate by 25bps
to 1.00% at its meeting, but it was the extension of refinancing operations to three years and a loosening of collateral rules that were the big headlines. The ECB would later reveal 489 billion of demand for the first 36-month LTRO. This was a positive catalyst for risk assets because investors hoped this source of cheap financing would prompt a bid for sovereign debt. In China, inflation continued to moderate in November, falling to 4.2% from 5.5% in October. Furthermore, both the services and manufacturing PMI series were below the important 50 level, indicating a slowdown for the Chinese economy. This is consistent with a slowdown in export growth due to declining U.S. and European demand. Investors are now anticipating further policy accommodation with another cut in banks required reserve ratio expected in early January.
on the release of stronger-than-expected U.S. economic data and investor optimism that the ECBs 36-month LTRO could ease the funding stress of European banks and help stem the spread of the sovereign debt crisis. In Canada, economic data released was mixed. The BOC held its overnight lending rate at 1.00%, as expected. The BOC also released its semiannual Financial System Review and stated risks to the system have increased markedly since June due to the European sovereign debt crisis, the significantly weaker global growth outlook, and the increased risk aversion in international financial markets. In other news, housing starts declined from 208.8K in October to 181.1K in November as the rate of new single home construction in urban areas fell. Unemployment unexpectedly rose for a second month in a row in November. Retail sales for October remained unchanged at 1%, rising at twice the pace forecast by economists. GDP was also little changed as declines in the production of goods offset increased output by service industries. CPI remained unchanged in November at 2.9% YoY due to rising food and automobile prices offsetting lower costs for gasoline. The yield on the 10-year Canadian benchmark fell 19bps to close the month at 1.94%. In the U.S., the Federal Reserve left rates unchanged notwithstanding its view that strains in global financial markets continue to pose significant downside risk to the U.S. economy. With respect to economic data, industrial production unexpectedly declined by 0.2% MoM in November while retail sales rose 0.2% MoM. At
3.4% YoY, CPI was little changed in November as gasoline prices dropped and food prices cooled. The four-week moving average for jobless claims dropped to 375K last week, the lowest level since June 2008. The index of pending home sales increased 7.3% in November following a 10.4% jump in October. The rise in home sales far exceeded the economic forecast for an increase of 1.5% and signaled the U.S. housing market may finally be on the road to recovery. The yield on the 10-year Treasury benchmark fell 21bps to close the month at 1.88%.
S&P/TSX Index - Target Overnight Rate, LTM
1.2 % 1.0 % 0.8 % 0.6 % 0.4 % 0.2 % 5/11/11 6/9/11 7/8/11 8/8/11 9/6/11 10/4/11 12/30/11 1/17/11 2/14/11 3/15/11 4/12/11 11/2/11 11/30/11
Source: Bloomberg
Dec. 21: ECB reveals 489bn of demand for the first 36month LTRO
Dec. 29: U.S. and NATO forces placed on alert in response to Iran posturing in Strait of Hormuz
1,300
14,500
1,250
14,000
Dec. 9: U.K. vetoes EU treaty change Dec. 13: December FOMC meeting passes with no major policy changes Dec. 23: U.S. House and Senate reach a deal to extend payroll tax cut by two months Dec. 23: AT&T (T) won approval from regulators to purchase airwaves from Qualcomm (QCOM) for $1.9bn Dec. 27: Sears Holdings (SHLD) announces closure of 120 stores and a charge of up to $2.4bn to mark down deferred tax assets
1,200
13,500
1,150
S&P/TSX
13,000
Dec. 2: Research in Motion (RIM) announces $360mm PlayBook charge and warns on 3Q earnings
1,100
Dec. 9: Rogers Communications (RCI.B) and BCE (BCE) strike deal to acquire 75% of Maple Leaf Sports and Entertainment for $1.3bn
12,500
1,050 12,000
Dec. 2: Employment report shows Canada lost 18.6K jobs in November, the second straight monthly loss Dec. 6: Precision Drilling (PD) announces $120mm charge to decommission certain rigs
11,500
Dec. 19: Eldorado Gold (ELD) agrees to buy European Goldfields (EGU) for $2.5bn
Dec. 23: Bombardier (BBD.B) wins a $648mm train order from Germany
1,000
11,000
12/1/11 12/2/11 12/5/11 12/6/11 12/7/11 12/8/11 12/9/11 12/12/11 12/13/11 12/14/11 12/15/11 12/16/11 12/19/11 12/20/11 12/21/11 12/22/11 12/23/11 12/27/11 12/28/11 12/29/11 12/30/11
950
S&P/TSX
S&P 500
S&P 500
World Markets
World markets were mixed in December. In the first half of the month, equities declined as investors digested agreements made at the last Eurozone leaders summit of 2011. Risk assets rallied mid-month after the ECBs announcement of the 36-month long-term refinancing operation. Investors were happy to see strong demand of 489 billion for this facility and hoped that this cheap financing would help boost prices of European sovereign debt.
All returns are on a total return basis unless otherwise noted All returns calculated in local currency except for MSCI World ** These indices are calcuated on a price return basis Source: Bloomberg
MSCI World Index: Global USD CAD M/M: 0.0% MTD: -0.0% YTD: -5.0% YTD: -5.5% China: Shanghai Index M/M: -5.7% YTD: -20.2% Hong Kong: Hang Seng M/M: 2.6% YTD: -17.4%
U.S.: S&P 500 M/M: 1.0% YTD: 2.1% Brazil: Bovespa M/M: -0.2% YTD: -18.1%
Germany: DAX M/M: -3.1% YTD: -14.7% India: Sensex M/M: -4.1% YTD: -23.6%
Event
ISM Manufacturing Domestic Vehicle Sales Building Permits MoM Trade Balance Empire Manufacturing Philadelphia Fed. CPI Ex Food & Energy (MoM) Housing Starts Building Permits Existing Home Sales MoM Retail Sales MoM U. of Michigan Confidence Leading Indicators Durable Goods Orders Consumer Confidence Bank Canada CPI Core MoM Change in Nonfarm Payrolls Net Change in Employment ISM Non-Manf. Composite Housing Starts Advance Retail Sales GDP QoQ (Annualized) Personal Consumption Personal Income Gross Domestic Product MoM S&P/CS 20 City MoM% SA Richmond Fed Manufact. Index Dallas Fed Manf. Activity
Period
Nov Nov Oct Oct Dec Dec Nov Nov Nov Nov Oct Dec F Nov Nov Dec Nov Nov Nov Nov Nov Nov 3Q T 3Q T Nov Oct Oct Dec Dec
Consensus
51.8 10.40M 1.6% -$43.9B 3.00 5.0 0.1% 635K 635K 2.2% 0.5% 68.0 0.3% 2.2% 58.9 0.1% 125K 20.0K 53.9 200.0K 0.6% 2.0% 2.3% 0.2% 0.1% -0.4% 5.0 4.8
Actual
52.7 10.53M 11.9% -$43.5B 9.53 10.3 0.2% 685K 681K 4.0% 1.0% 69.9 0.5% 3.8% 64.5 0.1% 120K -18.6K 52.0 181.1K 0.2% 1.8% 1.7% 0.1% 0.0% -0.6% 3.0 -3.0
Prior
50.8 10.29M -4.1% -$44.2B 0.61 3.6 0.1% 627K 644K 1.4% 1.0% 67.7 0.9% 0.0% 55.2 0.3% 100K -54.0K 52.9 208.8K 0.6% 2.0% 2.3% 0.4% 0.2% -0.7% 0.0 3.2
Source: Bloomberg
As Expected
20-Dec
Consumer Staples
Financials Financials
Consumer Discretionary Consumer Discretionary Industrials Industrials Information Technology Information Technology Energy Energy Materials Materials
0%
5%
0%
5%
10%
15%
Royal Bank of Canada Royal Bank of Canada Toronto-Dominion Bank/The Toronto-Dominion Bank/The BCE Inc BCE Inc Enbridge Inc Enbridge Inc Canadian Pacific Railway Ltd Canadian Pacific Railway Ltd TransCanada Corp TransCanada Corp National Bank of Canada National Bank of Canada Canadian Oil Sands Ltd Canadian Oil Sands Ltd TELUS Corp TELUS Corp Quadra FNX Mining Ltd Quadra FNX Mining Ltd
IAMGOLD Corp IAMGOLD Corp Research In Motion Ltd Research In Motion Ltd Silver Wheaton Corp Silver Wheaton Corp Potash Corp of Saskatchewan Inc Potash Corp of Saskatchewan Inc Suncor Energy Inc Suncor Energy Inc Bank of Montreal Bank of Montreal Eldorado Gold Corp Eldorado Gold Corp Kinross Gold Corp Kinross Gold Corp Goldcorp Inc Goldcorp Inc Barrick Gold Corp Barrick Gold Corp
-5%
-4%
-3%
-2%
-1%
Telecom Services
0%
2%
3%
4%
5%
-5%
-4%
-3%
-2%
Consumer Staples
-1%
0%
1%
2%
3%
4%
5%
0 0
1 1
2 2
33
44
20
40
60
80
Source: Bloomberg
-80
-60
-40
20
40
60
80
The information contained in this report has been compiled by RBC Dominion Securities Inc. (RBC DS) from sources believed by it to be reliable, but no representations or warranty, express or implied, are made by RBC DS or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC DSs judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Additionally, this report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to Investment Advisors and does not have regard to the particular circumstances or needs of any specific person who may read it. RBC DS and its affiliates may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC DS and its affiliates may also issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC DS or its affiliates may at any time have a long or short position in any such security or option thereon. Neither RBC DS nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. This report may not be reproduced, distributed or published by any recipient hereof for any purpose. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *MemberCanadian Investor Protection Fund. Registered trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under licence. Copyright 2012. All rights reserved.