Last Friday, the final trading day of October 2009, saw triple-digit losses following the previous day’s excellent U.S. GDP numbers. Are traders and institutional investors just taking money off the table for some profits? Or will this be the beginning of the retrenchment that we didn’t see in September or October?
One thing that is for sure is that analyst sentiment seems to be all over the place. Some even suggest we are at the beginning of a mega, multi-year bull market. And recent increases in the VIX (volatility index) indicator show that something is certainly afoot – be that profit-taking or investors coming in off the sidelines, or more likely, both.
Analysts also agree that stimulus programs have been the key driver of growth in the US so far and that more stimulus measures are yet to come. Going forward, investors have to start cherry-picking stocks driven by genuine fundamentals.
General Market Sentiment
According to Dean Orrico, analyst at Middlefield Capital Corp., we are still in some form of recovery. Orrico sees continued volatility and recommends being selective in this market. Orrico expects that we might see a stronger correction here, but since there is still a lot of cash on the sidelines, it will mitigate some of the downside. Orrico expects we will still see recovery fully into the end of the year, but agrees with others that so far, market growth has been driven by stimulus.
Anna Piretti, economist with BNP Paribas concurs that most of the recovery is based in government support at the moment. Piretti notes that the indicators of private demand remain very weak and we are likely to see continued weakness in GDP as a result. Inflation? Not yet. Piretti thinks we will see low rates past mid-2010 and in fact, doesn’t see the Fed raising rates until 2012. Even rental prices are easing in the US, according to Piretti. Regarding housing, labour and credit, Canada’s economy has not suffered as much as the US and has rebounded sooner than the US.
Oil and Gas
Orrico advises investors to primarily look in the resource sectors for true fundamentals growth: oil and gas in particular.
Craig Machel, portfolio manager at Blackmont Capital, favors natural gas over oil at this stage of the game. Machel says demand will pick up with the colder weather. Drill count in the US has been cut in about half, and won’t be able to come back on all at same time or quickly. So nat gas stocks look good until next spring.
Orrico agrees: we will see a recovery in gas prices late this year. Not to 12 or 13 dollars, but higher than other analysts are predicting. We will probably average around 6-7 dollars, which Orrico considers are healthy prices for gas companies. A recommendation? Orrico likes NuVista, which he sees as high-beta, but you want this exposure if you think gas is going higher.
As for oil, Orrico believes a large part of oil’s rise this year has been the production cut by OPEC in summer 2008; they pulled a lot of barrels off the market and have kept them off the market. It will slowly be restored, but not for the next year, so we will continue to see strength in oil prices. Orrico thinks these will probably stay in the $70-$90 range, but with some volatility.
An oil stock recommendation? Orrico likes Imperial Oil (TSX: IMO) – It has great exposure to Syncrude, is using innovative extraction technology for cost-effective production, and it provides a more conservative exposure to oil. Imperial is without a doubt one of Canada’s top oil companies. If you want something slightly less conservative, go with Canadian Oil Sands Trust (TSX: COS.UN), which allows you to get more yield; they also increased their quarterly dividend yesterday, too.
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