Markets Will Rally, But Now Is Time to Be Prudent - Canaccord

Although he is still optimistic that North American markets will rally higher over the next twelve months, Canaccord Adams portfolio strategist Nick Majendie thinks now is no time to swing for the fences.

With a economy still in disarray, he says rallying stocks are due for a correction and investors should play it safe over the summer.

"In sum, in an environment of great uncertainty, we believe it is prudent at the moment to be cautious and more than usually conservative," Mr. Majendie said in a note to clients.

This can be achieved through maintaining a fair degree of liquidity and ensuring that bond and stock holdings are of the highest quality and offer secure levels of income.

The market rebound on both sides of the border over the past four months has been driven in large part by evidence that the economic recession is easing. But while positive economic data has definitely rolled in and corporate profits look set to rebound in some instances starting this quarter, Mr. Majendie believes the short term remains highly uncertain when it comes to the economy, thus leaving financial markets vulnerable.

In particular, he pointed to the fact that Americans are presently pocketing most of the government stimulus being thrown their way. The fast-rising savings rate in the United States, which hit 6.9% in May, its highest level since the mid '90s, points to a cautious consumer more intent on rebuilding his or her balance sheet than going on a shopping spree.

So even with corporate profits rising, he thinks there will be little in the way of follow through for the economy from increased business and personal spending.

Now that markets have risen almost 40% from their March lows, the spectre of fresh negative economic news carries with it downside risk, ranging from a modest correction to something akin to what happened in March 2003.

In that instance, the equity market bottomed in October 2002, recovered by 25% and then gave up most of the gains through March 2003 before finally taking off definitively.

Mr. Majendie has been raising cash in sectors that appear that have become "rich in valuation." Those sectors include financials, basic materials – excluding gold – and energy.

Comments

[VSD:]

Let the earnings reveal the strength of the green shoots. Financials, Energy and Technology had a great quarter. Sectors that depend upon credit for growth will report ordinary earnings.

Jul 05 01:51 PM

[Fitz919:]

To the author:

I've heard this phrase "pocketing stimulus money" lately. You're talking about a pittance per paycheck. And with rising taxes for everyone, that money will have to be returned to the Govt and then some!

You talk about this 6.9% savings rate as "...a cautious consumer more intent on rebuilding his or her balance sheet, than going on a shopping spree." You've got this all wrong. It's people in Survival Mode holding onto every penny because the next step for them is the soup line if they can find one. Hundreds of thousands of people fall into this Survival Mode catagory each month even before their unemployment benefits have run out.

A week ago Friday, 5 small banks failed. Last week on Thursday 7 small banks failed. That makes 12 banks in 7 days, and 52 banks so far this year, and the last batch of them all failed because of Commercial Real Estate Loans.

You are far too optomistic about the future of this economy.

For purposes of full disclosure I have one position in the market at this time. TZA a Tripple Leveraged Short position, which rose more than 9% on Thursday.

Jul 05 07:58 PM