Market Shifts Into Second Gear

by: Chris Damas

The US stock market is solidly "up" this past Monday after surviving the normally bear-enticing “US Jobs Week” data virtually intact and powering higher.

Usually the Scylla (ADP Employment) and Charybdis (US Non-Farm Payrolls) of Economic Data has traders tied to the mast during the first week of the month afraid to pull the trigger and when easily panicked, to sell outright.

But on this Monday morning after, the DJIA was at 10,714 up 60 points, the S&P 500 (NYSEARCA:SPY) was at 1,127 and the Canadian S&P/TSX price index was up 74.5 points to 11,874.5 at 3pm.
Last Friday, the DJIA market bellwether, encouraged by a robust July ADP number of +42K, managed to ignore the mediocre US July payrolls report (131K in lost jobs overall but a not-so-bad +71K private hires) and come back from a minus 140 point deficit to end down only 21.4, a clear sign of underlying technical strength and upward bias.
In a nutshell, the stock market is moving up on bad news. That's what we have been talking about for quite some time now. And we’ve been betting with our wallets, too. Canadian July employment data showed a not so healthy trend too. 139,000 full-time jobs were lost and somehow turned into 130,000 part-time "positions". However, this is after strong employment growth in the first half of 2010.
The magic number of 1,113.23, (the three month high) on the S&P 500 reached intraday on June 21, 2010, is a mountain peak clearly within sight.
I wrote an article June 21st called “A Bull Market by Any Other Name”, and was pilloried by amateur pundits for my diagnosis of "emerging bullitis" for the market’s refusal to roll over and die for the PermaBears and professional skeptics that populate the darker side of "Investor World".
Is it too late to buy stocks at this point?
I don't think so. In my view, they are just breaking out. Please note, we have been enthusiastically buying Telus (NYSE:TU) below C$41 and are now buying the less liquid Telus non-voting A shares (both listed on the TSX) at below $40.
If this were a short-term trade we would be buying solely the liquid voting shares, hoping to turn them over in a jiffy. Telus reported solid Q2 earnings last week with 124,000 in net wireless customer adds over the period.
We are also maintaining our forest product stock positions and adding to some of the Canadian paper pulp producers. We averaged down on Fibrek at 94-95 cents per share a week or so ago. Fibrek (previously SFK Pulp) reported Q2 cash flow of $20.4 million before $4.3 million used for working capital and this was in line with our expectations. This compares with Q1 cash flow of $10.2 million before working capital changes.
Fibrek now has 130 million shares outstanding pursuant to the recent $40 million share rights issue. Fairfax Financial took down 16.2 million more shares for a total position of 33.6 million or 25.9% of the outstanding.

We expect Fibrek to report modestly softer results for the second half of the year and full year cash flow results should approximate 45 cents per share at the new diluted share count. Our downwardly revised target price is 4 times CF or $1.80. We have been buying Canfor Pulp Income Fund below $13 last week and see it is now rallying nicely. Fibrek, Canfor and other pulp producers have been affected by negative sentiment caused by three NBSK plant restarts that may cause short-term oversupply from Canada. But, we expect demand to absorb these restarts, which usually do not come without commissioning hiccups.

We are waiting for July US Housing Starts and Building Permit numbers to be released (August 18) to determine what the next move on lumber will be.

On fertilizer and agriculture investments, we have taken a wait and see attitude after witnessing a spirited move off the June lows in the stocks of Agrium Inc.(NYSE:AGU), CF Industries Holdings Inc. (NYSE:CF) and The Mosaic Company (NYSE:MOS), and then a second stage rally in late July/early August based on rising crop prices and solid Q2 earnings.
Here is our viewpoint on the recent torrid rise in wheat prices and how they might impact fertilizer stocks. Remember, a bull market should raise all boats and we would be neglectful to recommend selling any ag-related stocks.
Next earnings release of note: Cascades Inc (OTCPK:CADNF) (Aug 11 AM) and Cisco (NASDAQ:CSCO) (August 11 after the close). We are looking for plus $100 million in Q2's EBITDA from Cascades Inc. Note that the stock recently broke its three month high at $7.22, and we have a $9.50 share target price for 2010.
Luck favors the bold.

Disclosure: Long Telus, Fibrek, Canfor Income Fund, Cascades