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Market Watch Weekly - May 9, 2014

Erik Dekker - May 09, 2014
Last week we dedicated a portion of our commentary towards the “sell in May and go away” trading anomaly that exists within the capital markets, discussing the balance between the underlying economic data and trading momentum that takes place.

Last week we dedicated a portion of our commentary towards the “sell in May and go away” trading anomaly that exists within the capital markets, discussing the balance between the underlying economic data and trading momentum that takes place. This week we are going to expand on that a bit.

North American equity markets extended their decline this week as fluctuations in the retail and technology sectors continued to put negative pressure on the market. In an interview with Bloomberg this week Richard Sichel, chief investment officer at Philadelphia Trust Co., said “Investors fell in love with some stocks with very high price to earnings ratios, like biotechnology and cloud computing technology stocks over the past year. Now there is a feeling of wanting to take less risk, which has investors scaling back, those high flyers and taking some profits. With the current quarterly earnings season winding down, it’s becoming less of a stock picker’s market.”

Since the beginning of March when the US small cap and NASDAQ markets hit new highs, small-caps and Internet shares such as Facebook and Amazon have been the biggest victims of the market retreat that has begun as investors fled last year’s highest performing equities.

Last week we wrote that during a conference call with our U.S. Strategist, Tony Dwyer, we were reminded that while the underlying economic data and market momentum are intact to the upside, it does not preclude that we could see some short term softness in the American markets. During that same conference call we were also reminded that the current capital market and economic environment looks very similar to 1995 and 2004. Periods in time when a value investment style, led by the energy, information technology and financial sectors did quite well, with telecommunications and consumer staple sectors lagging in overall market performance.

So while we are seeing further confirmation of the short term softness in the capital markets, we also see longer term underlying economic strength. Thus we have recently been taking some profits and holding slightly higher cash balances that we will look to re-employ later this quarter.

The Canadian dollar, which had been strengthening recently after touching a low of 88.64 cents in March of this year, saw some weakness over the past couple of days after we saw an unexpected drop in the employment data this week. Statistics Canada released their April employment report showing a decline of 28,900 jobs in addition to a decline in the labour participation rate.

This could be expected to give the governor of the Bank of Canada the ammunition he needs to remain very accommodative in his monetary policy as this most recent jobs report clearly shows that our economy isn’t running at full steam yet. Our unemployment rate remained at the 6.9% level, while the labour force participation rate declined to 66.1%, the lowest it has been since September 2001.

Don Mikolich, executive director of foreign-exchange sales at CIBC, in an interview with Bloomberg today mentioned that “it does suggest a widespread slowness in jobs growth”, and that “with the (currency) market having strengthened so far these past few sessions, it’s not surprising to see a bit of a pullback.” Mikolich has forecast that the loonie will weaken to the 89 cent level by Canada Day before strengthening back towards the 92.5 cent level by year’s end.

Other big news this week is right smack in the middle of the technology world, with Apple bidding nearly $3.2 Billion for Dr. Dre’s Beats Electronics. Music has long been one of the cornerstones of Apple’s business, with its iTunes store and iPod music players that re-ignited the company’s fortunes a decade ago and forever changed how we purchase music

Digital download sales recently fell for the first time ever last year as more people have turned to streaming services to listen to music. With this move Apple is looking to bolster its online music capabilities by giving it ownership of the Beats Music service where subscribers get unlimited access to all of the songs in the service’s catalog. Long gone are the days we would leave our homes to buy a record and now it looks like the age of digital downloads may also be over as we move towards streaming our music.

My only disappointment in this shift to streaming music is that the cool artwork that once accompanied many of the album and CD covers seems to have also gone the way of the dodo bird.

Have a great weekend.

Thank you for your trust.

As always, we welcome any feedback.

The Dekker Hewett Group