RE: re; floor set at $6.48 ?TSX plunges most in three years
By DAVID PARKINSON
Wednesday, July 25, 2007
Someone yelled "fire" in the overcrowded global stock market theatre yesterday, triggering a rush for the exits that trampled a lot of investors - and Canadians got stepped on more than most.
Renewed concerns about the U.S. economy's housing and mortgage woes, coupled with corporate profit jitters and general unease over tightening global liquidity, shook global markets out of their happy summer reveries, as leading equity markets throughout Europe and the Americas suffered widespread selling.
New York's S&P 500 index slumped almost 2 per cent, while London's benchmark lost 1.9 per cent and German stocks fell 1.7 per cent.
But those losses paled in comparison with the energy-heavy Canadian market, where the suddenly negative global sentiment was exacerbated by a sharp drop in oil prices. The Toronto Stock Exchange's S&P/TSX composite index tumbled more than 400 points or 2.8 per cent to 14,068.16, its biggest one-day percentage loss in more than three years.
"The market almost seems tired," said David Wolf, strategist at Merrill Lynch Canada. "It just seems to be fatigued that we keep having to deal with the same things over and over."
Bearish outlooks from two major U.S. housing companies, a mortgage provider and a building materials supplier reignited concerns that the U.S. housing slump could linger longer than hoped.
Worries also exist that the housing slump could spill over to the broader U.S. economy. Some disappointing earnings reports and outlooks from the likes of du Pont, Texas Instruments and American Express Co. also served to darken investors' mood.
In addition, nagging worries about shrinking global liquidity returned to the markets, as weakness in the U.S. dollar against the Japanese yen rekindled fears that the yen carry trade - the selling of yen to finance bond purchases in other countries offering higher interest rates, which has been a key source for cash in global financial markets - could start to unwind if the yen moves higher.
Analysts are increasingly seeing a need for a repricing of equity markets to address rising risk, driven by generalized concerns about tightening credit conditions, both for U.S. consumers and in global financial markets, that could sap the markets of the easy money that has driven the mergers and acquisitions market the past few years. Stocks have largely been able to shrug off these worries so far, save for some jitters back in March and, now, the eye-opening selloff of yesterday.
"Equity markets can move against that tide for a while, but eventually they catch up," said Nick Majendie, portfolio strategist at Canaccord Adams in Vancouver.
He predicted that stocks could retreat "10 to 20 per cent" from their recent peaks.
For Canadian stocks, meanwhile, the prospect of a significant pullback in high-flying oil prices adds another risk. The benchmark crude futures contract fell $1.33 (U.S.) to $73.56 a barrel in New York yesterday, its third straight decline, amid growing talk out of the Organization of Petroleum Exporting Countries that the cartel is prepared to increase production to let some air out of ballooning oil prices.
Energy stocks make up 27 per cent of the S&P/TSX composite index, but more than that, the Canadian market has become increasingly seen by global investors as an energy play.
Canadian stocks have been rising along with oil prices all year, and the crude's recent rally above $75 a barrel helped propel the index to a record high, peaking at 14,646.82 in intraday trading last week.
Those gains haven't been dominated by the energy stocks themselves, but have been broad-based - an indication that the entire Canadian market, much like the Canadian dollar, has been attracting investment due to the economic benefits seen for Canada from bullish energy prices.
And just as the entire market has moved upward on the "Canada-as-petromarket" play, the selloff yesterday cut a wide swath through the entire TSX.
Although the energy sector did lead the way down, falling 3.9 per cent and accounting for almost 40 per cent of the S&P/TSX composite's decline, all 10 major industry groups fell, including losses of more than 3 per cent for the industrials, materials and technology sectors.
Base metal stocks, which are part of the materials group, slumped 4.4 per cent.
There's little doubt the TSX had become a correction just looking for an excuse: It had gained 15 per cent since early March, over which time price multiples had jumped to 19 times trailing 12-month earnings from a more reasonable 16 times.
Merrill Lynch's Mr. Wolf noted that the P/E multiples have been on the rise even with commodity prices near their peaks - a time when, traditionally, multiples are near their lows for resource-based stocks because the high prices for their products aren't expected to be sustained over the longer term.
"The fact of the matter is that most of the good news is already priced in, earnings growth is decelerating and there's a lot more downside to P/Es than upside," he said.
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MARKETS
TSX energy index
-3.88%
TSX metals-mining
-4.4%
TSX financials
-1.82%
Cameco Corp.
-7%
Research In Motion
-4.6%
EnCana Corp.
-4.6%