The Latest on Stock Markets, Corporate Profits and Cross-Border Pricing

03/04/2013 by Alex Carrick

The Canadian economy in the final three months of 2012 grew 0.6% quarter to quarter annualized, according to Statistics Canada.  Full-year 2012’s year-over-year climb in gross domestic product (GDP) was +1.8%, down from +2.6% in 2011.

More telling with respect to the current economic climate, however, have been the recent month-to-month changes in industry-based GDP. In December, the percentage shift was -0.2%, wiping out most of November’s +0.3%.

Prior to November, from August through October, the average GDP change was 0.0%. In summary, industry-based GDP growth over the last five months has been barely positive.

In the U.S., Q4’s GDP change versus Q3 was recently revised by the Bureau of Economic Analysis (BEA) from -0.1% to +0.1%. There were exceptional circumstances holding back the U.S. economy in the final quarter of last year, including the largest drop in defense spending since the Vietnam War. A cloud of uncertainty thrown up by the looming fiscal cliff also hurt. Thankfully, it was averted at the last second.

A strong housing sector will help to drive the U.S. economy forward in 2013, but there are still obstacles to be overcome, most of them artificially created in Washington.

The return to higher payroll deductions (from 4.2% to 6.2%) to pay for social security is an effective tax increase. And across the board spending cuts under “sequestration” threaten federal government jobs in many key areas. Cuts to employment in departments overseeing homeland security, border patrols and airline transport will both lower incomes and cause delays in cargo traffic and business and tourism travel.

All of the foregoing notwithstanding, the major stock markets in North America have been continuing to perform with amazing vitality.

Investors know that the U.S. economy remains the best hope for the world economy. It also helps that one key alternative source of investment income (e.g., bonds) continues to offer such low returns. The U.S. federal funds rate will stay near zero well into 2014 at least. 

The three major American indices – the DJI, S&P 500 and NASDAQ – all recorded their 52-week highs in February 2013. For the TSX, the latest 12-month summit was only a couple of days earlier, on January 29th of this year.

Versus their 52-week lows, all four indices have achieved double-digit percentage increases, ranging from a bottom of +13.7% for the TSX to a top of +19.6% for the S&P 500.  

The DJI has reached a new all-time high. The S&P 500 is virtually level with two previous twin- peaks recorded in August 2000 and October 2007.

NASDAQ has now exceeded any level since its dramatic “dot.com” spike that culminated in February 2000. Only the TSX continues to fall short (by -13%) of what it once achieved in May 2008.

In the fall of 2008 near the outset of the recession, Canada’s Prime Minister Stephen Harper was the butt of many jokes when he said it was a good time to buy stocks. It’s turned out he wasn’t so balmy after all. In fact, the case can be made for our Prime Minister being one of the all-time great investment advisors.

While stocks did continue to decline for another four months after October 2008, they hit rock bottom early the next year. The return on the major indices since then has been astonishing.

February 2009 was the most recent trough for all four indices. Versus exactly four years ago, the appreciations have been as follows: +129% for NASDAQ; +106% for the S&P 500; +99% for the DJI; and even +58% for the TSX.

Toronto’s equity prices have been restrained by weakness in the resource sector, where most commodity prices remain below their previous “glory days”.

Since their October 2008 closings, which was when Mr. Harper offered his opinion, NASDAQ has risen 84%; the S&P 500, +54%; the DJI, +51%; and the TSX, +31%.

Only the TSX has delivered a return over the last four-and-a-half years that may have only slightly beaten or matched some other relatively safe investments. The American indices have performed more than commendably. But Mr. Harper is the leader of this country, not the U.S. Surely he wasn’t thinking of American equities ahead of Canadian when he made his pronouncement. In other words, he’s still vulnerable to some teasing.

The latest data on profits from Statistics Canada casts light on the thornier path taken by the TSX. The following percentage changes are for “operating” profits or losses (i.e., operating revenue minus operating costs). They don’t include taxes or the myriad of extraordinary items (write-offs, etc.) that muddy the waters in “net profits”, although the case can be made that firms’ investment decisions are more closely aligned to the after-tax money available to them.

Canada’s total industry “operating profits” number in 2012, at $71.8 billion, was barely positive (+0.8%) year over year. In 2011, the comparable figure was +10.3%; in 2010, a robust +28.2%; and in the recession year of 2009, a not-surprising -27.9%.

Confirming the rough year experienced by the resources sector in 2012, operating profits in oil and gas extraction at $1.8 billion were -52.2% versus 2011. In mining, at an almost equal $1.9 billion, they were -25.3%.

Operating profits in the manufacturing sector dropped 9.0% but were quite high at $12.7 billion last year. Firms in “depository credit intermediation” (i.e., the banks) recorded operating profits of $9.9 billion in 2012, up 15.9% versus 2011. Firms in retail trade earned operating profits of $4.0 billion in 2012, virtually the same as in 2011. 

Retail sector profits in the period ahead may come under strain from an unexpected source. An increasingly vocal chorus has been asking why – given that the Canadian dollar has been close to parity with the greenback for several years – prices in Canada for many of the same goods (often sold by the same company) remain higher than in the U.S.

Among the factors often cited are higher tariffs for offshore imports; a somewhat elevated labour cost structure; more difficult transportation logistics over vast distances; fewer economies of scale; and a smaller pool of competitors. But our retail scene is undergoing a transformation.

More American shopkeepers are setting their sights on revenue potential north of the border. As plans become reality, they’re adjusting their pricing strategy. When the purveyor of premium-quality clothing lines, J Crew, set up shop here it was vociferously attacked for its cross-border price differential. The bad publicity led to a subsequent downwards adjustment.

San Francisco-based Williams-Sonoma (owner of the Pottery Barn and other sales brands) has just announced that it will keep its prices in Canada the same as in the U.S., except for big-ticket items that will require extra transportation charges from production sources across the border.

Target is about to open 100-plus outlets in Canada and has indicated it will strive for competitive pricing. Other U.S. retail newcomers include: Marshalls, with TJ Maxx outlets that are similar to Winners; Seattle-base Nordstrom, tackling the Calgary market first and then branching out to Vancouver, Toronto and Ottawa; and Bloomingdales, which is in talks with Hudson’s Bay to adopt the store-within-a-store concept.

Lower prices are good for customers. They provide one more reason for Canadians to be pleased the loonie has moved up from 63-cents U.S. in 2002 to mostly near parity today.

As for individual shopkeepers, they’ll benefit if sales traffic increases. But they won’t all come out ahead. Lower prices will put more strain on most retailers to realize profit projections.
Stock exchanges - performances of key indices - February 28, 2013
INDEX 52-WEEK LOW 52-WEEK HIGH YEAR AGO
(FEB 29, 2012)
MONTH AGO
(JAN 31, 2013)
Latest Month-end Closing Prices
(FEB 28, 2013
  PER CENT CHANGE,
LATEST VERSUS
52-WEEK LOW 52-WEEK HIGH YEAR AGO MONTH AGO
Dow Jones Industrials
NYSE (^dji)
Jun 4 12 12,035 Feb 28 13 14,149 12,952 13,861 14,054 16.8% -0.7% 8.5% 1.4%

S & P 500
NYSE (^gspc)

Jun 4 12
1,267
Feb 20 13 1,531 1,366 1,498 1,515 19.6% -1.0% 10.9% 1.1%
NASDAQ
(^ixic)
Jun 4 12
2,727
Feb 19 13 3,214 2,967 3,142 3,160 15.9% -1.7% 6.5% 0.6%
S & P/TSX Composite
TSX (^gsptse)
May 18 12 11,281 Jan 29 13 12,831 12,644 12,685 12,822 13.7% -0.1% 1.4% 1.1%
Sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Table: Reed Construction Data – CanaData.
Latest-year performances of key stock market indices
Latest-year performances of key stock market indices
*Each month's closing figure versus the February 29, 2012 closing figure for the index.
The Key Stock Market Indices are:
1) New York Stock Exchange - Dow-Jones Industrials (30);
2) New York Stock Exchange - Standard and Poor's (S & P) (500);
3) National Association of Securities Dealers Automated Quotations - NASDAQ Composite Index;
4) Toronto Stock Exchange - S & P/TSX Composite.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: Reed Construction Data – CanaData.
Performances of key stock market indices since most recent trough
Performances of key stock market indices since most recent trough
*Each month's closing figure versus the February, 2009 closing figure for the index. February 2009 was the most recent trough for all 4 indices.
The Key Stock Market Indices are:
1) New York Stock Exchange - Dow-Jones Industrials (30);
2) New York Stock Exchange - Standard and Poor's (S & P) (500);
3) National Association of Securities Dealers Automated Quotations - NASDAQ Composite Index;
4) Toronto Stock Exchange - S & P/TSX Composite.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: Reed Construction Data – CanaData.
S & P/TSX Composite
Toronto Stock Exchange
S & P/TSX Composite
New York Stock Exchange - Dow-Jones Industrials (30)
New York Stock Exchange - Dow-Jones Industrials (30)
New York Stock Exchange - Standard and Poor's (30)
New York Stock Exchange - Standard and Poor's (30)
NASDAQ Composite
(National Association of Securities Dealers Automated Quotations)
NASDAQ Composite
The charts show month-end closing figures.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Charts: Reed Construction Data – CanaData.