North American Weekly News

Week ended 27 January 2011

Major North American equity market indices lost ground late in the week in response to the release of relatively disappointing economic data, ending the period with mixed performance. The US Commerce Department reported that the nation’s gross domestic product (GDP) rose by an annualized rate of 2.8% in the fourth quarter of 2011. While the pace of growth exceeded the 1.8% level for the third quarter, the rate was generally lower than forecast. The acceleration in GDP growth for the last three months of the year was attributed mainly to increases in private inventory investment and consumer spending. Conversely, there were downturns in nonresidential fixed investment and federal government spending, as well as a rise in imports. On the monetary policy-making front, the US Federal Reserve (Fed) announced its intention to keep the benchmark federal funds rate at or near zero at least through late 2014. The Fed cited the continued slow pace of economic growth, along with relatively tame inflation, for which the central bank maintains a target rate of 2%.

There also was some notable global economic news during the week, which could have an ancillary impact on the US economy. The central bank of Brazil indicated that it may reduce its benchmark interest rate below 10% in an effort to stimulate economic growth after a prolonged period of monetary tightening. Brazil is a significant driver of international growth for US-domiciled companies, so a boost in both business and consumer spending spurred by lower credit costs in the region may ultimately benefit those US firms. Japan recorded its first annual trade gap since 1980, with a deficit of ¥2.5 trillion (roughly US$32 billion) for 2011. The shortfall was due primarily to the closings of several nuclear plants following the massive earthquake in March, as well as Nissan Motor Company’s decision to relocate some of its production sites to Thailand in an effort to reduce costs. The ever-present European fiscal crisis also hindered the global markets earlier in the week, as investors became concerned about stalled negotiations between the government of Greece and private investors holding Greek sovereign debt. The dispute was centered on the interest rate the government should pay on new bond issues.

The quarterly earnings season was in full swing during the week. Among our large-cap holdings, relatively weak demand hindered the fourth-quarter 2011 results for Potash Corp. of Saskatchewan, a maker of fertilizer and related industrial and feed products. The company reported that potash sales to distributors declined versus the same period in 2010, and nitrogen and phosphate prices fell amid the lower demand levels. Additionally, management tempered its business outlook for the 2012 fiscal year, but we remain optimistic regarding the company’s long-term prospects given multi-year secular tailwinds in agriculture. IT services provider EMC Corp. saw year-over-year revenue growth for the fourth quarter, spurred mainly by market share gains in the mid-size companies market and strength in its VMWare subsidiary, in which it has an 80% stake. The company also benefited from an increase in gross margins due to both business volume and mix. Management offered a relatively positive business outlook for the 2012 fiscal year.

Regarding the small-cap companies that we follow, auto repair chain operator Monro Muffler Brake’s third-quarter 2012 earnings were up compared to the same period a year earlier. The company benefited from an overall increase in sales, along with relatively higher operating margins due to lower expenses. These positive factors more than offset virtually flat year-over-year same-store sales growth for the quarter. Enterprise information solutions provider Micros Systems posted strong year-over-year revenue growth for the second quarter of its 2012 fiscal year. A jump in hardware sales, most notably in international markets, was the primary contributor to the top-line gains. However, Micros’ margins were virtually flat versus the same period a year earlier, hampered by higher operating expenses, which the company indicated it will seek to control going forward.