Bombardier and AnorMed in the news:

Bombardier (BBD.B-T) reported second quarter earnings of $58 million or 3 cents per share well down from the $117 million or 6 cents per share reported last year.

The plane and train manufacturer reported a slow quarter in its regional jets with only 26 planes delivered this quarter as compared to 39 last year. The aerospace division has seen margins decline due to competition mainly from Brazilian plane manufacturer Embraer SA. The market for regional jets has not recovered from the 9/11 attacks and Bombardier is now only producing 7 or 8 planes a month. Bombardier has been able to grow the business jet segment but will encounter more competition in this area from Embraer as well.

The company has not been able to reduce costs fast enough to off set the decline in orders and until it does is not likely to see earnings improve. There is no reason to own this company and there won’t be until the regional jet market picks up and Bombardier is able to manage costs more effectively.

Canadian biotech firm AnorMed Inc (AOM-T) is trying to fend off an unwanted takeover attempt by Genzyme Corp (GENZ-Q). The proposed $350 million offer would see AnorMed shareholders receive $8.55 per share. The news has pushed AnorMed shares up by almost 100% today as the shares closed at $10.99 up $5.44.

AnorMed is currently in stage III clinical trials with Mozobil a drug developed for cancer patients undergoing stem cell transplants. The company is also in the late stages of development of a promising HIV drug.

AnorMed management does not believe the current offer fully reflects potential shareholder value of the company which they believe should be valued in the $12 - $13 range. AnorMed management is not opposed to a takeover just not at this price.

AOM may be an interesting speculation now that it is in play, there is an opportunity to participate in a potential take over bidding war with limited down side risk.

The second quarter US GDP came in at 2.9%, slightly lower than most had expected indicating that the US economy is not as strong as first believed. This information should confirm to the Federal Reserve that their decision to hold interest rates was correct. If the payroll numbers on Friday are lower than forecast coming in any less than 100,000 and investors should expect the Fed to remain on hold and we may see a change in bias as well.

Stats Canada reported that Canadian merchandise trade surplus declined by $4 billion to $4.2 billion in the second quarter. The decline was mainly attributed to a decline in the exports of goods while imports remain strong.

The strength in the Canadian dollar has made imported goods much more attractive but has at the same time made it much more difficult for exporters to compete in the global market.

The Bank of Canada will have to be very cautious regarding any change in interest rates which would make the Canadian dollar more attractive to foreign investors creating the possibility of the trade surplus becoming a trade deficit.

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Banks and Consumers:

The Bank of Nova Scotia reported third quarter earnings were up 19% over the same quarter last year. The quarterly earnings came in at $928million or 93 cents per share up from 77 cents per share in 2005.

The Banks Latin American and Caribbean operations showed excellent improvement and were the main driver for increased earnings, while the Canadian operations performed about the same as last year.

The Conference Boards consumer confidence index declined materially in July falling from 107.0 to 99.6, economists had expected a decline to 102.5. Over the past ten years there has been a 66% correlation between the level of consumer confidence and consumer spending.

The recent slow down in the real estate market along with higher energy prices are likely the main reason for the sharp decline in confidence, if this trend continues it does not bode well for the US economy going forward.

The Federal Reserve will be watching the jobs number closely when it is released on Friday a weak report will tend to confirm the other data released over the past month. The data has tended to indicate that the US economy is slowing, possibly more dramatically that first anticipated.

Gold and oil both fell today as there appears to be a sigh of relief that the Gulf coast will not be hit by a hurricane and that maybe Iran will be reasonable regarding their uranium enrichment program.

Only time will tell if these events are not going to be threats in the future.

The Canadian dollar continues to hold up around the 90 cent US level and the longer this holds the more likely it becomes that the Can$ goes a lot higher. It will be interesting to see if the Can$ will continue this move gaining on most currencies including the Euro and the Yen.

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Week in review:

Bank earnings have been coming in well ahead of last year and in some cases like the TD Bank dramatically higher than those in the third quarter of 2005.

The US housing market is slowing much faster than anticipated with both new and existing homes sales falling for the fourth month in a row. The only bright spot for home owners is that existing house prices did move a little bit higher in July but the pace of change was only 0.5% as the median price for single family homes moving up to $231,200 in July from $230,100 in June.

More mergers in the Canadian market, Domtar and Weyerhaeuser merge their free sheet paper divisions in a $3.3 billion deal. EuroZinc and Lundin agree to merge creating a company with a combined market capitalization of over $3 billion.

The Canadian dollar much stronger closing at 90.13 cents US as investors come to a consensus that US interest rates are not going higher.

Oil and natural gas higher on fears that tropical storm #5 heading for the Gulf Coast will become a hurricane causing damage to this region.

Nickel on the London Metals Exchange touches all time highs of almost $35,000 a tonne ($15.90 a pound) as inventory levels fall to 6400 tonnes which is around a 1 day supply.

It should be another interesting week starting Monday.

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Housing market gets more bad news:

US existing homes sales were down a dramatic 4.1% in July coming in at a two and half year low of only 6.33 million on an annualized basis. This is the fourth month in a row of declining home sales and was well below the consensus of 6.55 million. The housing market received more bad news as the inventory of homes for sale in July rose 3.2% to 3.86 million or a 39.9% year over year increase. The only bright spot was that median sale prices were up marginally to $231,200 a 0.5% increase over June.

It seems that the Federal Reserve is seeing an impact from the interest rate hikes of the past year or so. If this trend in home sales continues it will not be too long before home prices actually start to decline as it becomes a buyers market. When home prices start to decline the consumer will see their spending power reduced and that is not going to be good for economic growth.

Big merger news in the forestry sector as Domtar and Weyerhaeuser announce a merger of some their paper divisions. The $3.3 billion deal will create the largest free-sheet paper producer in North America. Free-sheet papers are products such as those used in copiers and printers. The new company will retain the Domtar name and will be 55% owned by Weyerhaeuser shareholders and 45% by the current Domtar shareholders. The merger offers Domtar an opportunity to move into the global market as one of the largest free-sheet producers in the world.

Interesting news on global trade as Japan suggests an Asian free trade zone that would include Japan, China, India, Australia, South Korea, New Zealand and the current 10 member Association of Southeast Asian Nations (ASEAN).

This is just in the very early discussion stages but it could create the largest free trade zone in the world that would function along similar lines to the European Community (EC) and The North American Free Trade Agreement (NAFTA). The implications for growth in Asia are huge as Asia will be in a much better position to grow regardless of access to other markets such as the US and Europe.

It will be very interesting to watch and see if this idea gets off the ground.


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Another Merger Monday:

The merger activity in the Canadian mining sector continues as Eurozinc Mining Corp has agreed to merge with Lundin Mining Corp. The merger will create a global base metal producer with operations in Portugal, Sweden and Ireland. The combined company will have a market capitalization of close to $3 billion and will produce 450 million pounds of zinc, 200 million pounds of copper, 175 million pounds of lead and 6 million ounces of silver annually.

This merger is another in a series of mergers in the base metal mining sector and it will not be the last as companies try to grow by acquisition in an effort to remain globally competitive.

This week and next the banking sector will be releasing earnings and it appears that it will be another excellent quarter for the Canadian banks. It is expected that loan growth will be enough to offset a slower investment banking segment. The first to report will be the Bank of Montreal on Tuesday and then the Royal Bank on Friday. The Bank of Nova Scotia, TD Bank and the CIBC will all report next week.

The financial services sector has been a very stabilizing influence on the Canadian market this year as investors have viewed this sector as a safe haven during high volatility. Expect to see more interest in this sector as the commodity markets are likely to remain quite volatile.

Stats Canada will be releasing CPI inflation data Tuesday and the Bank of Canada is expecting that the 1.0% reduction in the Goods and Services tax (GST) that came into effect on July 1st will reduce inflation by 0.5% on both the CPI and Core CPI. The forecast now is for the CPI to decline by 0.3% for July bringing the annual rate down to 2.0%.

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Mining Merger News:

It looks as though the taker bidding war for Inco is coming to an end. The final bid from Teck Cominco is not going to fly as Teck has been unable to complete a stock issue designed to raise enough cash to compete with the all cash offer by Brazilian company CVRD.

It appears that investors have learned a lesson from the takeover activity that occurred in the late 1990’s when companies were able to use their high priced stock to purchase other companies high priced shares. In the end when the air came out of the bubble these companies suffered most dramatically due to the over valuation built in to the share price from over paying for acquisitions.

Investors who hold Inco should be selling into the market as there does not appear to be much upside from this point. Take the cash and look at some of the smaller base metal companies such as Aur Resources (AUR) and LionOre International (LIM). This segment of the market has much more potential for upside on a fundamental basis and will be the next area of consolidation in the mining sector.

The technology sector is receiving a steady stream of less than sterling news. The recent earnings announcement from Hewlett Packard was very encouraging but the news from Dell was just the opposite. These two companies are competing for the same market and it appears that the market is maturing and not growing as fast as expected. The situation with Dell and HP is that they are fighting for market share and HP has been able to offer better prices due to the ability to offer a variety of chips in their products giving HP more flexibility.

Dell has just announced that they will be offering AMD chips in some of their new models this should allow dell more flexibility in pricing. The downside to the whole segment is that over capacity is leading to very narrow margins and the margins continue to decline. It will be very interesting to see how either of these companies can overcome the margin squeeze over the longer term.

I would stay away from this sector the economy is slowing and the upside from here appears limited.

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