Decoupling from U.S. economy evident in momentum of resources sector

    TORONTO, March 5 /CNW/ - CIBC (CM: TSX; NYSE) - Whether the U.S. economy
is in recession or not, there is enough evidence of market decoupling that
Canadian investors need not take an entirely defensive posture, notes a new
CIBC World Markets report.
    "There is more than sufficient momentum in both energy and materials
stocks to warrant stock market exposure in the here and now," says Jeff Rubin,
Chief Strategist and Chief Economist at CIBC World Markets in his monthly
Canadian Portfolio Strategy Outlook report.
    "The chasm between globally driven resource stocks and housing-tainted
financial stocks grows wider by the month," he notes, pointing to the
energy-laden TSX pulling well ahead of the S&P 500. "Within the TSX, energy
and financial stocks continue to head in opposite directions. We are betting
that those trends will persist."
    As a result, Mr. Rubin is raising his oil price forecast by US$5 per
barrel this year to an annual average of US$100, and next year's prices to
US$110. And perhaps more important, he says, is natural gas which he forecasts
to hit US$9.50 per Mn BTUs this year and US$11 next year.
    "Oil prices seem now firmly entrenched in triple-digit territory, a level
from which they are unlikely to retreat, and natural gas prices have rallied
as strong utility demand has eaten into once-bloated U.S. storage levels. A
tandem of US$110 crude oil next year and US$11 natural gas prices will support
solid earnings gains while at the same time spurring increasing M&A activity
in the sector," says Mr. Rubin.
    Mr. Rubin's optimism is reflected in a one percentage point weighting
increase in his model portfolio's already "overweight" position in energy
stocks. That increase is funded by an equal cut in financials, split evenly
between banks and non-banks. The move out of financials follows further
declines in U.S. housing prices, and likely increases in mortgage default
rates.
    Consistent with his "global versus U.S. strategy," Mr. Rubin remains
"overweight" in materials stocks, including the base metals and gold
components. "The U.S. economy has not contributed to demand growth for most
major metals including aluminum, copper, zinc and nickel, while the Fed's
ultimate pursuit of a sub-2 per cent federal funds rate will weaken the U.S.
dollar and send gold prices to US$1,100 per ounce."
    Mr. Rubin's portfolio remains "underweight" in both the consumer
discretionary and telecom sectors, both of which are underperforming the broad
index. Also "underweight" are industrial stocks, which he says are "vulnerable
both to Canadian dollar-related stresses and a further deterioration in broad
US economic conditions, although rail stocks will benefit to some extent from
their high levels of efficiency against other forms of transport in a world of
triple digit oil prices."
    He remains "overweight" in bonds, expecting another 75 basis point
interest rate cut from the Bank of Canada in response to the U.S. Federal
Reserve Board's recent rate cuts and a visibly weakening Canadian
manufacturing sector. While the cash weighting in his benchmark has risen this
month at the expense of stocks, he continues to be underweight cash in his
portfolio.
    Mr. Rubin has a year-end target of 14,500 for the TSX Composite that
builds in some sideways, or possibly even modest down movements in the market
over the next quarter. His longer term TSX target of 16,200 for year-end 2009
anticipates a stabilization of the U.S. housing market by the first quarter of
next year.

    The complete CIBC World Markets report is available at:
    http://research.cibcwm.com/economic_public/download/psmar08.pdf

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