With the broader North American markets off to a good start in 2012, some may be thinking of the saying is, “as January goes, so goes the rest of the year.”

I am not so sure I agree with this, but it is nice to see such a good start after the difficult and volatile ride investors experienced last year. However, even with the good start, there are still a few questions I have about the market for 2012.

The first question I have pertains to U.S. banks. We have seen the American banking sector move significantly higher over the past two weeks, and in general taking the country's markets with them. I have been saying for quite some time now that I did not believe U.S. stock markets could move higher without the participation of the banking sector. Thus, why do the regulators continue to propose policies that may limit the success of the country's largest financial institutions? Why does government in the United States continue to clamp down on the banking sector, recommending policies that may limit their growth? We clearly see how valuable these companies are to the economy, which in turn affects investors everywhere. In my opinion, I believe someone should take a look at what all these regulations are doing to the banks and their performance and adjust these rules accordingly for these banks to thrive and prosper not only for their betterment, but for all investors in the United States and around the world.

The second question I have has to do with the ratings agencies and how and when they change ratings. Last summer the S&P lowered the credit rating of the United States, removing its AAA status. Yet not only did this fail to have any negative effect on the U.S. bond market, the opposite effect happened. Investors continued to flock to the safety of the U.S. bond and treasury markets, lowering the yield on a 10-year bond to below two per cent. Usually, when you have a country’s rating lowered, the bond yields move higher. However in this case, the yields moved significantly lower, totally ignoring the S&P’s downgrade.

 

Over the previous year, rating agencies have lowered the ratings on a handful of European countries that have been struggling with their debt issues. In this case, the downgrades did have a negative effect on the bond market of those countries.

Since the agencies usually explain why the rating of that country has gone down, my concern is these ratings agencies are trying to help these countries by explaining what they need to do to obtain a better rating by downgrading them, which only makes it harder for that country to get back on good standing. The downgrade itself makes things a lot worse and the issue usually spirals downward from there. It ends up costing more for the country that was downgraded to borrow money, which is a huge burden.

In my opinion, these ratings agencies in many instances are too late with their downgrades, issuing their statements well after the crisis is known. Perhaps their role would be much more accepted if they notified the country and the general public before a crisis actually hit instead of reacting negatively after we know the issues at hand. It’s closing the barn door after all the animals have escaped.

Lastly will our country finally realize what, in my opinion, we need to get more productive as a nation? I feel we need to become a nation or innovators and builders as we once were, rather than a nation that just exports commodities, minerals and oil. I believe it takes a lot more people in a factory on the assembly lines to build something than it does to drill for oil. In my opinion, Canada has taken a big hit to a manufacturing sector (especially in Ontario) that once employed many people. Ontario was once the hub for manufacturing in this country and now its production has been significantly reduced. I believe, if we want to reduce unemployment (create jobs) and compete globally in terms of innovation and technology, our government needs to create policy to stimulate the manufacturing sector.

Overall, I think 2012 will be a good year for investor returns. I think if the major U.S. banks perform well, the ratings agencies try to get ahead of the market rather than react to it, and if Canada can begin to stimulate growth in areas other than mining and energy, this will only enhance North American growth this year and in the years to come.

If you have any questions regarding the above article or are looking
for an investment advisor to help you with your portfolio, please visit
my website at www.investmentadvisorgta.com. I will be glad to speak with you.


Allan Small is a Senior Investment Advisor with DWM Securities Inc., a
DundeeWealth Inc. Company. This is not an official publication of DWM
Securities Inc. The views expressed are those of the author alone and
are not necessarily those of DWM Securities Inc.

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