Econowatch: Twitter’s IPO is strong, while slow economic recovery continues

Twitter’s IPO felt more like 2007 than 2013. Eager investors caused the stock to double in value—to nearly $50 from $26—in the first few minutes of trading last week. Few stopped to question whether the money-losing social networking service deserved a price-to-sales ratio far exceeding that of Facebook and LinkedIn—both of which actually turn a profit.

Meanwhile, back in the real world, the rest of the U.S. economy continues to grapple with a molasses-like recovery. Unemployment ticked up to 7.3 per cent in the third quarter, wage growth remained stagnant and an unexpected 2.8 per cent bump in GDP was credited mostly to swelling inventories as retailers prepared for the holiday season. (Canada recently recorded a non-existent 0.3 per cent gain in GDP in August.) The market highs and economic lows seem incongruous, but that’s exactly the type of distortion one would expect after five years of emergency interest rates.

The stock market’s tear since 2009—one day before Twitter’s blockbuster IPO, the Dow Jones Industrial Average hit another all-time record of 15,746 points—has been made possible by deep corporate cost-cutting during the recession and investors who believe that outsized performances will continue as the economy recovers. But money is also being funnelled into equities because low interest rates mean so-called safe investments such as government bonds offer returns that don’t even cover inflation. A similar phenomenon is underway in the housing market: Cheap mortgages have pushed prices into the stratosphere in many Canadian cities, while some economists are warning of a new bubble developing in the U.S.

Rebalancing the economic order is proving difficult. The Bank of Canada had been forecasting rate hikes for nearly two years, only to have new governor Stephen Poloz open the door to further cuts. Similarly, the U.S. Fed continues to debate whether beginning to withdraw, or taper, monetary stimulus will send the economy into another tailspin. Against such a precarious backdrop, one can hardly blame investors for thinking Twitter, whose shares have already fallen 16 per cent from that initial spike, is as safe a place as any to park their money.

Good News

Slow and steady . . . is better than nothing. Canada gained 13,200 jobs last month, and the unemployment rate held at 6.9 per cent (near a five-year low). Full-time employment was up and part-time work was down.

Talk about rolling back prices. A glitch on Wal-Mart’s U.S. website last week saw it offer some lucky shoppers deals like $600 computer monitors for just $9.

TransCanada doesn’t appear to be suffering despite the controversy over its proposed Keystone XL pipeline. It posted a quarterly profit of $481 million last week.

What global economic slump? A new Credit Suisse report says that, within two generations, billionaires will be commonplace—and there will be 11 trillionaires in the world, compared to zero today.

Air Canada’s stock price continues to soar, up 220 per cent so far this year to just over $6. The airline reported record quarterly results last week, with revenue and traffic both up.

The stock market bull run continues. The Dow Jones Industrial Average hit a record high last week and the S&P 500 drew within a point of its all-time high.

More evidence the Chinese economy—and global demand for its goods—is back: Exports jumped 5.6 per cent in October from a year earlier following a decline in September.

Bad News

U.S. consumers are still feeling cautious about making big purchases: Overall credit-card debt fell by more than $8 billion in the past four months.

Roll credits. The last 300 Blockbuster stores in the U.S. will be closed, said Dish Network, which owns the once-dominant video-rental chain.

Sales in the Toronto condo market, the epicentre of the Canadian housing bubble, keep falling, down eight per cent in the third quarter.

Russia downgraded its economic forecast for the next two decades, citing an end to growth fuelled by rising oil prices.

Lululemon founder Chip Wilson mastered the foot-in-mouth position last week when he said that the firm’s yoga pants won’t “work” for all women’s bodies. Say goodbye to a large segment of the U.S. market.

If only they could print money: Torstar, which owns the Toronto Star, reported a quarterly loss of $70.8 million last week. Meanwhile, the satirical newspaper The Onion said it is cancelling its print edition.

The European Central Bank unexpectedly cut its main interest rate to a new low of 0.25 per cent as it struggles to combat dangerously low inflation.

Stock Signs

• Tesla’s stock has taken a beating following a string of accidents involving its electric Model S sedan that have resulted in battery-pack fires. Its share price is down 20 per cent in the last month. Flaming hot rods are cool. Electric cars, less so.
• The $88-million pay package offered to incoming interim BlackBerry CEO John Chen is an eye-popper. Most of it—$85 million worth of convertible share units—can only be collected after five years, giving Chen ample incentive to make sure BlackBerry is still around in 2018.
• Encana’s decision to lay off 20 per cent of its workforce and slash its dividend resulted in a four per cent bump in its share price, to over $19. Still, it’s a drop in the bucket compared to the 15 per cent stock slump the Calgary-based company has suffered this year amid weak natural gas prices.
• Canadian Tire was supposed to suffer following Target’s Canadian arrival earlier this year. Instead, the chain known for everything from spark plugs to sleeping bags posted an 11 per cent increase in third-quarter profit and raised its annual dividend.

Stock Signs brought to you by Questrade