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Writedowns not only bank-stock worry

It's a waiting game now for stock market investors.

"The best thing you know now is that you can look back and say we have been in a bear market for one year," said Michael Smedley, chief portfolio manager for Canadian General Investments Ltd. C, a closed-end fund. "I think we are dragging along the bottom."

Michael Smedley, chief portfolio manager for closed-end fund Canadian General Investments Ltd. suspects the year-long bear market is dragging along the bottom. But with an eye on both Canadian and global equities, he says determining just where investors stand is a tough task. "In all cases it is "difficult to assess."

For Canadian investors this week will be all about bank's third-quarter results. Mr. Smedley says he suspects Canadian banks will fare better than banks in the United States and Europe, where the credit crisis was more severe.

"I feel more comfortable about the Canadian banks than the U.S. and European banks, where the crisis seems to be bigger," Mr. Smedley said.

Even though Canadian General Investments holds only about a 3.5-per-cent weighting in the major banks does not mean it sidestepped the financial sector's weakness. Over all, financials account for about 19 per cent of the fund's portfolio, but the sector includes real estate companies such as Brookfield Properties Corp. along with investment management companies, insurers and stock exchanges. The broadly defined financial group has also been hit, Mr. Smedley said.

The fund's portfolio also remains 40 per cent weighted in resources, which include oil and metals. Mr. Smedley does not expect a continuation of the stunning, broad-based growth of the past, but for steady growth in demand at a time of constrained supplies. That is especially the case in the mining industry, where soaring costs have halted projects, he said. Investors will have to be more targeted in their stock selection, Mr. Smedley said. Although the market seems disenchanted with HudBay Minerals Inc., he continues to like the metals producer.

For Canadian banks, this week will be all about writedowns, but for investors there could be longer-term concerns. "Markets have beaten up on financials over one-time writedowns," said economist Avery Schenfeld at CIBC World Markets Inc. "But the combination of slower credit demand associated with a softer Canadian housing market, and continued pressure on net interest margins, could be a more lasting restraint on share performance."

Funding costs remain an issue for domestic banks. The yield on typical five-year bank paper is about 115 basis points over banker's acceptance rates offered by banks operating in Canada, according to CIBC World Markets. In late 2007, the spread was about 60 points. Banker's acceptances are financial instruments issued by banks in the name of companies borrowing funds. Banks, for a fee, guarantee the the securities. (A basis point is 1/100th of a percentage point.)

Bank of Montreal and Bank of Nova Scotia are to report third-quarter results tomorrow; Canadian Imperial Bank of Commerce on Wednesday; and Royal Bank of Canada, Toronto-Dominion Bank and National Bank of Canada on Thursday.

© 2007 The Globe and Mail. All rights reserved.

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