03 October 2006

CIBC Recommends Banks & Bonds Over Energy

The Globe and Mail, Tavia Grant, 3 October 2006

Jeffrey Rubin, one of the most bullish voices on Bay Street, has changed tack and now recommends banks and bonds over energy as a slowing U.S. economy puts the brakes on consumer spending.

That drop-off in demand will likely prompt interest-rate cuts on both sides of the border, Canadian Imperial Bank of Commerce chief strategist Mr. Rubin said in a note late Monday. He expects the Bank of Canada will slash its key lending rate by 1 percentage point over the next year.

As the bank loads up on financial stocks and bonds, it is “significantly” cutting its exposure to natural gas shares by slashing the overweight portion of its energy position by half.

“Given the recent string of record warm winters in North America, we do not want to be making what is essentially a weather bet,” said Mr. Rubin, who is also the bank's chief economist.

The stance is a bit of a reversal for Mr. Rubin, who earlier this year predicted record natural gas prices in 2006 and oil prices at $78 (U.S.) a barrel. Natural gas futures have instead lost roughly two-thirds of their value from their record in December while oil prices are currently trading at below $60 a barrel.

Mr. Rubin suggested last month that it might be the time to switch into bonds and protect stock portfolios from an increasingly vulnerable U.S. economy. It's only now, however, that the bank is cutting its energy exposure.

Broadly speaking, “we are continuing to orient our portfolio toward a falling interest rate environment, in both our overall asset allocation and sector selections within the TSX and trust market,” Mr. Rubin said.

The Canadian bank has made other changes to its portfolio recommendations, including:

– adding another 2 percentage points of weighting to bonds from stocks, while remaining overweight in its bond portfolio

– adding 3 percentage points of weighting to financial stocks, as well as 1.5 points to telecoms and another 0.5 percentage point to the utilities sector, which tends to pay hefty dividends

– cutting income-trust exposure to 8 per cent from 10 per cent and trimming 6 percentage points from energy trusts weighting on the expectations natural-gas prices will fall

To offset the changes and help rebalance portfolios, the bank suggests now is the time to move into real-estate investment trusts and the power and pipe sectors.

Added together, the moves mean CIBC will now be 4 percentage points overweight in the financial services sector, rivalling the previous overweight position in energy stocks.

CIBC did note, however, that it remains “fundamentally bullish” on both oil and uranium prices and expects to see records in both commodities in the next year.