Irwin Michael, portfolio manager at ABC Funds, says he’s bullish on stocks for the next 12 months, particularly as M&A activity consolidates the supply of stocks.

“Although the North American stock markets closed out the month of October on an extremely weak note with the TSX having declined 5.65%, the Dow Jones -1.22% and the Russell 2000 -1.75%, the onset of November with its proverbial Santa Claus rally is providing for significantly higher stock prices and improving investor psychology,” Michael wrote in this lastest market commentary.

Michael says that the major North American economic and political problems remain, including the twin U.S. deficits, the depressed U.S. dollar, Iraq war quagmire and Mid-East uncertainty, fragile Canadian federal government with a pending general election, increasing separatist sentiment in Alberta and Quebec, and rising interest rates. “Yet in spite of all these well known negative factors, both the Canadian and U.S. stock markets have continued to climb a formidable wall of worry to establish new 12 month trading highs,” he observed.

“Either the stock markets are impervious to these issues or else they are largely factored into stock prices,” Michael wrote. “We believe it is the latter case, and as such, this opinion is the backbone of our generally bullish equity market outlook for the next 12 months.”

Michael suggests that the Canadian stock market is reacting positively to reduced supply and increasing demand for Canadian equities. “The principal cause, in our opinion, is due to the growing trend of mergers, acquisitions and takeovers such as Dofasco, Placer-Dome, Falconbridge Nickel, Vincor and the Hudson Bay Company as well as a spate of junior oil and gas and mining companies,” he argued. “Clearly, these takeovers are characteristic of an undervalued market rather than an overheated one as astute acquisitive corporations use hard cash to purchase relatively undervalued Canadian companies at takeover premiums of 25-50%.”

“In summation, we expect these trends to continue into 2006 as supply and demand, improving corporate earnings, a satisfactory economic growth outlook and growing investor optimism lead to firmer equity prices,”’ he concluded.