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The Big Picture...
The U.S. index of leading economic indicators rose 0.3% in October, after a 1% improvement in September and a 0.4% move up in August, The Conference Board said. October marked the seventh consecutive month of gain for the forward-looking index. "The data indicate that economic recovery is finally setting in," said Ken Goldstein, an economist with The Conference Board. I mentioned this several months ago, timing will be key as they will likely need to begin withdrawing the stimulus just at the right time, not too early and not too late. Geithner was being roasted by a Congressman yesterday, I was very happy to see him give it right back. These politicians had no idea what was going on, asked stupid questions through the whole thing, and like to act (a year later) as if they had some insight. These were the same people you may recall that voted down the stimulus initially, and then sat there with a "wha' happened" look on their faces...
The Rest of the Story...
The outlook for the two most important non-financial sectors (metals and energy) in Canada remains promising. The potentially strengthening US dollar will not help these areas but that strength does not appear likely to continue going forward. JP Morgan metal strategist, Michael Jansen, raised his price forecast outlook for metals. You can see below that the 2010 outlook for copper is about $2.70 per pound, which is less than the spot price currently of just over $3/lb. JP Morgan's coal analyst, John Bridges, sees upside risk to met coal prices if continue continues to import met coal at its current pace, which is likely if the coal that the Chinese can import can be purchased at an attractive price as compared to its domestic supplies.
Oil prices rose slightly as demand for oil products supported crude prices and we saw a surprising draw on crude and gasoline inventories on Wednesday, outweighing pressure from a stronger U.S. dollar. Investors have scrutinized economic data in recent months for signs of global recovery and a potential rebound in energy demand. Markets expect the Federal Reserve to keep interest rates near zero for some time, and this sentiment has weighed on the dollar and fueled gains in raw materials in recent weeks. Gold prices inched up to touch another record high as inflation worries and economic uncertainties continued to encourage buying in the commodity. My view that the U.S. dollar will remain weak is the primary support that is helping gold stay above $1,130 per ounce. Of course others see gold is seen as a hedge against inflation, (historically it has been a poor hedge but it is what people think, apparently, that is important... not what has been) and of course inflation erodes the value of paper assets. My view on copper has been far more rewarding as copper has almost doubled this year, whereas gold is not even up by half as much. But gold is more exciting to some than copper I guess... you may recall John Lennon saying "will all the people in the cheaper seats clap your hands? All the rest of you, if you'll just rattle your jewelry." (at the Royal Variety Performance, Nov 4, 1963) The International Monetary Fund (IMF) said it sold 2 tons of gold to the central bank of Mauritius at prevailing market prices on November 11th. The report follows news that the IMF sold 200 tons of gold to India early in November, a factor that drove gold prices to record highs above $1,100.
There is an interesting contrast between the jobs picture (the weekly email contains charts that are difficult to get in here) and the manufacturing picture. You can see that the job losses are slowing and we have mentioned previously that productivity levels are the highest they have been since the 1960's. So there is a story of recovery in the US and abroad. The housing market still continues to weigh on sentiment as mortgage delinquency in the US continues to be troublesome, and will likely continue to do so well into 2010. You will of course, hear the media start to talk about (if they haven't already) the next wave of option adjustable rate mortgages (Option ARMs) and the Alt-A mortgage resets that will occur. My belief is that much of this will reset at the same or approximately the same interest rates as the interest rates are generally much lower than a few years ago. More importantly, the ability of US borrowers to simply walk away from a mortgage is ridiculous and needs to be addressed (but likely won't be). Some of you may remember that Toronto-area house prices spiked in the late 1980's and took almost a decade to recover to their previous highs, but Canadians could not just walk away without repercussions. This likely proved to be much more of a stabilizing factor than most realize as Canadians endured two recessions (1990-91 and 2001-02) before their home values were back to the previous high.
The Obama administration last week extended an $8,000 first time home buyer tax credit, added a $6,500 provision for move-up buyers and increased income limits. Eligible borrowers must sign contracts by April 30th and close loans by June 30th 2010 instead of closing by the end of this month. Although, don't expect the expanded home buyer tax credit to be a permanent cure for the U.S. housing market. As the economy emerges from a recession triggered by the housing market crisis, increasing home sales is viewed as essential. Housing and related business account for about 20% of the economy, and more sales means more spending on everything from dishwashers to energy-efficient windows.
Top home improvement chain Home Depot reported quarterly results that beat analysts' estimates, but made a forecast that suggested weaker results at the end of the year and said a recovery might not take hold until the 2nd half of 2010. Home Depot and rival Lowe's have suffered from the protracted U.S. housing slump as customers have put off expensive renovations. Lowe's said on Monday it did not expect a housing market recovery to start until the middle of 2010.
And for the gold bugs out there the dilemma continues, does inflation raise its head because of the large cash infusion globally... or does deflation kick in because of the excess capacity... there is no easy obvious answer. High unemployment and untapped industrial capacity after the worst U.S. recession in 70 years have suppressed prices, but some fear massive efforts by the government and the Fed to restore growth could ignite inflation although, with high unemployment and low capacity utilization that may take some time. The Fed's report on industrial output underscored the level of “inflation-cooling” slack in the economy. Capacity utilization inched up 0.2% to 70.7%, a rate 10.2% below the 1972-2008 average. For interests sake, I have also included a Federal Reserve chart on capacity utilization from 1999-2008 where you can see the drop in cap. utilization during the 01-02 recession on the right hand side of the chart.
The consumer is restrained and we are still in a very tough economy, with a 26-year high in unemployment and consumer credit being reduced. So retailers have to work really hard to get through this holiday season. Data also showed that U.S. industrial output rose less than expected in October making this another headwind, overshadowing news that the Producer Price Index (PPI), a gauge of wholesale inflation, was tame last month. Treasury Secretary Timothy Geithner said Tuesday that the economy was likely to grow at a more moderate rate than in past recoveries as households worked to reduce their debts. Shockingly, bankruptcies in Newfoundland are up 100%. The number of bankruptcies doubled... from one to two. I know, you thought that was my joke for this week, but it is true! The first part of my met coal thinking is that it is needed to fire up steel production and you know that I have been a fan of materials here anyway, I also mentioned ArcelorMittal several months ago. I noticed that Credit Suisse recommended buying steel equities. Their analyst is seeing two early signs of recovery in the ex China steel markets: 1) as Chinese steel output plateaus freight rates are spiking suggesting the ex China market is the driver and 2) uptick in scrap prices in the U.S. running counter to weak sentiment in that market. Ex China is far more scrap intensive than China. They prefer the two larger cap names ArcelorMittal (MT U$38.00, Outperform, Target U$50) and ThyssenKrupp (TKAG.F 24.40 euro, Outperform, Target 30 euro) as they believe large caps will move first.
The tea leaves...
The technicals are pointing to the overall picture remains biased towards remaining long on the equity markets, but a break below 1082 would likely point to a retest of 1065. Below 1058 would point towards the next support line of 1026. The waning momentum is pointing towards a minor correction here but there was a breakout to the upside above 1109 this week. We need to see that retest for a leg upwards towards 1126.
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