and demand is there for infrastructure-related projects.  Growth in the western and central regions of China is growing quickly, but per capita GDP is still about half of that of the eastern provinces.  It will be interesting to see how growth continues in China as the government focuses more on developing internal demand as exporting slows.  I say this only half-jokingly, but could the Chinese consumer be the next "bubble"?  What if credit cards make their way into fuelling Chinese consumption growth?  In a related matter, I have noticed several rumblings of metal inventories being at very low levels, and it is because of this that I have been favouring this area (to the dismay of some!).  Alcoa's CEO said that inventories have fallen so low that any significant uptick in demand would likely trigger an increase in aluminum production.  He said he has "never seen the stock level being so low as it is today."  I have strong suspicions that the same can be said of steel, and very likely in some of the copper and zinc areas as well.

In reading a Morgan Stanley report on Chinese economics, the view is that there has not been a nationwide property bubble in China, and the fundamentals remain healthy.  Chinese household income growth has been very strong on average, and the secular trend is expected to remain intact for the foreseeable future.  From 2002-2007, the average annual nominal growth of household disposable income per capita was about 12%, which is much faster than both emerging and developed economies.  There is also a very high rate of home ownership and a strong demand for upgrades.  The house-ownership ratio in China is over 80%, one of the highest in the world. 

Quickly commenting on the bank earnings this week, there weren't too many surprises to speak of.  The only thing I want to point out is if you are going to pay attention to the media's reports, you MUST be able to determine the difference between a cash and non-cash charge for it to be meaningful.  Royal Bank just wrote down $1 billion of goodwill on some US assets, fine $1,000,000,000, but it was a non-cash charge.  So they didn't actually set fire to a very large pile of money, it was an accounting adjustment.  I picked up a note on the Dow Jones newswire that mentioned some market technicians are pointing at the inability of equity markets to break through the key resistance levels (that you have been reading about here for some time now) as a sell signal that is fuelling fears of a retest of the lows.  Dundee called this "an energy-building point needed to fuel the next market advance."  The Credit Suisse Technical Analyst D. Sneddon, believes that the S&P500 is still on course for an eventual test of the 1007/14 level, but that a setback to 830/25 is likely to happen first.  It appears that the recovery is stalling ahead of 944 and the 40-week average. As always, I will add a few technical comments at the end.

Real estate

David Rosenberg has moved from Merrill Lynch now and is back on Canadian soil. I have gone through some of his work this week and is giving a mixed picture (from an economist? Unbelievable) but he is one of several economists that did mention a theme that he believes will be a secular change: Attitudes towards credit, discretionary spending and home ownership have changed, and the "shift towards frugality is going to last for years."  he also mentioned one point I found interesting, he quotes the University of Michigan confidence survey that said "only 3% of the public believe that residential real estate is a good investment."  That is probably a  very strong contrarian indicator, for so many to believe that homes are no longer a good investment is astounding. Perhaps they should have asked if homes should be used as ATMs, not to live in.

Canadian repeat-sale home prices are down 5.8% YoY. I will put a link on the Investment 101 page of our website to the Canadian equivalent to the repeat-sales S&P Case Shiller measure of house prices used in the U.S. which is preferred to other measures of house prices because it does a much better job of controlling for the influence on average prices stemming from compositional shifts in the type of housing being demanded.  (Is that called a run on sentence?) It is, however, lagged a month behind the Canadian Real Estate Association’s measure of average house prices.It shows that nationwide prices by this measure are now 5.8% lower than a year ago after a 1.3% m/m drop in March.  Vancouver is down 9.6% y/y, Calgary is 8.4% lower, and Toronto is off 6.9%.  Prices are flat in Halifax (-0.8% y/y) and Ottawa (1% y/y), and up 2.9% in Montreal.

Confidence?

The US dollar has been rapidly declining, leaving the US for more surety, but this may also be a return of risk appetite.   US jobless claims slightly dipped last week, not the spike I am looking for, but I suspect that is coming.  I can see US auto suppliers declaring bankruptcy (this is likely to restructure under Chapter 11, not close as in Chapter 7) but I think we will need to start seeing a drop below 600,000 to qualify as a spike down.  That will likely happen over the next few months. U.S. Consumer Confidence for May jumped to 54.9 from 39.2 the previous month. Economists were looking for a reading of 42.6. Market reacting favourably overcoming weaker home price data earlier this morning. Richmond Fed Manufacturing also better.  Here are a few comments on Tuesdays market moves from our economist Derek Holt:

"There are two reasons why yesterday's reaction to the consumer confidence figures made no logical sense beyond a knee-jerk reaction to the superficial headline print.  First, confidence spiked sharply higher on consumer expectations of improved business conditions and somewhat healthier labour markets six months forward, but not because of buying intentions.  In fact, six month forward buying intentions were down for housing, and up ever so slightly for autos and major appliances.  Simply put, expectations for gradual healing in the economy are not being backed up by spending plans.  Second, consumer confidence measures have poor predictive abilities and are notorious for throwing off entirely false signals.  Actions speak louder than words, and those actions on the spending front face weak cash flows and deep negative wealth effects."

I would counter this with the simple thought that it is confidence that is required before translating into intentions, and intentions come before action.  In no way would even the "simplest" of consumer act before confidence is in place.  Of course, I still do not understand how someone goes shopping to make themselves feel better, so perhaps someone else should comment on that.

Oil

Oil has been moving of late, and while the OPEC Secretary El-Badri commented that fundamentals are not behind the price move, it appears that the expectation of an economic recovery is likely behind it.  With drilling off as dramatically as it has been, it may be difficult for supply to match an increase in demand.  More than 35% of 200 private equity (PE) investors surveyed, according to KPMG, said energy would be the most appealing sector for PE as the economy recovers, with financial services and technology sharing second place.  We have already seen PE take out a failed bank in the US (TD was also looking at buying in).  Crude inventories fell 5.4 million barrels in the US, and this number is quite bullish for oil.  I will quote Dennis Gartman who said "most bullish of all was the report that the nation's refineries were working at 83.8% of capacity last week, up 3.8% from the previous week. This is an enormous rise in refinery utilization, and it caught everyone off guard.  We'll accept it as a one-off fluke...if the rate does not fall back towards 81.5-82.0%, we'll know that demand upon those refineries is higher and rising." A talking head recently commented "we are awash in oil" and wondered why the price is going up.  This clearly shows the media's ability to have a five minute forward-looking view.  As I have pointed out on several occasions, even if there is 130 million barrels of oil in storage right now, that is TWO days of global oil consumption.  There are two factors driving oil prices: first, sentiment thinking that if the economy does recover, oil demand will rise and push prices higher and supplies lower, and secondly, considering the rapid drop off in drilling activities, people may be surprised at how how much capacity was shut in as drillers stopped and oil companies closed down higher cost projects.  The oil may be in the ground, but you cannot consume what you do not have in your tank/furnace/powerplant.

The tea leaves...

Technically, the S&P500 remains in sideways mode right now.  The likely immediate range is 914/888, but a break outside of the wider range of 929/875 parameters are needed to give a clearer directional signal.  A break above 942 would signal the target zone of 1008/17.  A break below 875 has support at 867, but on failure of 863, we would look for 832/28 from which we would expect a good recovery.  The volatility index hit 29.62, and has upside resistance at 34.57.