2010 is going to be a choppy year.  In January and in April of this year, I started to raise concerns, and in February and now June, things are looking interesting again.  I mention these months as generally people get bullish at the top and bearish at the bottom, and the sentiment now is decidedly bearish.  Good!

The Rest of the Story

Quick Points
Japan's GDP came in at 5%, better than expected. Economic reports from China, Japan, and Australia show accelerating growth. It appears the EU situation is beginning to stabilize, although LIBOR still seems to be creeping higher slowly.  China's exports jumped 50% YoY, (although off a low base, so it was an easy comparison), RBC Economics predicts that Canada's economy will surge in 2010, the strongest growth in a decade due to strong demand and job creation. The ECB's Trichet says the ECB will keep buying government bonds to fight the EU debt crisis

Shiny Distractions
Traders continue to focus on the shiny lights and get distracted easily.  Not many have the ability (or desire) to peel back the curtains to see what is actually going on it seems.  Hungary's new ruling party, Fidesz, ignited a broad sell-off of Hungarian and European assets on Thursday and Friday when a new spokesperson said Hungary had only a slim chance of avoiding a Greek-style debt crisis.   Hungary has a debt to GDP ratio of 78%, roughly in line with the EU average of 74%, but much better than Greece at 115%.  According to Reuters, the announcement last week out of Hungary may have been more political than economic... "Changes of government can cause market jitters even when the new governments espouse market-friendly policies, in a region where politicians are relatively inexperienced in democratic transitions and economic institutions are young.  That may be what happened in Hungary last week. While some analysts think Fidesz may have been setting the stage to backtrack on earlier promises of deep tax cuts, inexperienced politicians appeared to misjudge the impact of their rhetoric on markets.  The party backtracked on those remarks on Saturday, with a top official calling them "exaggerated" and "unfortunate" and saying Hungary would strive to meet the 3.8 percent deficit target this year."

"All of those tourists covered with oil..."

BP appears to be winning the battle with the oil spill, while under a great deal of pressure from the US government.  You may have also heard, as I did, that some people were talking about use a nuclear explosion to try to stem the flow of oil.  Yikes!  I am likely repeating myself but, can you guess when the Exxon Valdez disaster occurred?  Give you a minute... ready?  I will put the answer below.  Consider that since that disaster, it has take this long to push double hulled ships into the transportation system to help deal with the risk of shipping oil.   While Obama is putting the brakes on offshore drilling, I don't believe they will ban it indefinitely.  But the oil sands ain't lookin' so dirty now, is it?  (And for subscribers, I included a chart showing the contribution to oil supply growth) Deepwater sources are too valuable to be overlooked, or put on hold.  With potentially as much as 6 million barrels/day of excess capacity, OPEC has the ability to handle increased demand for oil, and this should keep a lid on oil prices for awhile. Canadian production is about 3.4 million barrels per day, and is set to grow in coming years.  The Keystone pipeline is currently being filled and is set to start sending 435,000 b/d in the second half of 2010.  Eventually, this will be expanded to have a capacity of 1.1 mb/d.  Considering the importance of oil to Canada's economic well-being, oil prices seem to be in a $70-$85 range, and may have downside to the $65 level.  At which point, I think OPEC will meet to try to lower production.  In any event, within the next two years, I would expect oil to move to a higher range of $80-$100.  Have you thought of that answer yet?  The Exxon Valdez disaster occurred in 1989.

 
Housing
Housing values comprises a major portion of the "wealth effect".  That feeling that individuals are becoming wealthier over time, and an unfortunate side effect of that was that many people forgot what it was likely to actually save money.  I have included a few thoughts on Brazil, Australia and the U.S. to give you a sense of what the wealth effect is adding to or detracting from the current psyche.   On another note, we just completed some cottage succession seminars that always seem to gather some attention.  Of course many are coming to find the "silver bullet" (not the beer...).  We like to tell them up front that there is no silver bullet, but the cottage is an emotional asset so there are always a few interesting discussions that result... I thought you might like this.
I saw an interesting article from the Associated Press about a Brazilian housing program.  Using about $60 billion of federal, state and municipal funds, "My Home, My Life" gives buyers low interest rates and subsidies for families who earn a maximum of $870 a month (1,530 reals) -- three times the minimum monthly wage of $290 (510 reals.) The amount diminishes as participants' salaries rise. Houses are simple, clay-block, two bedroom homes built by private construction companies, which act as intermediaries with the bank on behalf of customers.  As of February, the government had 670,000 new-home applications in the works and aims to have signed contracts for 1 million homes by the end of this year. A second phase of 2 million homes is planned to begin in 2011.  If the program continues at the intended rate, Brazil could erase its shortage of 7 million homes -- and hundreds of illegal settlements that have popped up over the years in the South American nation of 190 million people -- in the next decade.  Home ownership (responsible home ownership, not the $14,000/year earning-strawberry picker buying a $1,000,000 home kind of ownership) in Brazil will likely lead to better standards of living, and perhaps more kids.  After all, these are two bedroom homes!

Foreclosures in the U.S. are ongoing, according to RealtyTrac Inc., U.S. home foreclosures in May reached new highs for the second month in a row, with repos rising to 93,777, an increase of 44% versus May of last year.  Keep in mind that there was a pause in forclosures last year, so I think the year over year number reflects that.  Higher interest rates in Australia is likely reducing affordability and demand for homes and may lead the RBA to hold rates. Still construction is ongoing, it will be interesting to see how this plays out.  As for the Canadian situation, Benjamin Tal of CIBC said recently that home prices in Canada are about 14% overvalued, but obviously it is difficult to "play" the housing market as flipping homes can be an expensive affair.  Still, a home should be viewed as a long term investment.  On average, people spend about 15.6% of their gross income on mortgage payments, and including utilities and taxes, this rises to 22% of gross income according to a CIBC report.  (How many people invest 15% of their gross income saving for their biggest expense, retirement?)  You spend money to maintain your home, you spend money to pay property taxes, and you do not have any guarantee on what the value of your home will be in the future.  Ask anyone who bought a home around 1990 in Toronto, prices took about ten years to recover.  I remember a client who said that he had saved for two years upon coming to Canada, in the 1950's I believe, and bought a home in Toronto for about $38,000, and his friends told him that he was crazy.  He said that two years later that home was worth about $48,000, and those same friends told him he was lucky. How quickly we can go from crazy to lucky...  Robert Shiller has a great chart that you might find interesting...
 
Big Fat Mandarin Weddings
The Chinese have been spending money around the globe as they build out the infrastructure needed to support the health and growth of the most populous nation in the world.  And now they are looking in Greece.  According to the Washington Post, "Spurred on by government incentives and bargain-basement prices, the Chinese are planning to pump hundreds of millions -- perhaps billions -- of euros into Greece even as other investors run the other way. The cornerstone of those plans is the transformation of the Mediterranean port of Piraeus into the Rotterdam of the south, creating a modern gateway linking Chinese factories with consumers across Europe and North Africa."  Tourism operators are also increasing their focus on Chinese travellers, promoting fairytale weddings, or "Big Fat Mandarin Weddings".   Also, the weak Euro will likely add about 1% to GDP in Europe over the next year, so there are economic benefits coming.  Also, I have seen travel bookings increasing... look out Europe, here come the Griswolds...

Ellen Griswold: [Ellen opens door, seeing there is no bathroom] Clark, there's no bathroom.
Clark Griswold: Honey, I'm sure Europeans go to the bathroom.
[Clark opens door to his left to find another closet with a mattress inside]
Clark Griswold: ... Maybe they don't.

The Tea Leaves...

The technicals are showing support to the downside remains in the 1040 level, but the action is very much a sideways market on higher volatility.  (Nerves are getting frayed, I can see it)  A break below 1041 would target 1027 but the 1000 level will likely hold in the near term.  Action moved to the upside Thursday, as the index bounced off overhead resistance at 1088.  If it breaks through here, we could see 1097/1104 as upside resistance in the near term.  I know this is the technical piece, but most equity strategist targets I see are still in the 1200-1250 range.  I would expect the volatility to continue.