July, 2009 Market Update

Good Day to each one of you,

I would like to accomplish a few things in todays post. First,  we recently updated the office computers and in transferring all of the various software and with that the email addresses, we managed to miss a few of you. I have spent some time to try to rebuild my list so it could be that this is the first time you have heard from me for a while. Also, I have gone through all my addresses and added some names that were not on the list before. If I have added your name and address but you are not really interested in receiving my monthly updates on the market, go ahead and send me a note asking to be removed. I know how much junk mail I receive daily and I most definitely do not want to be considered to be just another piece of junk that you need to delete. Do not hesitate to send me a little note asking to be deleted. I will not be offended.

The second thing we should do is a bit of a review.  Earlier this year I suggested to you that we would likely see a fairly hard bounce up in the markets. If you go back and check, I believe we set a target of 11500 in TSX. I also was brave or foolish enough to suggest that the S&P 500 would hit 1100.  Yesterday the TSX closed just over 11000 and the S&P hit 1,000. We have also been very aggressive in urging you to get rid of as much debt as possible and if you have any good debt, that is debt tied to things that appreciate in value, like a house, or land or a business, that you should try to get the rate locked up for the next ten years. Bad debt, like credit card debt or consumer debt tied to assets that depreciate should be paid down as quickly as possible.  That should still remain your number one priority.

And now lets move ahead. I know that all the front page news recently has been very positive. Even the Bank of Canada recently announced that the recession is over. The front cover of  the most recent edition of Newsweek proclaimed the recession to be over. However, before we break out the champagne, lets just review the other side of this. The big announcement today was that Manulife is going to cut its dividend in half. Why would one of the largest insurance companies in North America cut its dividend if the worst is behind us?  Do they know something we do not?  Also, a recent insider trading report shows that company insiders are sellers of their company shares. Not buyers.

One of two things is going to happen next. We are either going to see a continuation of last fall when the market was selling off at 400 and 500 points per day and the 8500 bottom we experienced in March will be just a fleeting memory,or we are going to see one more short drop and bounce back up before the next major leg down.  I know that all our clients are still very much in cash and we will remain there. But, I would urge all of you to move your company RSP plans into cash as well. Most often, the closest you will be able to get to cash is a money market fund. That is what should be done sooner rather then later. So, yes, this is as close to our target as I believe we will get. My target for the American broad index was a little too aggressive upon further reflection. Now, as those of you who have been clients for some time know,  I am usually a little early in getting out of the way of anything major. And that I do not mind. Better a little early then a lot too late I say. If you are not a client but are invested fully in the market, I would suggest that you move to cash as well. Or if you are invested in mutual funds, move the money to a money market fund.

Some of the other parts of the market are not as easy. It looks like the US dollar is going to strengthen one more time so that means the Canadian dollar will likely drop.  There is still a substantial glut of oil and natural gas in the system. Natural gas will remain low for some time and it most definitely looks like oil will drop considerably as well.
Gold and silver should both see fairly large drops, gold perhaps down to about 700 dollars and silver down to 7 or 8 dollars.

I am still having major difficulty finding a target for interest rates.  In the short term, it would appear that rates are headed lower, but , perhaps because of my experience of the high rates of the 80's, I am still very much afraid that the rates at some point will go much higher. Governments printing as much money as they are and taking on the huge debt loads they are can only drive rates higher. The question remains when.

Deflation is still happening as I write this so I would anticipate that house prices will drop some more as well. Todays Financial Post is forecasting that 50% of US mortgages will be underwater by next year. So that means 1 of every 2 Americans will owe more on their house then what it is worth.

And attached is the latest update from Empire Life. You can see that the top performers were all Canadian Funds. The dividend Growth, Small Cap Equity and the Elite Equity or the Canadian Equity were the place to be since the end of March.   But for now, lets see what plays out in the next few months.

If you can not open the attachment, please download adobe reader. It can be found here. http://get.adobe.com/reader/otherversions/

I trust that the first month of summer treated you well. Hope that August is also to your benefit.

John Voorhorst, CFP