October 30, 2009 Market Update
As we watch the market's behavior today I can not help but conclude that October 21 will likely turn out to be the high in what will be recognized as a bear market rally.
I know that there are some that are suggesting that we are experiencing the beginnings of the next bull market however, it most definitely does not look like that to me.
Yesterday we saw the markets all have a substantial positive day after 5 days of declines, but today all indexes turned south again. At this moment the TSX is down some some 200 points or just over 2%.
Why are they heading south? Well corporate profits are still moving lower On an absolute basis they will fall for the 9th straight quarter. And perhaps the last quarter of 2009 will show an improvement from the last quarter of 2008, but, what does that really mean. Keep in mind that the aggregate loss in the S&P 500 in the last quarter of last year was 23.25 per share. They lost more money in one quarter then they had ever made in any other quarter. We should expect that the loses in the last quarter of 2009 will not be as bad as that, but they will not be good enough to turn this around.
In Canada, the industrial product price index surprised to the downside for the month of September. Deflation is still happening in Canada as well as in the US.
Initial jobless claims in the US are still above 500,000 for the week ending October 24th. Initial jobless claims have now been above 500,000 for the 42nd consecutive week. In seven weeks, if this trend holds, we will have set a new record. Not a nice record to brag about but a record non the less. The last time we went through any thing similar was in 1982. Then the average age of the boomer generation was 25, today it is 52. At that time household balance sheets were expanding; today they are contracting.
The question you may want to ask is, if this recovery is really underway, why are banks still cutting back their lending at an unprecedented 15% annual rate.
So, what am I expecting? Well, unfortunately, it would appear that the Dow and the S&P will blow right through their March lows. And the TSX will follow suit. It would also not surprise me to see gold drop to something around 700 dollars and silver could drop to something below 8.00 from its current level of 18.00. I am anticipating a substantial rally in the US dollar. So if you are going south for the winter, buy your dollars yesterday. OK, buy them today.
We will continue to hold cash and those of you that may be interested in buying something that will make money in a falling market, consider buying Horizon Beta Shares, like HSD or HXD, both available on the TSX.
And once again, do everything you can to get out of debt. But you have a little time there now. For the short term, hold onto cash. The big banks like Goldman Sachs in the US are going to crash hard.
There will continue to be a period of deflation rolling through Canada. Yes, this means that initially house prices will fall. Groceries will become cheaper as the big box stores compete for market share.
As they say, hold on to your hats. We will be in for an interesting ride.
John Voorhorst, CFP