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June 2012

June 14, 2012 • Print This Article

"Remember that there is nothing stable in human affairs; therefore avoid undue elation in prosperity, or undue depression in adversity"

May saw the return of extreme volatility in the markets. As before, the epicentre of the problem is the Eurozone. The challenges have moved from Greece to Spain, and the fear is that contagion will spread and take down the Euro. It is important to remember that if the leaders in Europe are committed to the common currency, they may have the ability to maintain it. The real challenge at this point is building the political will to create a unified banking system which would strengthen the region as a whole. The European Central Bank is essential to this. Policies need to move from austerity to growth with a balanced approach to fiscal responsibility.

Ripples from the slowdown in Europe are hitting China and the United States. It is important to realize that the slowdown of growth in China was somewhat orchestrated by Chinese policy makers, who have the ability to stimulate growth if they feel it is needed. China is still experiencing growth and the US continues to move forward. In the US, corporate balance sheets are flush with cash. Corporate America awaits clarity on the ending of tax breaks and other stimulus removals scheduled for January 1st. The termination of several programs (the so called Fiscal Cliff) is to be a major focus of policy makers and markets over the next 6 months. Once there is a resolution, there could be a wave of pent up spending/hiring/M&A activity that should accelerate growth and drive markets.

The US dollar is attracting an incredible in-flow of capital right now and bond yields are at historic lows. We are seeing the US housing market beginning to show some life, which is essential if the US economy is to pick up.

Commodities are likely to continue to face pressure in this climate, which affects the Canadian dollar. The Canadian economy is expanding at a rate of nearly 2% and our banking system continues to grow and strengthen relative to the rest of the developed world.

Interest rates remain incredibly low. People are living longer and may need to support retirement with more than treasury yields in the 1% range, with inflation and taxes factored in. Equities are inexpensive on a relative basis and offer good dividend yields by comparison. Once the fear subsides we should see the money sitting on the sidelines come back into the markets. One of the reasons that a sustained market advance is taking so long is that people are uncertain and there is a feeling of pessimism. It is important to remember that the stock markets contain many growing companies that provide the back bone of economic development. Technological advances are exponential and in turn, create growth and opportunity. A car on the road today contains as much computer technology as it took to get a man on the moon. These kind of advances in technology create jobs in the future. It is important to remember that many of the industries that drive the economy today didn't exist 30 years ago. It is this trend of advancement that drives the capital markets. It allows for a reasonable sense of certainty that the long term future will be brighter once the short term challenges are faced. The trend line is upwards but the journey is volatile at times.

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

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