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Third Quarter 2013

October 14, 2013 • Print This Article

There are indications that the US economy is beginning a sustained recovery. Home prices are rising, employment, although still well below prerecession levels is stabilizing, credit although tight appears to be loosening. IPOs and underwritings are picking up. Europe appears to have begun recovery and China and Japan's economies seem to be accelerating. Equity markets on both sides of the border have been rising, but do not seem overvalued at this time. Corporate earnings are at record highs. Corporations are cash heavy. The S&P 500 and Dow Jones Index have breached previous high water marks last reached in 2008 and the TSX is trending higher and has the potential to play catch up as resource prices should begin to rise with economic activity. Economic growth on both sides of the border is high enough to continue a long uptrend for equities but not high enough to spur inflation.

Despite the positive signs, gridlock in the United States between the Senate controlled by Democrats and the US House of Representatives has led to brinkmanship. The result has been the partial closing of the government due to an inability to pass a Budget. The recent debt limit standoff revealed how ineffective the US government has become. The decision was delayed in the hopes of reaching a "Grand Bargain", however this appears unlikely and another showdown will likely occur in the New Year.

We do not believe that the US Government will allow a default on its debt. However the partial closure of the US Government was estimated to cost 0.2% of GDP per week. In addition, there was very real damage done to the global reputation of the US as foreign governments shook their heads at how remarkably dysfunctional the US system of government was revealed to be. It is after all a system that was developed to deal with conditions in the 18th century. There is growing debate that it may not be a suitable form of government for the 21st century.

In an environment of probable economic growth and political uncertainty and current interest rate policy, it is likely that mid to long term bonds will underperform.. Many prognosticators have stated that the Bond bull market is over. We remain as underweight as we are allowed and we remain in short-term durations. The S&P 500 has performed extremely well and has outperformed Canadian Equity Indexes by a wide margin.

The Canadian equity market has underperformed. It should be noted that the majority of all our exports go to the US. As the US economy heals, Canadian exports should grow, benefiting our economy and equity valuations. As bond yields began to track higher in the US, funds have gone into equities, leading to P/E expansion. This has not happened to the same extent in Canada. It is not unreasonable to assume that the S&P TSX will at some point play catch up to the S&P 500.

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.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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