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Third Quarter 2010

October 8, 2010 • Print This Article

Canada continues to be in a relatively good position.

  • Canadian stimulus measures were moderate.
  • Funding went into needed infrastructure which may have future economic benefit.
  • The Canadian deficit appears to be manageable and it is anticipated that the books will be balanced, at least at the federal level, in 2015.
  • Interest rates will continue to remain historically low.
  • Exports of materials required by the expanding developing world should help offset stagnation of activity with our largest trading partner.

In 3Q10 there was a strong recovery in equity markets on both sides of the border. Equities that were heavily sold during the recessionary contraction have performed strongly. Growth stocks outperformed interest sensitive issues by a wide margin this quarter. We believe growth stocks played catch up.

When compared to the United States, Canada's relative fiscal, financial and trade advantages should provide continued strength in the Canadian Dollar. Canadian bond markets should be supported by low yields and anticipated quantitative easing south of the border. Canadian equity markets should continue to perform relatively well with financials, utilities and resource stocks leading the way.

Individuals, pension funds and institutions are beginning to chase yield, realizing that interest rates may remain low in the near term. Given that interest rates on 10 year Government of Canada bonds are below 2.75%, the purchasing power of future interest payments and principal on maturity may be reduced by even moderate inflation. Individuals nearing retirement will be looking to higher yields in dividend paying equities. Canadian banks and utilities, income trusts and selected energy companies are currently paying dividend yields well above the Government bond yields. We believe interest sensitive common equity issues should outperform as the hunt for yield continues.

Investors on both sides of the border are realizing that economic expansion may not be robust. We see this as a good thing and believe it may take an extended period of relative stability to heal the imbalances that were created by the collapse of the U.S. sub-prime mortgage market. Banks in the U.S. are currently able to borrow money for little to no interest and loan it at historically high spreads, creating cash flow and profit, allowing repayment of bailout funding. It could take many years to unwind the overhang in foreclosed homes and to repair the balance sheets of a generation of American consumers.

As emerging markets face the challenge of controlling growth and keeping inflation in check, interest rates may rise as they attempt to contain potential asset bubbles by tightening money supply and imposing higher lending standards. Exports to North America and Europe are being supplanted by growth in regional and domestic trade. Canada should be well situated to take advantage the low U.S. interest rate policy and expanding demand for the materials in the developing world.

Filed under: Quarterly Reports

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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