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Third Quarter 2012 - The Markets

November 13, 2012 • Print This Article

  • We believe that as economies begin to stabilize, economic stimulus will begin to be withdrawn. This should lead to gradually higher interest rates and lower bond valuations. Removal of stimulus should allow inflation to remain at low levels.
  • We believe that companies flush with cash will continue to reward shareholders with dividend increases and share buy backs.
  • We believe that accounts should continue to benefit from being overweight in high dividend paying canadian common shares.
  • We remain underweight in bonds with a bias on the short end of the maturity spectrum where any price movements will be muted.

Canada's economic expansion continues at a moderate rate. Weakness in the US and other trading partners has contained growth. Targeted measures to slow growth in the housing sector (through changes in amortization, stricter CMHC Insurance qualification) has dampened consumer sentiment and spending. It appears unlikely that housing prices will drop in Canada, as seen south of the border.

We are of the opinion that economies around the world are slowly healing. Stabilization should make corporations more likely to begin making much delayed upgrades to technology and capital spending. M&A activity should increase as equity valuations appear to be moderate, especially in the resource sectors. Anticipated economic stimulus with the new government in China could lead to higher commodity prices.

Equity markets on both sides of the border turned higher as evidence continues to mount that the US economy is healing. It appears that the worst of the US housing crisis may be over. Housing starts, resales and prices are rising from deeply depressed valuations. Mortgage losses and foreclosures are also lower. The stabilization of the housing market has led to improvements in consumer confidence and consumer spending. Automobile sales are at post-recession highs.

In the United States, while the economic backdrop is improving there are political and structural problems to be resolved. The fiscal cliff (Bush era tax cuts and stimulus measures that are automatically terminated unless extended) could take 4% off the GDP and push the US economy into recession. There is general consensus that a deal will be reached. However, with gridlock in Congress and the House of Representatives, there is the potential for political games. The closer the new year comes without resolution, the more nervous the market may become. Businesses may hold back on hiring and on investment until there is some certainty on future tax rates (both corporate and payroll), health insurance premiums and other costs. Assuming there is a resolution late in the 4th quarter, pent up corporate demand could lead to strengthening levels of growth.

There is also the issue of a trillion+ dollar annual US deficit. As growth becomes entrenched, stimulus will most likely be removed and either services or supports reduced and/or taxes increased. Current stimulus measures have been calculated to have added 3% to GDP. Gradual removal of stimulus may moderate growth for many years to come, moderating inflation and extending current slow growth conditions.

Europe appears to be slowly stabilizing as the road ahead becomes clearer. The cost of bailouts could inevitably fall at the feet of Germany and it is not surprising that german GDP growth is stalling.

It appears that the chinese economy is slowing and there are concerns of a "hard landing". However, chinese government changeover is occurring. Many believe that the new premier will take measures to stimulate the chinese economy. Economic acceleration in China could lead to higher commodity prices, especially in base metals (copper, iron, aluminum, metallurgical coal). This would benefit Canada, Australia and other commodity dependent economies.

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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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