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Turns out that being a Bear is a bit easier today.

This was an interesting week for North America markets.  Yesterday was amazing, although I missed the live action (I was in a meeting) market participants freaked out late in the afternoon (when the Down Jones Industrial dropped by 1,000 points).  In Canada new jobs for the month of April were announced at + 108,000, or about 4 time the anticipated growth rate (last time it was this high was in January 1976!).  Also this morning permits for residential construction were up a staggering 12%.  

So why did the market react the way it did with a further 2% drop?  The very first sign was the low market volatility (price movements) and very low trade volumes when the market was rising but large volumes whenever the market dropped a bit.  Something became askew a few weeks ago when the Shanghai stock market which had been stead for the past few months started to trend down.  As of this morning the Shanghai market is off 22% since the beginning of the year.


G7 markets were priced for perfection, where the price earnings equation was high and suggested that companies could generate large earnings by cutting costs (when Caterpillar announced its results – revenues down 20%, profits up 5% the game was essentially up).  Canada was “overvalued” but not to the same extent that the U.S. markets.  The big question is how the Central bank will react to the massive increase in permits for residential construction, and  the employment report.  Inflation is still negligible and falling – on all measures.  But the Canadian market seems to have only two of its three pistons functioning:  energy & Natural resources, and residential construction were doing fine.  Manufacturing not so much; and now natural resource prices are getting hammered.  Copper, Aluminum and the energy complex are the most famous, add to this equation the events in Europe (Greece seems to be doing everything it can to sabotage its partners attempt at helping), growth complex make the assumptions that Europe can and will be the engine of growth – replacing America a more doubtful outcome. 

Taking a more careful look at the employment numbers we see that the Canadian employment report shows that none of the jobs created were in the manufacturing sector (about ¼ of Canada’s GDP), in fact the bulk of the new jobs were in construction or construction related sectors…I have mentioned before that Canada’s GDP has been greatly assisted by the strength of its housing market, exhibiting a full recovery in Toronto and Vancouver and a continuation of the growth trend in Montreal (Calgary is still off its feed – but closer to back to its peak 2008 level).


Since, I am no prognosticator I will shy away from making a prediction on the direction of the markets, although a 10% correction is very likely (so 4% still to go!) but it could be a deeper correction.  The instability in Europe could become a contagion.  Yesterday the European commercial paper market froze [EURBS5], this is important because nearly 1/5 of bank funding in Europe is source via the commercial paper market (anything from 1 to 30 days).  

The next few weeks promise to be interesting.  Mark Carney of the Bank of Canada has some hard decisions to make, the Canadian housing market is overheating dealing with this situation will take some level of deftness on his part, and that's not taking into account the events elsewhere.

Good Weekend

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