Wednesday Night #1328 Jacques Clément Report

U.S.
The Dow Jones, after reaching over 14,000 on July 14, has lost 1,179 points since, in a highly volatile environment as difficulties in the U.S. mortgage market touched worldwide stock markets with over $3.3 trillion of losses caused by the collapse of the sub-prime housing market.
The Fed described the housing slump as “the biggest risk to the six year expansion.” The residential sector is mired in the worst recession in sixteen years. The 8.8 month supply of homes for sale is the highest in fifteen years. It is estimated that 1.7 million households will lose their home through foreclosures. Home prices are forecast to fall ten to fifteen percent as the housing market is crumbling. Defaults by highly leveraged, illiquid firms will rise substantially as credit tightens.
Concern about a credit crunch is very strong, leading world Central Banks (Federal Reserve, Bank of Canada, the European Central Bank, Bank of Japan, Bank of China, Australia, Hong Kong, et cetera) to inject over $400 billion of liquidity to avoid a credit crunch.
Despite the Fed “not forecasting a spillover from the housing sector in the other parts of the economy,” the I.M.F. has already revised down economic growth in the U.S. this year to 2%. Consumer spending has slowed in the second quarter to 1.3% annual rate from $3.7% in the first quarter. June personal spending was the slowest in nine months. New vehicle sales have declined for the last seven consecutive months. Housing starts are down 20% in the last twelve months, housing permits declined 7½% in June to the lowest level in ten years. Home sales are down 30% in the last twenty months from peak. New home sales tumbled 8.8% in May-June with the largest decline in five months. Productivity is declining. Global investor confidence has seen the sharpest decline in over three years. The volatility index is the highest in over one year. The manufacturing expansion is the slowest since March and spending on services, the lowest in four years. Unemployment has risen to 4.6%, a six month high and employment was only 92,000 new jobs in July. Second quarter corporate earnings growth has been revised up to 11%, inflation at 2.4% with core at 2.2% in July and producer prices of 4% and core, 2.3%, with labour costs moderating in the second quarter leading the Fed to remain steady at 5¼% Federal Funds and 6¼% discount rate.
The next meeting is scheduled for September 18 and a slight easing cannot be ruled out, given the credit and capital market crisis. Merrill Lynch thinks the U.S. is in the early stage of a consumer-led recession. The U.S. dollar has strengthened to 1.3580 Euro from 1.3827 after reaching a record low versus the Euro and twenty-five year low versus the British Pound on July 24.

CANADA
The T.S.X., after reaching a record 14,626 on July 19, has lost 1,578 points since, as the U.S. sub-prime mortgage market mess has started to affect Canada. The credit markets have tightened dramatically in the past two months in the asset-backed commercial paper market, seventeen issuers have been shut out of credit markets seeking emergency cash with $28.6 billion outstanding paper maturing. Issuers could face default and forced to liquidate. The asset-backed commercial paper market is $120 billion and one third or $40 billion are issued by trusts created by non-bank financial companies like Coventree where banks are refusing to provide funding on $700,000,000 mortgage debt. Bank of Canada has intervened heavily by pumping a massive amount of liquidity into the financial system to restore confidence and stabilize markets. The interventions are estimated at over $5 billion.
Bank of Canada next meeting is September 5 and they are likely to remain steady at 4½% overnight and 4¾% Bank rate. Housing starts were down over 8% in June-July. Employment was only 11,000 new jobs in July. Exports were down 1% in June and the trade surplus narrowed to $5.3 billion, declining $600 million. Second quarter G.D.P. is estimated at close to 3% following May G.D.P. rise (+2½% year/year) with strong retail sales since March (+5%). Canadians continue to buy foreign securities with an additional $5.7 billion in May and $44.7 billion in the first five months. The Canadian dollar is off three cents since its thirty year high of 96.7 cents U.S. July 25. The commodity price index is off fifteen points with gold rising $15.00 and crude close to $6.00

Near Term Trading Outlook:

Canadian Dollar: 92¢ U.S. – 93¢ U.S.
Euro: $1.35U.S. – $1.36U.S.
Gold: $660.00 -$670.00 U.S.
Crude $73.00 – $75.00
TSX 12,800 – 13,000
Dow-Jones 12, 600 – 12,800