Wednesday Night #1334 Jacques Clément Report

September 28, 2007

U.S.

At 13,913, the Dow Jones is 128 points away from the July 19 record, having gained over 500 points since the September 18 bold move by the Fed in cutting by ½%, its federal funds rate (4 ¾ %) and discount rate (5¼%). It was the first cut in four years and the largest in nearly five, in order “to restore confidence to the U.S. economy, to stop the turmoil, turbulence and disruptions in the housing and financial markets from bringing down the overall economy.” The Fed “still has lingering worries about inflation, acknowledged the risks of recession, the tightening credit conditions and credit squeeze.” They are in recession watch despite a strong second quarter economic growth of 3.8% (+0.6% in the first quarter). The third quarter G.D.P. will likely be closer to 2% given the housing industry is in recession.
Existing home sales have declined for the fifth consecutive month (-4.5% in July-August), new home sales were off 8.3% in August, housing prices have declined 6.5% from their peak (the most severe since the Depression) and are expected to fall by another 13% by next August. Housing starts were down 2.6% in August (20% in the last twelve months). Unsold homes at 4.6 million, are at a twenty year high and equivalent to ten months’ supply. Listed houses for sale are at an all time high. Building permits have fallen to a twelve year low. Home and mortgage foreclosures are up 115% (year/year).
Durable goods have fallen 5% in August. Last month saw the first job loss in four years and only 88,000 new jobs were created in the last two months. Business confidence is the lowest in four years. Consumer confidence is tumbling with retail sales sagging in the last three months. Exports are rising given the record low U.S. dollar versus the euro ($1.42 U.S.) and other currencies. The Fed is likely to ease by ¼% at both the October and December meetings to 4¼% Fed funds.
Equity buybacks in the second quarter were at a record $770 billion, financed by $625 billion of corporate borrowings and the balance by liquidity, but have dried up in the third quarter so far, the lowest in four years.

Canada

At 14,130, the T.S.X. is nearly five hundred points away from its July 19 record, fuelled by record prices for crude ($83.32) and gold ($740.00), a twenty-eight year high and other commodities, a very strong economy that has propelled the Canadian dollar above parity ( a thirty-one year high) as the second quarter balance of payments improved by $2.3 billion to $8.4 billion. G.D.P. has averaged 3½% in the first half with strength in consumer spending, business capital investments, corporate profits, oil and gas extraction activities, a very strong housing sector, increased capacity utilization and strong employment in the last three months, creating an average of 23,000 new jobs monthly and unemployment remaining at 6%, a thirty-three year low. The manufacturing sector was very strong in July with rising shipments (+2.3%), new orders (+3.2%) and unfilled orders up 6.7% in the last three months. Housing starts climbed over 5% in August but existing home sales declined 5.3%. Building permits (July) were off close to 11.5%. Productivity growth (second quarter) receded. Retail sales plunged 1.7% in the June-July period. Imports climbed 3.5% in July and exports only 1.5%, reducing the trade surplus to $3.7 billion from an average of $5.5 billion monthly in the previous six months. Housing prices (August) averaged $326,000 (+11.2% year/year) versus U.S. at $225,000 (+0.2% year/year). David Dodge is worried about the rise in housing prices (particularly in Eastern Canada), the increasingly loose lending rules and the easy terms mortgages. He does not foresee much inflation relief from the strong dollar and feels that the domestic credit crunch could slow growth in Canada with core C.P.I. at 2.3% and G.D.P. deflator at 5.7%, Bank of Canada is likely to remain steady at 4 ½ % overnight rate and 4¾ % discount rate at their meetings October 16 and December 4. The $14.2 billion final fiscal surplus for 2006/2007 after the initial estimate of $3 billion and March revision of $9.2 billion will be used to reduce the $467 billion outstanding debt, the lowest in twenty-five years. The interest savings of $750 million will be used for tax cuts. Record personal and corporate taxes contributed to the tenth consecutive fiscal surplus fuelled by strong economic growth.

Fourth Quarter Outlook:

—Canadian Dollar: $1.02U.S.
—Euro $1.43U.S.
—Crude $85.00
—Gold $750.00
—TSX 14,500
—Dow-Jones 14,250