Wednesday Night #1371

Ron Meisels will introduce his colleague and friend Jonathan Arter, Senior Executive Analyst at the late Ian Notley‘s firm, Yelton Fiscal Inc, who will be the guest speaker at the monthly meeting of the Montreal Chapter of the Canadian Society of Technical Analysts. (You wouldn’t expect Ron to bring a fundamentalist, would you?)
The Yelton website tells us that “Analysts are familiar with a wide variety of market approaches and the history of the capitalist process, aided by a library of over two thousand volumes including editions of nineteenth and early twentieth century origin. Their diverse backgrounds provide a unique perspective on the securities industry.” So, you can expect some wide-ranging commentary on what ails the world’s markets and how long it will continue. Maybe it’s better if they don’t lift their eyes from their charts, then they can concentrate on the mysterious trend lines, and unlike the rest of us, proceed without the distraction of troubling news.
Among our gleanings: the Bank of Canada defies expectations by holding the line on interest rates; Most U.S. stocks declined for a third dayled by raw-materials and energy producers, as the prospect of higher interest rates drove down oil and metals and the International Energy Agency lowered its forecast for fuel demand; Inflation Worries [that] Unsettle Global Markets; The fight against inflation in the 15-country eurozone will remain the European Central Bank’s top priority even if that clashes with US attempts to prevent a further slide in the dollar;Global Woes Hit Developing Countries— according to the World Bank, private capital flows to emerging markets are expected to fall to around 800 billion dollars by 2009 [and] economic growth in developing countries will slow to 6.5 percent in 2008.
To add to the gloom and doom, we have the failure of the World Food Summit to produce much more than platitudes, while permitting the leaders of Iran and Zimbabwe to grab the spotlight [we recommend Cleo Paskal’s piece on Nationalistic capitalism and the food crisis]; the almost certain death of the U.S. civil nuclear deal with India and the warnings sounded by President Bush and European leaders over the Iran nuclear program as Iran’s defense minister warns Israel of a “very painful” response if it launched a military strike over his country’s nuclear program.
In the wake of the passage of the new and arguably unpopular sweeping immigration reform under Bill C-50, we now learn that ‘our’ Government outsources visas at some foreign embassies including the one in China. We note that former Wednesday Nighter, Richard Kurland, is quoted and he is not amused.

The Report

Adam Daifallah introduced two Concordia political science students, Jonathan Abecassis and Antoine Dionne, both of whom are active in the Conservative Party and the Quebec Liberal Party. Jonathan also works with our favorite MNA, Jacques Chagnon. Their affiliation with the Conservative Party inevitably gave rise to mention of former Minister of Foreign Affairs, Maxime Bernier, with little agreement on the import of the ‘unfortunate’ events surrounding his resignation.
Ron Meisels’ introduction of Jonathan Arter stressed his close relationship with the late Ian Notley and the role he has played in publishing The Notley Notes and other valuable technical analysis. Jonathan will be taking over responsibility for the Yelton Group.
Clarification: Kimon Valaskakis will be away for six weeks, not six months, and will return to us in August.
John McCain will be in Ottawa next week, giving a speech to the Economic Club of Canada on Free Trade – an interesting development bringing Canada into the U.S. election campaign.

The market
Although there are a number of people who quote historical data on the effect of a Republican or Democratic administration on the market, in some experts’ opinion, there are other reasons for the market’s performance. The possibility that given the vulnerability of the financials the bear market will worsen in the fall, leading up to the election in November does not bode well for the Republicans. While the outlook for the U.S. market is not good, Wednesday Night’s Technical Analyst still believes that thanks to Canada’s the TSE will reach 16,000 by September. In his opinion, the current weakness in the North American stock market should end in June, followed by a serious downturn from November to January, 2009. The Dow-Jones index is not expected to reach the 2007 high level this year. 2009 will require skill in selection of investment opportunities. In every market, each individual stock follows its own S-curve. In unsettled or declining markets such as anticipated in the coming months, it will be important to seek out those securities that have not yet reached their peak. In the view of one economist, it is the double-S curve (which translates into a Bell curve) that more accurately reflects the life cycle of sectors. He also points out that deflation can in some situations be beneficial, pointing to the computer industry where with the drop in prices, markets have expanded exponentially.
The irritability of the stock market reflects that of the economy. Dominating the scene is the supply and consumption of petroleum and petroleum products and the question of whether or not the world has reached and passed the point of peak oil . Opinion is divided, but it is likely that any new discoveries, like that off the coast of Brazil, will be vastly more expensive to exploit.

Oil & energy
As a major supplier of commodities, Canada is better placed than most countries to survive the fallout, but is certainly not immune. To date there appears to be little relationship between the price of petroleum and demand. In this very elastic market, the increased cost of petroleum, petroleum products and everything that is transported has been absorbed. In addition to the cost of transportation, the price of petroleum is reflected in the cost of many commodities including plastics, roofing, et cetera. At some point, however, unless a less costly alternative is found, it is inevitable that the increased cost will lead to disastrous economic and/or political results. In the United States, signs of this have begun to be observed and may even be a factor in the November presidential elections. Reports from New England indicate that sales of gasoline are down, sales of new vehicles are declining, resulting in lower government revenues as the U.S., gasoline tax is volume related, rather than calculated as a percentage of the retail price.
For some, it is imperative that governments intervene to correct a situation where even in Canada – an energy-rich country – a sizable percentage of the population of Canada is spending 25% of their income on energy, depleting the disposable income of the middle class. The high cost of energy is expected to have some profound societal consequences in addition to changes in discretionary spending: at some point, suburban two-car families will move back into the cities in increasing numbers, swelling the tax roles, improving downtown municipal services and taking some development burdens off the outlying areas.
Although an economic incentive must be present if expensive exploration and development are to continue, inevitably, the question arises as to why, if supply and demand are in equilibrium, prices continue to rise exponentially. There are probably several explanations, including the current tendency to replace the U.S. dollar with commodities as a reserve currency.
There is the suggestion on the part of some Wednesday Nighters that the trade in petroleum like the trade in any global commodity is by definition, uncontrolled. Collusion is the natural way of doing things – why compete if you can combine? Globalization has created global markets without referees. Very few global markets are competitive. There is no anti-trust legislation at a global level. This is true for all global markets, not only oil, or even commodities sectors. There is no global regulation for banking. With few large players, the large operators set the price and the smaller operators follow without any conscious attempt at collusion. It is not a question of supply and demand. It is not in governments’ interest to control prices as their revenue, in most instances, is a function of selling price so that conscious collusion is not a requisite for lack of competition.
Curiously, technology does exist to make petroleum consumption more efficient, and to develop consumer products that reduce or eliminate dependence on petroleum, yet little is being done to follow that route.

Water
Related and reflecting a similar self-destructive human nature, is our lack of concern for water. Potable water is currently being used in large quantities in the production of ethanol from cereal crops and oil from the tar sands. Each litre of oil produced in the tar sands requires one litre of water in the production process. While a quarter of the world’s population does not have access to potable water and the water table slowly goes down, golf courses and elaborate landscaping in arid parts of North America are watered continuously. Elsewhere in the world, cities are being built in the desert.

The Outlook
The combination of a world food supply shortage and higher petroleum prices is creating escalating political unrest, making the near future unsettling. [Editor’s note: Saudi Arabia has announced that it will raise oil production to record levels within weeks in an attempt to avert an escalation of social and political unrest around the world ]. Historically civil unrest has been the response of otherwise docile populations, driven beyond a certain point by events beyond their control.
It is predicted that the price of money will closely follow the rise in the price of commodities, reaching two-digit yields, which will change the value of stocks and how people look at the investment problem. The inflation genie is out of the bottle To conserve value some experts advise investment in gold (over $2000 an ounce) and other commodities, or cash (better than losing money). The currency of any country is seen as a reflection of its affluence. Canada, like Australia, Brazil and Japan, is expected to outperform.