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April Update

What I am hearing and observing since last time:

I had the good fortune to speak personally to Scotiabank’s VP and Chief Economist, Warren Jestin late in March when he was guest speaker at our local Chamber of Commerce’s Annual Dinner. I was left with the belief that the benefits (and risks) to Canada from the developing markets growth (China, India, Brazil) are real and will be enduring. In the meantime, however – real caution is warranted, and taking some profits on commodity stocks that have had such a great run would not be a bad decision.

In terms of our exchange rate relative to the US dollar, there is without a doubt a “good feel” for the Canadian dollar globally – there is a lot of money around the globe looking for a place to call home, and Canada doesn’t look so bad relative to Europe or the States. If our interest rates increase as we expect then to do in the second half of this year –

this will make our dollar that much more attractive relative to the US dollar. But. (Always a but!)  Be forewarned – the majority of the current holders of C$ on the margin are speculators – hedge funds and the like – with the whiff of any bad news – they will exit their positions very quickly; and thus our currency can make big swings. Then we have the effects of central bank moves. For example, Russia’s recently made comment that they may want to include Canadian currency as part of their foreign currency reserves. Just the comment, let alone the action can move our currency enormously.

David Rosenburg, Chief Economist and Strategist at Gluskin Sheff has been decidedly negative on our markets for months now – he will eventually be proven right to some extent – markets never go straight up, or down forever – and we have had a good 12-13 months without any meaningful correction. There are still a number of unknowns out there that will swing our markets. How bad is the commercial mortgage situation in the US, and how will it resolve itself? What will the financial reform being debated around the globe look like? Latest headline economic growth looks pretty strong – but for how long? We have been able to call a technical end to the global recession because many countries have delivered economic growth compared to their recessions in 2008-2009.  Low interest rates and massive government spending allowed for a turnaround of sorts.  Much of the shovel-ready projects are only happening now and will continue to help headlines improve over the summer. It has been estimated that approximately 75% of U.S. stimulus spending had not been spent as of September 30, 2009 and that most of that spending would occur over the following 9 to 12 months.


So you have to know that current activity will not continue at the same pace next year. We are already hearing about higher interest rates and government plans to reduce spending. The big question then is what will real growth (or contraction) look like after the government money has been spent? I remind clients that while markets can and often do trade on today’s headlines – they are also a forward indicator – they move 6-9 months or a year ahead of what the headlines will be. News was not so great a year ago when the markets bottomed. Markets are already starting to price in the worries I have pointed out.

My advice today is to tone down your return assumptions; last year’s returns were likely a once in a generation event (and please let the hit we took the year before be once in a generation also). Do not invest money in the market that you will need to draw out in the next three years. Be content to own mostly solid, blue chip, dividend paying companies that will still be here 3 years from now. Be happy and proud to be a Canadian – could be worse, eh?