What the 700B Bailout Delay Could Mean for Canada

Many are asking if or when the frozen credit system and slower growth in the U.S. will impact the Canadian economy. The answer is broken down to a number of points:

• The energy index fell greater than the TSX Index
  
• The materials index fell greater than the TSX Index
• 5-year first time mortgages reached almost 8% (signaling a flight to safety)*
• The auto industry remains in a decline
  
• Gold rose
  

* as reported by Diane Francis in Financial Post for Sep 30. Rate could not be verified

Impact on Toronto Real Estate

I have been assessing the Toronto real estate activities for 2008. The theme remains the same: listings are increasing (supply), days on the market is increasing (activity is slowing slightly), housing prices have increased. With mortgage rates rising significantly due to the events in the U.S., the purchasing power for consumers will weaken.

As we have already seen, provinces most exposed to the commodity market will see declining profit (and a need to hire more workers). Again, there will be pressure on the demand side of the housing market.

At some point, perhaps in a month's time, the prices for homes in Toronto will need to adjust to the pressures of the global economy. After all, other countries have been proven to be impacted by the weak U.S. economy. This includes China, London, India, and Europe. Canada will be no different.

Chart below: U.S. Energy Sector reflects economic health for Canada:


Source: http://stockcharts.com/charts/gallery.html?XLE

Excerpt from TSG Weekly Market Watch
September 26, 2008
Written by Matt Blackman

About the $700B Bailout plan

• They are highly inflationary and even if they do temporarily work, result in rapidly eroding buying power as government deficits soar and the value of the dollar plummets
• Recessions are a necessary part of maintaining healthy capital markets longer-term. They remove excesses that have been built up over years of easy money and rapidly appreciating asset prices as the inevitable bubbles build. To try to interrupt this cycle makes about as much sense as trying to suspend the law of gravity

Housing

• August new home sales fell 11.54% from July and are now down 34.4% year-over-year. All the bailouts and money pumped into markets have yet to have any impact on sales according to the latest Census Bureau data.
• July marked the first time since the bubble began to pop that the excess of homes being build (red area) exceeded sales and as we see from the chart, this situation continues to plague builders.

Stock Market:

• Every sector remains in a technical downtrend demonstrated by a series of lower highs and lower lows.

Conclusion:

We will have to wait to see if the bailout has a positive impact on this but as we have said in the past, this is not a liquidity problem, its is a solvency crisis that no amount of liquidity will cure.

Full Article here: http://tradesystemguru.com/content/blogcategory/34/68/

Seeing Beyond the $700B Smoke of Distraction

I found a great counter-argument to the market's assumption that the stock market is still healthy. I, personally, am having difficulty assuming the markets will rally between November and April (on seasonal strength). The current smoke screen investors are facing is the 700B bailout making its way through congress.

Let's look at the figures to see beyond today's headlines.

In the U.S. for August, 2008:

• Durable goods orders declined 4.5% .. Source: @ http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf

• Fresh claims for unemployment benefits jumped sharply to 493,000 (it last reached the 500,000 mark in September 2001)
• Even after adjusting 50,000 jobless claims (hurricane Ike), the 4-week average of 443,000 claims was last reached November, 2001
• new home sales plunged by 11.5 percent in August, (1 percent dip that had been expected). Annual seasonally adjusted annual sales rate of 460,000 is the slowest pace since January 1991
• The average price of a new home fell in August by 11.8 percent to $263,900, the biggest one-month drop on record
• The median home price was down 5.5 percent to $221,900.

Sources:
http://seekingalpha.com/article/97377-the-perfect-storm-even-with-bailout-economy-is-hurting

http://news.yahoo.com/s/ap/20080925/ap_on_bi_ge/economy;_ylt=AkeTtzMaEZ4Qh04Yh.1sAi5u24cA

It remains clear that although I believe by sentiment that the markets will stabilize or even rally, the fundamentals are not there yet for a sustained rally.

I am really torn as an investor and as an analyst: the market is more ripe for short-term trading than for value investors who like to buy and hold. It is for this reason that one might find my notes contradictory from one entry to the next.

The market simply needs to hope that the government bailout action will at the very least restore liquidity in the debt markets in the face of declining employment, lower home prices, and higher commodity prices.