Getting ready for the second half of the bear market
The credit crisis is still with us and the next stage of the bear market may soon be here, says an editor who sees hope for Canadian energy.
It was a long winter, but the bears are waking up.
The bull market that has lasted for more than two years may be bumping its head on the ceiling.
The bear market that so many have predicted may have arrived.
There are no certainties of course. Those pundits who tend to be bullish always seem to find hope in a half-full glass. Bears will tell you that same glass is emptying faster than you think.
Still, signs of deterioration are evident, and one Canadian analyst asserts that the recovery is something of a fraud anyway.
"Talk of getting the economy back to where it was pre-Crash ignores that it was a debt-financed bubble era that should never have been tolerated, and is unlikely to be seen again for many years."
The quote is from Ian McAvity's Deliberations on World Markets. Mr. McAvity writes in Toronto for a readership that is largely American.
A series of lingering problems are weighing on the global economy. Collectively, they have taken the steam out of the boom in commodity prices.
The knottiest problem, however, goes right back to where the whole thing started — housing in the United States. And the shock waves that spread to Europe are still very much with us.
In his monthly comments on the Canadian market, this editor sees the Toronto exchange falling back. But he also sees a strong future for the nation’s energy producers. Gold mining stocks, not so much.
No more NINJA
The NINJA loan (No Income? No Job? Approved) is no more. America is back to normal mortgage procedures. But not to normal levels of buying.
For three years, government credits have kept the housing market from sinking even further. “It arrested a decline, but that’s about it,” says Mr. McAvity. As these deferrals run out, foreclosures are up again.
New housing starts are at just 25 per cent of the levels seen in 2005 and 2006, adds the editor. And this is a labour-intensive industry.
Resource-intensive as well. Everything from copper to lumber gets a boost when America’s large population is building and renovating homes.
Beneath the uninspiring housing figures lies the heavy load of debt that Americans (and Canadians) are trying to reduce.
They can only hope they do a better job than the Europeans.
The limitless pit
The arrest in New York of International Monetary Fund (IMF) President Dominique Strauss-Kahn could scarcely have come at a more awkward time.
He has heavily involved in negotiating the complex arrangements aimed at saving the euro zone from sinking in the seemingly limitless pit of debt mining the governments of Greece, Ireland, Portugal and other nations.
Now the IMF must negotiate new leadership. Europe and America want another French president, Ms. Christine Lagarde, but the emerging markets think it’s their turn to have the top job.
In the wake of all this confusion, both U.S. and European banks have regressed. They had rebounded sharply from their panic lows in 2009. But now they are peaking at lower levels, says this editor as he studies his technical charts.
The Euro Bank Index suggests the old continent’s banks could start probing their 2009 lows again, he notes. U.S. banks have more wriggle room, he believes, but they’re still showing lower highs and lower lows.
Add in the waning momentum of Asian markets, and “we may be closer than many realize to the precipice of the second half of the mega bear cycle” within a long trend that dates from 2000, warns the editor.
Politically stable source
The slowdown in commodity prices has taken its toll on the S&P/TSX Composite Index. It is no longer maintaining its substantial lead on the S&P 500 in New York.
“If I’m correct in anticipating some downside surprises in New York,” says Mr. McAvity, “it seems likely that the TSX would probably join in and probe down to the 11,000-12,000 range.” With the markets falling again, the exchange stands at 13,396 this morning.
The longer-term trend of Canada vs. New York is clearly in favour of Canada, writes the editor, but following a long uptrend, it “regularly needs a period of rest and digestion.”
That’s what we’re liable to get this summer.
Yet one Canadian industry sees its prospects getting steadily better. As this editor watches the conflict in Libya rage on, Canada’s energy producers look like “a politically stable source in an increasingly unstable world.”
He doesn’t have the same optimism about gold mining stocks. The TSX Gold Miners Index peaked in May 2006 at 369 with gold at US$725. Five years later, the price of gold has more than doubled — and the index is at 360. And this despite the big rise in the Canadian dollar.
“Canadian T-bills with virtually no yield have outperformed the gold miners over the past five years?” chortles the editor. “And most of the major gold mining executives still have their jobs?”
There may be a time to buy the miners, but not yet. “On the other side of the looming correction and S&P decline, there will be time to buy the gold miners,” says Mr. McAvity, “but history has shown that on sharp market declines they get clocked, and typically find their lows a little ahead of the overall market bottom.”
And that is the bottom line for this editor. The market ‘s recent problems are not temporary. It’s time to prepare as though the bear was already here.
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