Levelling Out

by Zubin Driver
August 17, 2009

These were the words used by America's FOMC (Federal Open Market Committee) to describe the current state of economic activity after its most recent meeting last week. At the last meeting in June, the Fed stated that "the pace of economic contraction is slowing," so implicitly, an improvement was noted this meeting.

The Fed also intimated that its open market operations, which involve purchases of debt securities to bolster liquidity, may soon begin to contract. These operations became the economy's life support when the bid from the private sector vanished during the crash, and an open question remains as to when to discharge the patient from its sickbed. The revival of private sector demand, especially given high unemployment, will be fragile. For some time yet, the Fed will face a difficult balancing challenge. On one side of the ledger, stimulative measures shouldn't be withdrawn prematurely, thereby endangering the result the Fed has worked so hard to achieve; on the ledger's liabilities side, the US government is carrying egregious debt levels that threaten longer term prosperity as interest rates and inflation could spike to crippling levels. For now, the FOMC will err in the stimulative direction.

Vaporising Gas Prices

It's one of those downtrends that defies logic and inflicts pain. With every thing else--commodity prices, equities, real estate--recovering impressively, why hasn't gas participated in the good times? Obviously, there are some straightforward fundamental reasons: shale gas discoveries have increased supply, for one. Second, air con demand has lagged. Though the west coast has been HOT, back east, where people actually use air conditioning rather than ineffectual fans that just blow the hot air around, the summer has been unusually mild, so a/c related gas use is down. Yet, supply is ample for copper and oil as well, and they've skyrocketed.

How low can natty go? Its use won't disappear, so unlike corporate entities that are vulnerable to bankruptcy, it can't implode to zero value. Most natural gas stocks aren't making new lows, so obviously the equity market's statement is that demand will turn around. Other fundamentals, such as the amount of drill rigs out looking for gas, point to higher prices sometime, as barely anyone's looking for it, an obvious recipe for shortage down the road. And the other 'x' factor is just coming up now: hurricane season. The Florida coast is starting to see some storms now, though none are as yet major. One thing is certain though. The bounces for natural gas have been large all along the current downtrend, and for nimble players of the natural gas ETF, HNU on TSX, some nice profits have been realised by trading it.

Electric Cruisin'

Lithium was discussed here about a month or two back, and since then, many small cap lithium stocks have continued to climb. Last week, more charge was added to the space as GM's CEO announced the opening of a battery manufacturing site for the production of lithium-ion batteries for low-emissions electric cars. Almost all of the small cap lithium stocks enjoyed a strong lift from this announcement, and this type of news certainly adds some substance to a sector that many, at this point, consider mainly to be driven by hype.

Some lithium venture companies are as follows: Canadian Lithium Corp (CLQ-V), Western Lithium (WLC-V), TNR Gold Corp. (TNR-V), First Lithium (MCI-V), North Arrow Minerals (NAR-V), New World (NW-V), Rodinia Minerals (RM-V), and Lithium One (LI-V). A few of these companies are run by some prestigious figures. North Arrow is run by Grenville Thomas of Aber Diamonds, a company who made a major diamond discovery in Canada's north. Lithium One is being built by some of the same members who started Potash One and Energy Metals, a precursor to Uranium One, which was formed as a startup but eventually grew in value to about $18 / share. Given the strong track record of Lithium One's management team, this company may be the frontrunner capable of creating shareholder value based on quality assets, complete with an audience who will be keenly watching to see how management's plan unfolds.

Best regards,
Zubin

Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com

Canaccord Capital Corporation
Attention: Zubin Driver
P.O. Box 10337 Pacific Centre
2200 - 609 Granville St.
Vancouver, B.C. V7Y 1H2

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OFFICES IN MAJOR CENTRES ACROSS CANADA. MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA. MEMBER CANADIAN INVESTOR PROTECTION FUND (CIPF).