Strong Getting Stronger

by Zubin Driver
August 27, 2009

After a difficult start last Monday, markets ground their way upwards for a strong finish to the week, with the Dow closing at 9,505, a fresh high for 2009. In early July, 9000 looked distant as the Dow struggled to hold the 8000 level; now 10,000 doesn't seem far away. The strength just keeps compounding, as every pullback meets hungry buyers and marches higher.

While Asian markets, particularly China's, have led the way back off the bottom, last week they took heavy losses as American markets led the way back. As The Economist noted last week in its lead article, Asia has been enjoying an "astonishing rebound," with 2nd quarter GDP numbers showing a 5-10% annualised growth rate, and is playing a central role in the nascent global recovery.

On Friday, at an international conference for central bankers, US Fed head Ben Bernanke reiterated his belief that a return to growth should soon take place. He cautioned that credit is still tight and must return to normal to sustain a recovery; most important though, is to see this positive perspective from such an important economic authority. The same Friday US home sales figures for July were reported, showing a rise of 7% from June's figures, at 5.24 million homes sold. Though the average realised sale price, USD 178,400, was 15% lower than this time last year, transaction volume was the highest since August '07.

Greenback Emissions

The 'Oracle from Omaha', Warren Buffett wrote an editorial for The New York Times reminding readers about the pitfalls of excessive government debt. The US debt to GDP ratio stands at 13%; the largest peacetime debt to GDP ratio since 1920 is 6%, so this year saw a massive increase into 'uncharted territory.' "The United States is spewing a potentially damaging substance into our economy--greenback emissions," said Buffett. While said 'spewing' was a necessary evil to stave off financial apocalypse, sustained debt growth of the current magnitude could constitute a "threat as ominous as that posed by the financial crisis itself."

When conditions stabilise at a normal growth level, governments will need more money to finance the debt. Where will it come from? Revenues for governments will likely be tepid for some time; variables governments can control are spending and taxation. "Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election," but one, the other, or a combination of the two will likely provide the only way to reduce the debt-to-GDP ratio. Not a choice to look forward to, but one that will be unavoidable in time.

Waiting for the Fall

In the venture space, one hears it every year. In September, things will pick up. On the big boards, markets have been hotter than all predictions but the venture has been mostly quiet. Lithium has been strong, along with a handful of exploration plays who have hit big intercepts. Apart from that, everyone's waiting for September to gear up, which, incidentally, is when a number of commentators are calling for a correction in the larger markets. Will the venture rally without broad market support? Last year, people waited for conditions to gear up in fall, but instead they geared right down to reverse and drove off a cliff backwards. This year will almost certainly be better, but if everyone's expecting one thing, then the other possibilities have to be taken into account.

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).