Correction Underway, Markets Probing for Support

by Zubin Driver
July 15, 2009

Since reaching a high water mark at 10,700 points in the second week of June, the TSX touched the 9500 level last week, marking a 1,000 point correction that many believe will take markets back to test the March lows. Volumes are drying up, and buying power feels spent. People speak of 'feedback loops' between market movements and economic news and data, wherein the two reinforce and fuel each other's momentum in a given direction. Through the spring there was a positive feedback loop as the market moved higher while economic news, earnings, and data, continually came in above people's doomsday fears.

Now the opposite appears to be occurring. At an initial scout meeting of G8 finance ministers a month ago, while markets were still propelled by strong tailwinds, the talk was of looking towards how stimulus funds and liquidity will be withdrawn as the recovery gets underway in earnest. The actual G8 meeting last week began with a headline-grabbing warning from Gordon Brown. The British PM stated that a second round of stimulus would be necessary to avert the next crisis that he foresees unfolding in two parts; one part due to unemployment, the second to the pace of recovery, which may be too slow to actually make it off the ground. Needless to say, with respect to market momentum, last month's tailwinds are this month's headwinds, with the news now serving to reinforce the overhead resistance.

Commodity Crunch

Through the recent correction one may have expected financials to lead the way down, but in fact commodities and commodity stocks have been the hardest hit. Oil has seen the sharpest drop, falling from a high of $74 / barrel in mid-June down to $58 at one point in Thursday's trade. Yet oil is not alone, as gold, copper, fertilizer stocks, and natural gas are all under pressure. Commodities are a key indicator for economic recovery, and their rise through the spring constituted an important green shoot into which observers read beginnings of a global recovery. The commodity rise was significantly attributed to Chinese stockpiling, so are commodities falling because China is accumulating no longer? Unlikely. Just two Friday's ago, Canada's Teck Resources closed a $1.74 billion financing with China Investment Corp, a Chinese sovereign wealth fund. Commodities are volatile though; those who continue to believe in their value should patiently look to this correction as an opportunity.

Q2 Earnings

Alcoa opened Q2 earnings last week with a better than expected loss of 32 cents / share, versus analyst expectations of .38 / share. As discussed above, markets have been falling pretty rapidly, and thus far earnings appear to be providing much needed positive data to at least temporarily stem the slide. Yesterday, Meredith Whitney, an analyst whose fame has built through the financial crisis as her bearish calls on the banking sector became reality, issued a buy recommendation on Goldman Sachs just ahead of its earnings report. That sent Goldman flying upwards from its Friday close of $141 to close yesterday at $149.44. This morning Goldman announced earnings $4.93 / share, handily surpassing the expected $3.54 / share predicted by analysts. Are Goldman's results a harbinger for the rest of the earnings period? Or will other banks and companies disappoint? Intel reports this afternoon, and for now markets seem to be betting that the rest of the earnings period flips the feedback loop back to positive...

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
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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).