BOC Governor Declares Recession's Conclusion amidst market breakout

by Zubin Driver
July 29, 2009

Last Thursday the Bank of Canada Governor, Mark Carney, declared the recession in Canada is finished. Carney predicts 1.3% GDP growth this quarter, 3% in 2010, and 3.5% growth in 2011. Low interest rates, robust fiscal stimulus, improving international economies, and surprisingly strong consumer confidence, household debt, and commodity numbers are all contributing to the earlier than expected recession curtain call. The BOC Governor recognises that any recovery remains tenuous, dependant as it is upon whether other countries' economies show sustained improvement. Unemployment will likely yet continue its decline.

The same Thursday markets rallied, and not just the TSX. In fact, breakouts through '09 highs occurred for the American markets (Dow, S& P 500, NASDAQ) while the TSX and TSX Venture are currently flirting with June highs without having yet broken through. In the heat of standard summer doldrums time, the 'big boards' are ablaze. This week holds the end of earnings reporting along with a number of American economic data points, including 2nd quarter GDP, housing numbers, and consumer confidence.

Caveats as Always

A number of respected voices are expressing disbelief in the current rally. They note its occurrence on low volume, and that the market's trend has not yet reversed out of its downward bias. Economic data, while improving somewhat, is still tepid with unemployment continuing to rise, all of which will not support any fast paced return to growth. Buyers, be careful up here!

The Monster Pattern

Through one of the most tumultuous years (2008) in modern economic history, gold was one of the few assets that actually held its price. As uncertainty persists, and the possibility that upon recovery, hyper inflation may loom, a potentially massive breakout of the gold price is brewing. Since the removal of currencies from the gold standard in 1973, bullion's price is hanging up at its highest levels (without adjusting for inflation.)

Gold's 3 year charts displays a pattern that has shown constant resistance at $1000 / ounce. Something big is happening, either a major failure or breakout. Around March of the last 2 years gold has traded over $1000 for a day before sharply receding from that point. Were it to trade and actually hold above $1000 for a few days, it may well jump 200 to 300 more dollars faster than we can say 'recovery.' On the other hand , perhaps an economic recovery will remove investor uncertainty, causing gold to fail for a 5th time at $1000, and promptly dive back to $700....

Venture Doldrums

Even as the major exchanges have enjoyed strong rallies since early July the venture market has remained stagnant. Volumes are low and, aside from a few honourable mentions who have surprised the market with jaw-dropping news, most stocks aren't moving anywhere. Obviously, there's the usual reason to explain why--summer doldrums; everyone's away on vacation. Fair enough, but with the major markets behaving so strongly it sure would be nice to see more of that strength spill over to the small cap equities. One wonders if, when the rally subsides, stock's that were just holding steady will start getting hurt. Hopefully however, things remain stable, setting venture investors up for a profitable fall and winter to come.

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).